Bhaskar Bhattacharya, J.@mdashThis appeal u/s 260A of the income tax Act, 1961 is at the instance of an assessee and is directed against an order dated 16-4-2004 passed by the income tax Appellate Tribunal, "B" Bench, Kolkata, in income tax Appeal bearing ITA No. 892 (Kol.)/2003 for the assessment year 1995-96. The facts giving rise to filing of this present appeal may be summed up thus:
(a) The assessee is a public limited liability company within the meaning of the Companies Act, 1956 which carries on business of growing and manufacturing tea. The assessee has 17 tea gardens and its employees from time to time come from the gardens to the assessee''s headquarters at Calcutta for the purpose of the assessee''s business. The assessee maintains a transit flat at Calcutta for the garden employees who come to the Headquarters for official work which is used exclusively for the employees coming for official work and the assessee does not pay any allowance to such employees and no recovery is also made from them for their stay at the transit flat.
(b) According to the assessee, the Assessing Officer for the assessment years 1988-89 to 1992-93 illegally treated the transit flat as guest house within the meaning of sub-section (4) and sub-section (5) of section 37 and disallowed the expenditure relating to maintenance of such transit flat. On appeal, the assessee succeeded before the Commissioner (Appeals) for the assessment year 1988-89 but in the subsequent years, the disallowance was upheld. On further appeal, the Tribunal upheld the treatment of the transit flat as guest house within the meaning of sub-section (4) and sub-section (5) of section 37. The Tribunal, however, limited the nature of expenses which could be subjected to disallowance. According to the Tribunal, disallowance could be made only in respect of depreciation and rent. Any other expenditure covered by the provisions of sections 30 to 36 could not be disallowed u/s 37(4).
(c) During the previous year ending on 31-3-1995, the assessee credited to its profit and loss account, inter alia, a sum of Rs. 5,02,646 as liabilities no longer required to be written back since the cheques for the said amount issued to the creditors were not presented within the validity periods. The assessee claimed that the said sum of Rs. 5,02,646 was liable to be excluded from the profit as per profit and loss account and could not be subject to tax u/s 41(1) of the Act since the action of the assessee in writing off the said amount was an unilateral act and there was no remission or cessation of the trading liability nor had the assessee obtained any cash or any amount in respect of such expenditure or any benefit within the meaning of the said section.
(d) By assessment order dated 30-3-1998, the Assessing Officer treated the expenditure of the transit flat as falling under the purview of sub-sections (4) and (5) of section 37 and disallowed such expenditure. The Assessing Officer further treated the aforesaid amount of Rs. 5,02,646 as the assessee''s income u/s 41(1) of the Act.
(e) Being dissatisfied, the assessee preferred an appeal before the Commissioner of income tax (Appeals) but the said authority dismissed the appeal and upheld the view of the Assessing Officer on both the grounds.
(f) Being dissatisfied, the assessee preferred an appeal before the income tax Appellate Tribunal and by the order impugned in this appeal, the said Tribunal has dismissed the appeal and upheld the view of the Commissioner of income tax (Appeals).
(g) On the issue relating to transit expenditure, the Tribunal followed its orders for the assessment years 1993-94 and 1994-95 and with regard to the sum of Rs. 5,02,646, the Tribunal held that writing off the said amount in the books of account was not an unilateral act of the assessee but had resulted out of the creditors'' conduct in not presenting the cheques to the Bank for encashment within the validity period and not claiming the amount from the assessee within the limitation period and the assessee had also not shown any desire to pay the amount to the creditors. The Tribunal held that liability in respect of the said amount was extinguished or remitted within the meaning of section 41(1) of the Act.
Being dissatisfied, the present appeal has been filed.
2. A Division Bench at the time of admission of the appeal formulated the following substantial questions of law:
(a) Whether on a proper interpretation of the provisions of sub-sections (4) and (5) of section 37 of the income tax Act, 1961 the Tribunal was justified in law in holding that the transit flat for employees was a guest house and the expenditure in respect thereof was to be disallowed as expenditure on the maintenance of guest house within the meaning of the said provisions.
