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Banswara Electric Supply Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 31 of 1979
Judge
Reported in[1986]160ITR127(Raj)
ActsIncome Tax Act, 1961 - Sections 41(1) and 148
AppellantBanswara Electric Supply Co.
RespondentCommissioner of Income-tax
Appellant Advocate R. Balia, Adv.
Respondent Advocate B.R. Arora, Adv.
Excerpt:
.....that it stood dissolved on march 31, 1960, and that any agreement was reached between the assessee-firm and the successor-firm in regard to the royalty payable and the benefit, if any, on final decision of the government. the provisions of section 41(1) were clearly attracted and the amount in question was rightly assessed in the hands of the assessee. 179): in the present case, the amounts standing to the credit of motilal including interest thereon have been received by the sons and the widow, not in respect of any loss or expenditure for which the allowance or deduction was allowed, but by virtue of their being heirs of the deceased motil thus, all the conditions necessary for the application of section 10(2a) the act are not satisfied in the present case. 14. the result is..........of the assessee and carried:it on as its branch business. it may be pointed out that both the assessee firm and the successor firm consisted of seven partners. six of them, namely, rasool bhai, suleman, saifuddin, hakimuddin, ali husen and fakhruddin, were common to both. the seventh partner in the assessee-firm was faidahussain, son of rasool bhai, whereas in the successor-firm, the seventh partner was moiz, son of ali hussain. the entries regarding the royalty were made in the books of 'banswara electric supply co., banswara' described in bracket as--'branch of mulla rasool bhai abdul hussain 7 brothers.' it appears, in the assessment year 1962-63, the sum of rs. 44,395 was initially assessed by the income-tax officer in the hands of the successor firm, namely, m/s. mulla rasool.....
Judgment:

Sobhag Mal Jain, J.

1. In this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act')' made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short 'the Tribunal'), at the instance of the assessee, we are required to decide the following question, namely :

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the sum of Rs. 44,395 was taxable under Section 41(1) of the Income-tax Act, 1961, in the hands of the applicant firm ?'

2. The assessee, M/s. Banswara Electric Supply Co., is a partnership firm and had been carrying on the business of generation and distribution of electricity since 1947 and was a licensee of the Government of Rajasthan. The assessment year with which we are concerned in this case is 1962-63. In respect of the period up to March 31, 1960, the assessee claimed that a sum of Rs. 84,121 was payable by it to the Government as royalty. As no actual payment in respect of this amount was made, the assessee made a provision for this liability by debiting its profit and loss account and by making a contra credit entry to the royalty reserve account. In the assessments for the years 1950-51 to 1959-60, the assessing authorities allowed a sum of Rs. 62,371 out of the aforesaid amount claimed by the assessee. Subsequently, the Government of Rajasthan by its order dated February 2, 1962, reduced the amount of royalty payable by the assessee to a sum of Rs. 17,976. It is said that on April 1, 1960, another firm, M/s. Mulla Rasool Bhai Abdul Hussain, Banswara (hereinafter referred to as 'the successor-firm'), took over the business of the assessee and carried:it on as its branch business. It may be pointed out that both the assessee firm and the successor firm consisted of seven partners. Six of them, namely, Rasool Bhai, Suleman, Saifuddin, Hakimuddin, Ali Husen and Fakhruddin, were common to both. The seventh partner in the assessee-firm was Faidahussain, son of Rasool Bhai, whereas in the successor-firm, the seventh partner was Moiz, son of Ali Hussain. The entries regarding the royalty were made in the books of 'Banswara Electric Supply Co., Banswara' described in bracket as--'Branch of Mulla Rasool Bhai Abdul Hussain 7 brothers.' It appears, in the assessment year 1962-63, the sum of Rs. 44,395 was initially assessed by the Income-tax Officer in the hands of the successor firm, namely, M/s. Mulla Rasool Bhai Abdul Hussain. On revision, the Commissioner of Income-tax, Jaipur, by the order dated March 14, 1969, deleted the amount on the ground that the remission granted by the Government was not in favour of the successor firm but in favour of another firm, namely, M/s. Banswara Electric Supply Company. Thereafter, a notice under Section 148 of the Act was issued to the assessee and in response thereto, a nil return was filed alleging that the assessee-firm ceased to exist from April 1, 1960, and, therefore, it had no income in the previous year relevant to the assessment year 1962-63. The Income-tax Officer assessed the amount of Rs. 44,395 in the hands of the assessee. The Income-tax Officer held that the alleged dissolution of the assessee-firm was never notified to the Department or the State Government and that the assessee-firm continued to deal in its own name with the different authorities in connection with its various claims. An appeal was taken to the Appellate Assistant Commissioner and there a letter dated March 24, 1976, containing the written arguments was filed by the assessee, wherein it was alleged that the assessee's assets and liabilities including the liability in respect of royalty were taken over by the successer-firm on April 1, 1960, and that the assessee-firm stood dissolved on this date. It was further submitted that the remission in the royalty was allowed by the Government on February 2, 1961, when the assessee had already ceased to exist and, therefore, the benefit of Rs. 44,395 could not be assessed in its hands under Section 41(1) of the Act. The Appellate Assistant Commissioner dismissed the assessee's appeal on the ground that the benefit of remission was allowed to the assessee and not to the successor firm. Against this, a further appeal was filed by the assessee before the Tribunal and the same was dismissed by the Tribunal by order dated January 24, 1978. The Tribunal came to the conclusion that the assessee failed to establish that it stood dissolved on March 31, 1960, and that any agreement was reached between the assessee-firm and the successor-firm in regard to the royalty payable and the benefit, if any, on final decision of the Government. The Tribunal further held that the firm did not dissolve on March 31, 1960, and continued to exist and was recognised as its licensee by the Government and the benefit of the remission of royalty was received by the assessee-firm. Thereafter, the assessee made an application before the Tribunal under Section 256(1) and on this the Tribunal has made this reference to this court for its opinion on the question referred to above.

