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Commissioner of Income-tax Vs. B.N. Elias and Co. (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 225 of 1977
Judge
Reported in[1986]160ITR45(Cal)
ActsIncome Tax Act, 1961 - Section 41(1)
AppellantCommissioner of Income-tax
RespondentB.N. Elias and Co. (P.) Ltd.
Appellant AdvocateH.M. Dhar and ;A.N. Bhattacharjee, Advs.
Respondent AdvocateR.N. Dutta, Adv.
Excerpt:
- .....by the supreme court in bombay dyeing & , : (1958)illj778sc , followed an earlier decision of the bombay high court in j.k. chemicals ltd. v. cit : [1966]62itr34(bom) and held that the amount in question was not chargeable to tax. the high court observed as follows (p. 330 of 96 itr) : 'when a debtor decided not to show an amount as due to the creditor because the amount had become irrecoverable under the statute of limitations and when he proceeded to divide the amount for his own purposes all that it meant is that the amount is not recoverable from him and that he does not intend to pay that amount if an action is taken by the creditor against him. there is in terms no admission that there is no liability. it is a well-known principle that if a recovery of a debt had become barred,.....
Judgment:

Dipak Kumar Sen, J.

1. M/s. B. N. Elias & Co. (P.) Ltd., the assessee, was assessed to income-tax in the assessment year 1971-72, the relevant accounting year ending on September 30, 1970. The assessee had 127 creditors to whom diverse amounts were due by the assessee by way of sundry trade liabilities aggregating to Rs. 1,81,380. The said dues had remained unclaimed for more than three years and in the accounting year involved, the assessee wrote off the said debts in his accounts making corresponding credit entries in the profit and loss account. The assessee contended that the said amount was not taxable as there was neither remission nor cessation of the liabilities. The Income-tax Officer found that the amounts had remained unclaimed for the years in question, that they had become barred by limitation and the assessee's liabilities for the claims had ceased. He held that the said amount should be treated asbusiness income of the assesses under Section 41(1) of the Income-tax Act, 1961, in the said assessment years.

2. On an appeal preferred by the assessee, the Appellate Assistant Commissioner held that cessation of a liability need not necessarily flow from any overt act on the part of the creditor giving up his claim against the debtor as remission. He found that the creditors of the assessee had been deprived of their remedy to institute proceedings in a court of law to recover the debts by reason of limitation, the liability of the assessee after the expiry of the period of limitation was merely notional and not real and in the absence of any legal remedy, the rights of the creditors had ceased and the assessee had written back the liabilities to the credit of its profit and loss account. The Appellate Assistant Commissioner rejected the contentions of the assessee and upheld the decision of the Income-tax Officer.

3. Being aggrieved, the assessee went up on further appeal before the Income-tax Appellate Tribunal. On consideration of the rival contentions, the Tribunal followed and applied a decision of the Kerala High Court in Kuttappu & Sons : [1974]96ITR327(Ker) , and held that Section 41(1) of the Act had been wrongly applied in the case of the assessee. The Tribunal allowed the appeal and deleted Rs, 1,81,380 from the total income of the assessee.

4. On an application of the Revenue under Section 256(1) of the Income-tax Act, the Tribunal has referred the following question, as a question of law arising out of its order, for the opinion of this court:

'Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 41(1) of the Income-tax Act, 1961, the Tribunal was correct in holding that the sum of Rs. 1,81,380 could not be included in the total income of the assessee ?'

5. Learned advocate for the assessee contended that the controversy raised in the question was well-settled in favour of the assessee. In support of his contentions, he cited the following decisions :

(a) Bombay Dyeing & . v. State of Bombay : (1958)ILLJ778SC . This decision was cited for the following observation of the Supreme Court (p. 337):

'... when a debt becomes time-barred, it does not become extinguished but only unenforceable in a court of law. Indeed, it is on that footing that there can be a statutory transfer of the debts due to the employees, and that is how the Board gets title to them. If then a debt subsists even after it is barred by limitation, the employer does not get, in law, a discharge therefrom. The modes in which an obligation under a contract becomesdischarged are well defined, and the bar of limitation is not one of them.'

'... if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that in the normal course he is not likely to be exposed to action by the creditor. '

(b) CIT v. V.T. Kuttappu & Sons : [1974]96ITR327(Ker) . In this case, the assessee, a firm, credited to the accounts of its two partners an amount which represented credit balances long unclaimed in the accounts of a number of its creditors. In the assessment of the firm, the amount was treated as profits chargeable to tax under Section 41(1) of the Act.

