Rajesh Balia, J.
1. Heard learned Counsel for the parties.
2. This appeal by the Revenue against the order of the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur, dated 19.9.2003 to the extent the order was against the Assessee. It was challenged by way of D.B. Income Tax Appeal No. 8/04 which has since been decided by a separate order dated 17th April 2006.
3. Following two questions of law were framed while admitting the appeal on 14.7.04:
1. Whether the learned Tribunal was justified in law as well as on facts in deleting the addition of Rs. 22,78,980/- on account on cessation/remission of liabilities when the same liabilities were written back and the creditor failed to lodge their claim before BIFR?
4. The question No. 2 was not framed clearly and needs some modification. The modified question required to be considered in this appeal, reaas as under:
2. Whether the learned Tribunal was justified in law as well as on facts by deleting addition of Rs. 97,22,082/- on account of disallowance of bank interest when the same interest was waived by BIFR under the scheme approved by it vide order dated 27.5.93 but written off in the books of account of the assessee ending on 31.3,1993 relevant for the Assessment Year under consideration?
We shall first examine the Question No. 2.
5. The facts relating to question No. 2 are that for the accounting periods prior to Financial Year ending dated 31st March 1993 the interest on dues to various banks and expense deductable under Section 37 of the Income Tax Act while computing taxable income for the relevant Assessment Years. The Assessee is following the Merchantile Accounting i.e. accounts are maintainable on the basis of accrual of liabilities for accrual of income and not cash basis. Therefore, in ordinary circumstances the Trading liability incurred on account of interest that accrued on loans and deposits with the Assessee was liable to deduction while computing taxable income for the Assessment Year up to 1993-94. Interest accrued during earlier assessment years were duly accounted for and allowed as deduction in computation of total income of relevant Assessment Years. Apparently it was an undischarged liability.
6. However Assessee Company became a Sick Industrial Company and its case was pending before the Board of Industrial Financial Construction (BIFR) under the Sick Industrial Companies (Special Provision) Act, 1985. Under the Scheme for its rehabilitation framed by BIFR vide order passed on 27.5.93, interest liability in respect of certain debts of the Assessee due to banks and financial institutions was waived and as a result of which the total amount of Rs. 97,22 lacs stood waived. Simultaneously with the waiver of the interest liability of the assessee company under the scheme, it was also ordained that the assessee company shall be entitled to exemption from operation of Section 41(1) of the Income Tax Act of 1961, in respect of waived liabilities.
7. Section 41(1) states that 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 assessee 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 was in existence in that year or not.
8. The following explanation was inserted with effect from 1.4.97 only and had no retrospective effect.
9. Explanation 1 For the purpose of sub-section of the expression 'loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof' shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under Clause (a) or the successor in business under Clause (b) of that sub section by way of writing off such liability in his accounts.
10. The aforesaid explanation had been inserted in the wake of Judicial Pronouncements that unilateral action by the assessee of written off any liability in his books of accounts does not amount to his remission or cessation. But the same having not been given retrospective effect, the Assessment Years prior to 1997-98 shall be governed as if no explanation existed, on the basis of judicial precedents.
11. As a matter of fact waiver of interest under BIFR came into existence vide order dated 27.5.93 which fell within financial year commencing from 1st of April 1993 and ending on 31st March 1994 and Assessment for which was to be made for year 1994-95 and it did not relate to assessment year 1993-94 in question at all. Under the order of BIFR, the Bank and Financial Institutions on their part were required to waive interest accrued on their advances to the respondent company until the date of order. Though this order was to be operative with effect from the date it was made, the assessee compact, whose books of account were yet to be finalised, write off the said amount of interest in his books for accounting period ending on 31.3.93 relevant for Assessment Year 1993-94. Very significantly, the BIFR order also directed that provisions of Section 41(1) shall not apply to assessee company in respect of directions made in the order. The Assessing Officer, in the first instance, resorted to issue notice under Section 148 of the Act for Assessment Year 1994-95 for including aforesaid liability on account of waiver of interest as a result of order BIFR. However, when it was faced with condition of waiver under the order of BIFR, Section 41(1) will not be' invoked in respect of concession granted to the sick companies, the proceedings under Section 148 were dropped, but sought to consider the same in the course of Assessment for the Assessment Year 1993-94, the made additions of the sum of interest so written off in the books of assessee on the basis of said book only by invoking Section 41(1) of the Act.