3. We have heard Mr. Rajesh Balia, learned counsel for the assessee, and Mr, B. R. Arora, learned counsel for the Revenue. The question which requires our answer is, whether the sum of Rs. 44,395 was liable to be taxed in the hands of the assessee under Section 41(1) of the Act. Section 41(1) reads as under:

'41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the asse'ssee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'

4. The scheme of Section 41 is to enable the Revenue on the fulfilment of certain conditions to take back what it has allowed in the past. To meet the requirements of this section, the Revenue has to satisfy:

(i) That an allowance or deduction was made in the computation of the assessee's income in the former years in respect of loss, expenditure or trading liability incurred by the assessee;

(ii) that subsequently during the previous year, the assessee obtained in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof.

5. In the present case, there is no dispute that the assessee in the former years got an allowance of Rs. 62,371 on account of royalty payable by it to the Government. It is also not disputed that royalty dues of the assessee were subsequently reduced by the Government and this resulted in a benefit in trading liability by way of remission. Thus, the only question that requires our consideration is, whether the benefit of this remission was obtained by the assessee to attract the provision of Section 41(1).

6. Mr. Balia has contended that its liability to pay royalty stood already transferred to the successor-firm and, as such, it was the successor-firm and not the assessee who derived the benefit of this remission. In support of this contention, the counsel has relied upon the following passage appearing in the statement of the case submitted to us by the Tribunal:

'The successor-firm took over the assets and liabilities of the assessee including the liability of Rs. 84,121 in respect of the royalty payable to the Government of Rajasthan.'

7. We find no substance in the argument advanced by the assessee's counsel. The above passage referred to by the learned counsel is a mere narration of the assessee's case and it does not form part of the facts as found by the Tribunal. The Tribunal rather, after a careful consideration of the material on record, has come to a definite conclusion that it was the assessee who received the benefit of the remission in royalty allowed by the Government. To quote ;

'We hold in the circumstances that the assessee-firm did not dissolve on March 31, 1960, and that it continued to exist and the Government of Rajasthan, by its aforementioned order dated February 2, 1962, granted the remission of the royalty to it. There was obviously no question of the said benefit being granted to the successor-firm who had no locus standi in so far as the Government of Rajasthan was concerned. The Government recognised the assessee who was its licensee and none else. The licensee, i.e., the assessee-firm, therefore, had to continue to exist till the Government's final decision in the matter and it did continue to exist after March 31, 1960, although its business had been taken over by the successor-firm and it did receive from the Government of Rajasthan the benefit of the remission of the royalty.'