A Division Bench of the Kerala High Court applied the principles laid down by the Supreme Court in Bombay Dyeing & , : (1958)ILLJ778SC , followed an earlier decision of the Bombay High Court in J.K. Chemicals Ltd. v. CIT : [1966]62ITR34(Bom) and held that the amount in question was not chargeable to tax. The High Court observed as follows (p. 330 of 96 ITR) :

'When a debtor decided not to show an amount as due to the creditor because the amount had become irrecoverable under the statute of limitations and when he proceeded to divide the amount for his own purposes all that it meant is that the amount is not recoverable from him and that he does not intend to pay that amount if an action is taken by the creditor against him. There is in terms no admission that there is no liability. It is a well-known principle that if a recovery of a debt had become barred, what is barred is only the remedy and not the right. A fortiori the corresponding obligation must continue even after the recovery of the debt had become barred.'

(c) Liquidator, Mysore Agencies Pvt. Ltd. v. CIT : [1978]114ITR853(KAR) . In this case, an amount had been debited in the accounts of the assessee, a company in liquidation, towards rent payable to its landlord and had been allowed as a trading expense in its earlier assessments of income-tax. In a subsequent year, the liquidator transferred the amounts to the profit and loss account as an item of credit as the period of limitation prescribed for the recovery of the amount had expired. A Division Bench of the Karnataka High Court, following Bombay Dyeing & . : (1958)ILLJ778SC , held that the said amount could not be treated as income. The High Court quoted a legal principle from Salmond on Jurisprudence, 12th edition, as follows (at p. 857 of 114 ITR) :

'The statute of limitations, for example, does not provide that after a certain time a debt shall become extinct, but merely that no action shall thereafter be brought for its recovery. Lapse of time, therefore, does not destory the right, but merely reduces it from the rank of one which is perfect to that of one which is imperfect. It remains valid for all purposes save that of enforcement. It may be good as a ground of defence, it may suffice to support any security given for it, and it may possess the capacity of becoming a perfect right. Money paid in satisfaction of a statute-barred debt cannot be recovered ; a pledge securing the debt remains valid; and acknowledgment of the debt by the debtor will revive the creditor's right of action. All these cases of imperfect rights are exceptions to the maxim, ubi jus ibi idem remedium. The customary union between the right and the right of action has been for some special reason served, but the right survives.' (d) CIT v. Sadabhakti Prakashan Printing Press (P) Ltd. : [1980]125ITR326(Bom) . In this case, another Division Bench of the Bombay High Court following J.K. Chemicals Ltd. : [1966]62ITR34(Bom) , held that where deduction had been claimed and obtained earlier on an amount shown as provision for gratuity, the appropriation of the said amount later by reversal of the entry in the profit and loss account would not attract the provisions of Section 41(1) of the Act. It was reiterated that the transfer of an entry was an unilateral act and did not bring about cessation of the liability of the debtor.

(e) CIT v. Sugauli Sugar Works P. Ltd. : [1983]140ITR286(Cal) . In this case, the assessee transferred an amount out of its suspense account to its capital reserve account. It was found that a part of the said account represented liability for expenses which had been allowed as deduction in earlier years but the debts had become barred by limitation. The Income-tax Officer invoked Section 41(1) of the Act to include this amount in the total taxable income of the assessee. It was held by a Division Bench of this court following Bombay Dyeing & . : (1958)ILLJ778SC , J.K. Chemicals Ltd. : [1966]62ITR34(Bom) and Sadabhakti Prakashan Printing Press Pvt. Ltd. : [1980]125ITR326(Bom) , that there was neither a remission nor a cessation of the trading liabilities though the same had become barred by limitation and the same could not be included in the total income of the assessee. The Division Bench dissented from a contrary decision of the Allahabad High Court in Indian Motor Transport Co. v. CIT [1978] 114 ITR 677.

Learned advocate for the assessee cited the said decision of the Allahabad High Court in Indian Motor Transport Co. Ltd. [1978] 114 ITR 677 and also a decision of the Madhya Pradesh High Court in CIT v. Mathuralal Kapoorchand & Co. : [1983]141ITR297(MP) . The later decisionwas cited for the proposition that whether a debt has become bad or not cannot be determined merely on the basis of statement of assets and liabilities of the creditor. This decision is of little relevance in the facts before us and supports the case of the assessee indirectly.

6. We accept the contention of the assessee that the point raised in the question is covered in favour of the assessee by the decision of the Supreme Court in Bombay Dyeing & . : (1958)ILLJ778SC , as also the earlier decision of this court in Sugauli Sugar Works P. Ltd. : [1983]140ITR286(Cal) .

7. We answer the question referred in the affirmative and in favour of the assessee. There will be no order as costs.

G.N. Ray, J.

8. I agree.


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