12. The additions made by the Assessing Officer under Section 41(1) of the IT Act, 1961 of the amount waived under the orders of BIFR vide order dated 27.5.93 was affirmed by CIT (Appeals).
13. On further appeal, the Appellate Tribunal allowed the appeal and deleted the additions made on account of interest written off in the books of account by the assessee under Section 41(1) of the Act.
14. The Tribunal also noticed that the audited accounts of the respondent company had the following notice:
(i) The effect of the rehabilitation scheme sanctioned by BIFR on 27th May, 1993 have not been considered in the I.T. return for Assessment Year 1993-94 although effect of the same have been given in the books of accounts of the company for the year ended on 31st March, 1993, for the following reasons,
(a) Scheme was sanctioned on 27th May, 1993, i.e. the previous year relating to A. Ys 1994-95; and
(b) Financial Institutions/banks will give effects of the scheme in their books in the financial year 1993-94 as also necessary documents would be executed in the financial year 1993-94.
15. Apparently, from the treatment of order in the Books of accounts cannot effect the position of law. The interest in question had accrued since the advances were received by the assessee and has been dealt with accordingly each year when liability to such interest had accrued. That liability had not ceased and remitted by the Financial Institutions during the financial year relevant to Assessment Year 1993-94. Financial institutions and banks were required to waive the interest only in pursuance of directions issued by BIFR vide its order dated 27.5.93. Hence, waiver of liability of the assessee to pay the interest could come only after that date and not earlier. Merely dealing of such waiver by the assessee in his books of account for earlier period will not alter the effect of the order to befall earlier than interest was made. The Assessment for Assessment Year 1993-94 related to financial year ending on 31.3.93. Only the transactions which actually take place or liability incurred or ceased up to 31.3.93 could be subject matter of consideration.
16. No remission or cession of liability towards interest came into consideration until 31st March 1993. Nor the assessee became entitle to waiver of interest as on 31.3.93 under the order of BIFR. He became entitled to such waiver only under the order of BIFR is not in dispute. It is merely because accounts were completed after order of BIFR came in existence and the Assessee made entries in his books of account by writing off the liability towards interest on the basis of order of BIFR in the wake of scheme sanctioned by BIFR on 27.5.93 and waiver of such liability come into existence only in the previous year corresponding to Assessment year 1994-95. No remission was granted by creditors or any other agency to the assessee to discharge him of liability during the accounting period relevant for the Assessment in question. Nor did the liability cease to exist in the previous year relevant to Assessment Year 1993-94. Therefore, merely on account of making entries in the books of accounts would not effect computation of total income of the Assessee accrued or received by him during the financial year ending on 31st March 1993 in accordance with the provisions of Income Tax Act.
17. At this juncture, we may notice that Explanation (1) to Section 41(1) was inserted vide amendment through Finance Act No. 2 of 1996 with effect from 1.4.97 which made it permissible to add such sum in the income of the assessee in terms of Section 41(1), if the assessee has written off such sum in his books of accounts, as his unilateral act. However, the provision was specifically brought in to effect prospectively w.e.f. 1.4.97 only and did not have retrospective operation. The amendment had come due to the fact that judicial pronouncements have been that Section 41(1). cannot be invoked on unilateral action of writing off liability in his books of account by any debtor, Remission can be only by an act of creditor and cessation of liability can come by agreement or by law.
18. Apparently the present case is a case of writing off the liability to pay interest, accrued in the past, in the books of assessee relating to previous year corresponding to Assessment Year 1993-94, as a result of order passed by BIFR sanctioning scheme for rehabilitation of the respondent assessee, a sick industrial undertaking. The order' sanctioning the Scheme did not come into existence during the accounting period in question. Writing off the sum in the books for accounting period in question was voluntary and unilateral act on the part of the assessee.