8. We see no reason to disturb the above finding which is not vitiated by any error of law. The conclusions of the Tribunal are in accord with our own appraisal of the facts and circumstances of this case. No agreement evidencing the transfer of liability of royalty from the assessee-firm to the successor-firm has been brought on record. The assessee-firm at no stage informed the Government that it firm stood dissolved on March 31, 1960, and that its liability to pay royalty stood transferred to the successor-firm. The remission in the amount of royalty was made by the Government in the name of the assessee-firm. In the assessment proceedings of the successor-firm, it was urged before the Commissioner hearing the revision that the remission of royalty by the Government was in favour of the assessee, i.e., M/s. Banswara Electric Supply Co. We, therefore, find no infirmity in the findings of the Tribunal that it was the assessee who received the benefit of the remission granted by the Government. The provisions of Section 41(1) were clearly attracted and the amount in question was rightly assessed in the hands of the assessee.

9. Mr. Balia has cited the cases of CIT v. Hukamchand Mohan Lal : [1971]82ITR624(SC) and Moti Lal & Sons v. CIT : [1975]101ITR177(All) . We do not think these cases in any way help the assessee. In Hukamchand Mohan Lal's case : [1971]82ITR624(SC) , the assessee was the sole selling agent of M/s. Mohan Lal Hargovindas and had succeeded to this business on the death of her husband, Kanhaiyalal. M/s. Mohanlal Hargovindas had recovered a certain amount towards sales tax from the assessee's husband. In an appeal filed by the said firm, an amount of Rs. 24,341 was remitted and the firm refunded this amount to the assessee. The question for consideration in that case was, whether the assessee, successor in business, was liable to be taxed under Section 41(1) of the Act.The Madhya Pradesh High Court had answered the question in favour of the assessee and, on appeal, the Supreme Court concurred with the view taken by the High Court. It was observed by the Supreme Court (p. 627):

'That section, in our opinion, cannot possibly apply to the present case because the assessee who is now sought to be taxed is not the assessee contemplated by that section. The assessee within Section 41(1), namely, Kanhaiyalal, having died, the Revenue could not take any advantage of its provisions.'

10. Their Lordships of the Supreme Court rather observed (p. 626):

'In the present case, if the husband of the assessee had been alive and had received the amount which had been remitted during his lifetime, he would certainly be liable to pay tax under the provisions of Section 41(1), But Kanhaiyalal having died and his widow being the 'assessee', she cannot possibly be brought within the section.'

11. Moti Lal & Sons' case : [1975]101ITR177(All) , decided by the Allahabad High Court, was also concerned with the tax liability of the successor firm. It was observed in that case (p. 179):

'In the present case, the amounts standing to the credit of Motilal including interest thereon have been received by the sons and the widow, not in respect of any loss or expenditure for which the allowance or deduction was allowed, but by virtue of their being heirs of the deceased Motil Thus, all the conditions necessary for the application of Section 10(2A) the Act are not satisfied in the present case.'

12. Mr. Arora, on the other hand, has referred to the case of CIT Chandajee Khubajee & Co. : [1983]143ITR365(AP) , where the Andhra Pradesh High Court has said (p. 371):

'If the assessee which received the refund is the same assessee which paid the tax during the said assessment years, it constitutes its income under Section 41(1), and it is immaterial what it does with that income later. Whether it appropriates the money to itself, or gives it away to some persons, whether bona fide or under a misapprehension of law, or whether it gifts away that amount to someone else, are not factors relevant to the question of taxability.'

13. It would thus be seen that the cases cited above are not of any assistance so far as the arguments on the side of the assessee is concerned.

14. The result is that the conditions of Section 41(1) of the Act are satisfied and the assessee is liable to be taxed on the sum of Rs. 44,395. The answer to the question referred to us is in the affirmative, i.e., in favour of the Revenue and against the assessee.

15. The parties are left to bear their own costs of this reference.


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