19. In the present case, Financial Year ending on 31st March 1993 is relevant to the assessment in question, no waiver was granted under BIFR Scheme in respect of outstanding liability towards interest on advances received from banks and financial institutions. Liability of the assessee cannot be said to have been remitted or ceased to exist prior to the sanction of Scheme by BIFR. Until then no benefit to that extent was obtained by the assessee nor could have been obtained by it by any voluntary act of it. The question of inclusion under Section 41(1) of such sum governed by waive by the BIFR in the income of the Assessee could arise for consideration only while considering. Assessment of Assessment Year 1994-95 relevant to financial year ending on 31st March 1994 during which remission of waiver of interest was directed by BIFR. That was clear purport of the order of BIFR that is how creditors were to act on the direction of BIFR thereafter and that is how the assessee company has to treat the same. The benefit of the interest waived can actually be said to have been obtained by assessee only during financial... relevant to Assessment Year 1994-95. This finding of fact is obvious from the material available on record that no remission or cessation came to company during the accounting period relevant to Assessment Year 1993-94. Therefore, it could not have been taken into account while computing income for Assessment Year 1993-94.
20. Apart from the aforesaid reason there is yet another reason which emerge clearly from the record to justify the order of the Tribunal. The remission on the basis of which assessee had made entries in the books of accounts directly related to the order passed by the BIFR. The order of BIFR could not have been taken into truncated form. Under the orders of BIFR while directing waiver of interest, it was also made clear that Section 41(1) of the Act. In fact the I.T.O. in first instance had issued notice under Section 148 for re-assessment of the Assessment Year 1994- 95, but when faced with the order of BIFR exempting operation, of Section 41(1) of the Act, proceedings were dropped. Thereafter for the same amount of waiver under the same order he made additions in income of the assessee for Assessment year 1993-94 only on the basis of book entries made by the assessee as noted above.
21. As per Revenue's own decision it has accepted the condition of extending operation of Section 41(1) as permissible, and the remission of waiver of interest liability was granted subject to above condition. The assessee has given effect to said waiver in terms of the order of BIFR only at best in the books of financial year ending on 31.3.93, if that waiver by BIFR could be considered as benefit obtained by the assessee during previous year related to Assessment Year 1993-94, it cannot be writ in order of BIFR. Independent of the order of the BIFR there is no remission on cessation which could invite operation of Section 41(1) of Act of 1961, under the order of BIFR operation of Section 4(1) in respect of such waiver is excluded.
22. As a consequence of the aforesaid discussion, we are of the opinion that decision of the Tribunal in deleting the addition made on account of interest written off in books of account of assessee for the Assessment Year 1993-94 by the Assessing Officer on account of waiver of interest by order of BIFR was correct and does not call for interference.
23. We may now examine the issue under question No. 1.
24. The respondent assessee company had written off in his books of account his liability towards payment of commission expenses incurred by him and allowed a deduction in the earlier years considering such unilateral action on the part of assessee as remission or cessation of his liabilities the Assessing Officer invoked Section 41(1) for making addition of Rs. 22,78,980/- benefit obtained by the assessee in respect of amount earlier allowed as deduction while computing his total income and made additions of such sum in computing total income for Assessment Year 1993-94.
25. The Assessing Officer has relied on the decision of Bombay High Court in the case of CIT v. Bennet Coleman and Co. Ltd. : 201ITR1021(Bom) and held that the amount is taxable.
26. On the other hand assessee relied on judgments of different High Court which included judgment of this Court in C.I.T v. Sadul Textiles Ltd. 167 ITR 534 Karnatka High Court in Liquidator, Mysore Agencies Pvt. Ltd. v. C.I.T. Mysore 14 ITR 853 and Calcutta High Court in C.I.T. West Bangal III, Calcutta v. B.N. Elias (P) Ltd. : 160ITR45(Cal) .
27. C.I.T Appeals affirmed the order of the Assessing Officer.
28. However, the Tribunal allowed the appeal of the assessee relying on the decision of Supreme Court in case of Sugauli Sugar Works (P) Lrd : 236ITR518(SC) in which in the like circumstances, the unilateral action of the assessee in writing off his trading liability incurred by him in his books was held neither amounting to remission nor cessation of such liability or cessation merely because the period of limitation of recovery of such sum by the concerned person has expired.
29. Contending that the Tribunal's order in this regard is incorrect and the Tribunal was in error in setting aside the additions made on account of liability incurred towards payment of commission, it is submitted that recovery of such became barred by-time and assessee had written off the sum in the books of accounts of his own amounting to an admission of assessee that liability has ceased to exist and further relying on the circumstance that nobody has lodged claim before the BIFR, as a conduct of creditors.
30. In support of the aforesaid contentions, learned Counsel for Revenue has also pressed into service another Supreme Court decision CIT v. T.V. Sudaram Lyengar & Sons Ltd. : 222ITR344(SC) and followed in CIT v. Aries Advertising Pvt. Ltd. : 255ITR510(Mad) .
31. Learned Counsel for Assessee on the other hand submitted that the present case is squarely governed by the principle enunciated by Supreme Court in CIT v. Sugali Sugar Works Ltd. : 236ITR518(SC) which is related to the remission or cessation of liability incurred by the assessee and unlike Sundaram Lyengar's case is not a case of appropriating money received by the assessee as trading receipt during the course of his business for his own use at earlier occasion, though, when the receipt did not constitute income. In the present case, no amount was required to be refunded and recovery having become barred by time, it appropriated amount received as trading receipt for his own use. It was pointed out that the decision relief by the Revenue in the present case squarely covering the ratio of Saugauli Sugar Works (supra).
32. Now we may consider question No. 1.
33. We have already noticed the provisions of Section 410) above while considering question No. 2 which related to waiver of liability by the order of BIFR, therefore, waiver was not disputed in the order. The fact remains regarding question of remission or cessation of liability. Apparently, on the plain reading of Section 41(1) the term remission relates to any overt or specified act attributed to the creditor to forgo his right of recovery from the debtor, on the other hand cessation of liability may be on account of agreement or by operation of law which may have effect of extinguishing the liability. The other necessary element of operating Section 41(1) is that assessee must actually receive cash or a benefit equal in terms of money in respect of a claim to allowance or deduction of such sum which has earlier been admitted while computing his total income of any earlier year.
34. Expression 'Remission' has been defined in Blacks' Law Dictionary to mean'' a release or extinguishment of a debt. It is conventional, when it is expressly granted to the debtor by a creditor having capacity to alienate; or tacit, when creditor voluntarily surrenders to his debtor for the original title, under private signature constituting the obligation.
35. In the ordinary dictionary meaning Remission in relation to the liability of payment has been stated in Random House Dictionary to mean relinquishment of payment obligation.
36. Apparently, act of remission is attributed to the creditor and it cannot be unilaterally attributed to debtor himself declaring that he will not pay. As noticed above, remission is by an overt or specific act and conduct of the creditor by which liability of the debtor is extinguished. Apparently in the present case there is no material which suggest any act or omission on the part of creditor which results in extinguishment of liability of assessee on his account. Writing off such liability in books of accounts made by debtor only convey the intention of the assessee not to pay. However, intention of debtor about not discharging his liabilities does not extinguish or cause cessation of his liability to discharge his debt so as to hold that he has by manifesting his intention has obtained some benefit in cash or benefit equivalent to that.
37. The Revenue has relied on the circumstances, as stated by the I.T.O. that claims have not been filed before the BIFR by creditor. But it has not been brought to the notice that any provisions exists under Sick Industrial Company (Special Provision) Act, 1985 which required the creditor of the sick industrial company to lodge their claims before BIFR and if such claims are not filed before BIFR, the same stand extinguished. As a matter of fact, object of Sick Industrial Company (Special Provision) Act, 1985 is to explore the possibility of rehabilitation of sick industrial undertaking for its financial vitality. If it is considered possible the BIFR may sanction scheme that may be proposed by the reviving agency. While matter is pending before the BIFR certain rights of creditors remains suspended. But no provision has been brought to our notice which envisages extinguishment of existing right except to the extent they become part of package under sanctioned scheme.
38. It is significant to notice that in case BIFR comes to conclusion that the company is not capable of revival or the scheme sanctioned for its revival fails, it does not result automatic closure or winding of the company and extinguishment of all liabilities of the company but the BIFR is authorised to recommend winding of the company through procedure under the Companies Act. In that event if winding up order is made by order of the Company Court, on an application being made to it in accordance with the provisions of Company Act. It is only after rules are made by the competent courts and Official Liquidator or provisional official Liquidator as appointed that the claims of the outstanding against the sick company are required to be lodged before the Official Liquidator after creditors are invited to do so and they are dealt with under the Companies Act. But that stage has not at all reached. This is only to demonstrate the out standing against the company before BIFR and does not extinguish or ceases to exit merely because the creditors have not approached BIFR. Hence, the ITO and CIT (A) have taken into consideration wholly irrelevant circumstance that creditors have not approached BIFR.
39. The aforesaid conclusion is in consonance with the decision of Supreme Court in case of CIT v. Sugauli Sugar Works Pvt. : 236ITR518(SC) It was a case in which assessee has unilaterally transferred certain amount out of suspense account running from 1946 to 1948-49 to the capital reserve account. Excluding the amount which has been refunded by the assessee remaining capital reserve by the assessee was included in income of the assessee by the Assessing Officer which was affirmed by the CIT. The Tribunal accepted the contention of the assessee and held that its unilateral entry in accounts transferring the amount to the capital reserve account would not bring the matter within the scope of Section 41(1) of the Income Tax Act 1961 and it neither results in remission nor in cessation of liability. The revenue had contended that since amount so transferred had become barred by limitation and recovery proceedings could not have been initiated by the creditors, the action of the assessee in transferring the amount from suspense account to capital reserve fund resulted in it becoming trading surplus in his hands. Consequently, it was liable to be included as income in computing taxable income of the assessee under Section 41(1) of the Income Tax Act, 1961.
40. Supreme Court rejected the contention of Revenue while upholding order of the High Court by laying down the ratio that obtaining any amount or a benefit by virtue of remission or cessation is sine qua non for the application of Section 41(1). The mere fact that the assessee has made an entry of transfer in his account unilaterally will not enable the department to say that Section 41(1) would apply and the amount should be included in the total income of the assessee.
41. In coming to its conclusion Court relied on the large Bench decision of Gujarat High Court in case of CIT v. Rashmi trading (1975) 103 ITR 312 that the only meaning that can be attached to the words 'obtained', whether in cash or any other manner whatsoever, any amount in respect of such loss or expenditure incurred in any previous year clearly refer to the actual receiving of the cash or benefit equivalent to that amount. The amount may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or the equivalent of cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words 'has obtained', whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past'. As rightly observed by the Division Bench in the context in which these words occur, no other meaning is possible.
42. On the other hand, it disapproved the decision of Bombay High Court in CIT. v. Bennett Coleman and Co. Ltd. : 201ITR1021(Bom) (relied on by the revenue in this case also) and also held that principle enunciated in Bombay Dyeing and . v. State of Bombay : (1958)ILLJ778SC is well applicable under Section 41(1) of the Income Tax Act, 1961. It is held that the principle that 'expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt' has been well settled.
43. It is enough to refer to decision of this Court in Bombay Dyeing and . If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that will not by itself confer any benefit on the debtor as contemplated by the section.
44. Thus, Supreme Court affirmatively stated that in order to operate Section 41(1) of the Act as existed before insertion of Explanation, unilaterally in books of account by transfer of certain amount liability in profit and loss account neither availed benefit seized nor remission or cessation of liability. Trading liability incurred by the assessee to make room invoking Section 41(1) of the Income Tax, 1961.
45. This principle was reiterated and restated in subsequent decision in case of CIT v. Kesaria Tea Co, Ltd. : 254ITR434(SC) . It was a case in which assessee engaged in a business of tea, spices etc had made a provision for purchase tax liability and necessary adjustment were made in the books of account. On that premises it was contended by the Revenue that fact that assessee itself took steps to write off the liability on account of purchase tax by making necessary adjustment in the books, which itself was indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of the amount deeming the same as income of the year 1985-86 under Section 41(1). But, what the assessee has done is not conclusive. As observed by the Tribunal, a unilateral action on the part of the assessee by way of writing off the liability in the accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this Court in CIT v. Sugauli Sugar Works (P) Ltd. : 236ITR518(SC) .
46. In coming to this conclusion the Court said that Explanation 1 to Section 41(1) was inserted w.e.f. 1.4.97 to Section 41(1) and was not retrospective in operation and did not govern assessments prior to Assessment Year 1997-98.
47. Coming to the decision of Supreme Court in CIT v. T.V. Sundaramn Iyengar & Sons Ltd. : 222ITR344(SC) it may be stated that the said case related to the money received in past by the Assessee but was appropriated for his own use during the previous year relevant to assessment in question. Such amount when originally received were capital receipts and not liable to be taxed as income. The question did not relate to making of any allowance or deduction claimed by the assessee. The court considered the matter as a case of appropriation of money during the year for own use resulting in change in nature of receipt from capital to revenue and becoming a trading surplus. The question about remission or cessation of liability allowed to be adjusted or deducted from income was not the question before the Supreme Court.
48. Though, the decision of Supreme Court in T.V. Sundaramn's case was not noticed in Sugauli Sugar Works case, but in the later decision the Supreme Court in CIT v. Kesaria Tea Co. Ltd. : 254ITR434(SC) which is also of 3 judges bench decision, referred in CIT v. Sundaramn Iyengar and Sons Ltd. : 222ITR344(SC) and distinguished the same while considering the provisions of Section 41(1) of the Act and followed its earlier decision in Sugauli Sugar Works case (supra).
49. In view of the clear pronouncement of Supreme Court decision on the contrary, we need not refer to other judgments cited by the learned Counsel for the assessee or the Revenue from the different High Courts anterior to the decision of Supreme Court.
50. However, it would be apposite to notice the decision of Madras High Court in CIT v. Aries Advertising Pvt. Ltd. : 255ITR510(Mad) . It was a case in which assessee had unilaterally written back in his profit and loss account, the unclaimed balance stating credit in his account. The revenue has sought to add the unclaimed amount so written off in his profit and loss account as income of the previous year relevant to the assessment year in question by invoking Section 41(1) of Act of 1961. It was urged before the Madras High Court, by the Revenue and sustained by the Madras High Court inter alia on the ground that although, the amounts received originally were not income in nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the depositors became time barred and the amount attains a totally different quality. It becomes a definite trade surplus.
51. The assessee itself treated the money as its own money and took the amount to its profit and loss account. The amounts were assessable in the hands of the assessee. Suffice it to say that the Madras High Court relied on the decision of CIT v. T.V. Sundaram Iyengar and Sons Ltd. and upheld the contention. However, the decision of Supreme Court in Sugauli Sugar Works case not brought to the notice of the Madras High Court which was a later decision and ratio of which fully governs the case nor the decision of Supreme Court in Kesaria Tea Exporter : 254ITR434(SC) in which T.V. Sundaram was distinguished and it was held that Section 41(1) of the Income Tax Act in like circumstances cannot be invoked. Therefore, in view of two Supreme Court decisions clearly clinching the issue in one of which earlier decision in T.V. Sundaram Iynger was referred and distinguished with utmost respect, we are unable to agree with the conclusion reached by the Madras High Court in case of Aries Advertising (supra).
52. The Tribunal, in our opinion was right in holding that Section 41(1) cannot be invoked in respect of the amount which assessee paid as commission and written off in books of account of profit and loss account.
53. Consequently we do not find any merit in this appeal and the same is hereby dismissed. No costs.