(b) Whether the Tribunal was justified in law in holding that the liability in respect of the sum of Rs. 5,02,646 representing cheques not encashed by the appellant''s suppliers within the validity period thereof stood extinguished or remitted and the said amount was liable for tax u/s 41(1) of the income tax Act, 1961.
3. Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant, at the very outset, fairly conceded that so far as the question No. (a) formulated above is concerned, his client is bound by the Division Bench decision of this Court in the case of
4. In support of the aforesaid point, Mr. Khaitan contended that his client maintains mercantile system of accounting and there is no dispute that the cheques for the aforesaid amount were duly given to the creditors who, however, did not encash those cheques. According to Mr. Khaitan, merely because those creditors did not encash the cheques, does not imply that those debts have been either extinguished or become barred under the law of limitation. According to Mr. Khaitan even if it is assumed for the sake of argument that the period of limitation for filing a suit for recovery of that amount has become barred, the debt of his client to the aforesaid extent has not been extinguished as pointed out by the Supreme Court in various decisions.
5. In support of such contention, Mr. Khaitan relies upon the following decisions:
1. CIT v. Agarpara Co. Ltd. [1986] 158 ITR 78 : 27 Taxman 186.
2.
3. CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 102 Taxman 713 (SC)
4.
6. Mr. Khaitan contends that the learned Tribunal below committed substantial error of law in holding that the provisions contained in section 41(1) of the Act are attracted in the facts of the present case.
7. Mr. Bhowmick, the learned counsel appearing on behalf of the revenue has, on the other hand, opposed the aforesaid contention of Mr. Khaitan and has contended that the Tribunal below has rightly held that section 41(1) of the Act was applicable from the materials on record. In support of such contention, Mr. Bhowmick has relied upon the decision of the Supreme Court in the case of
8. In order to appreciate the aforesaid question, it will be profitable to refer to the provision contained in section 41(1) of the Act which is quoted below:
41. Profits chargeable to tax. -(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 assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-
(a) the first-mentioned person 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 such person 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; or
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income tax as the income of that previous year.
9. The Supreme Court had, in the case of Sugauli Sugar Works (P.) Ltd.''s case (supra) the occasion to consider the effect of section 41 of the Act. In that context, it was held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that section 41 would apply and the amount should be included in the total income of the assessee. It was further held therein that it could not be said that the liability had come to an end as period of more than 20 years had elapsed and creditor had not taken any steps to recover amount. Expiry of period of limitation, the Supreme Court pointed out, did not extinguish the debt but only prevented the creditor from enforcing the debt.
10. The following observations of the Supreme Court, approving an earlier Full Bench decision of the Gujarat High Court in that case, are relevant and quoted below:
As pointed out already, the crucial words in the section require that the assessee has to obtain in cash or in any other manner some benefit. That part of the section has been omitted to be considered by the Division Bench of the Bombay High Court. The said words have been considered by a Full Bench of Gujarat High Court in detail in CIT v. Bharat Iron & Steel Industries [1993] Tax LR 188. The following passages in the judgment brings out of the reasoning of the Full Bench succinctly (At Pp. 195 and 196 of Tax LR):
11. In our opinion, for considering the taxability of amount coming within the mischief of section 41(1) of the Act, the system of accounting followed by the assessee is of no relevance or consequence. We have to go by the language used in section 41(1) to find out whether or not the amount was obtained by the assessee or whether or not some benefit in respect of trading liability by way of remission or cessation thereof was obtained by the assessee and it is in the previous year in which the amount or benefit, as the case may be, has been obtained that the amount or the value of the benefit would become chargeable to income tax as income of that previous year.
12. We fully agree with the view taken by the Division Bench in CIT v. Rashmi Trading [1977] Tax LR 520 (Guj.) (supra) that the only meaning that can be attached to the words "obtained, whether in cash or in 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 of 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 the 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.
We are in agreement with the said reasoning.
[Emphasis supplied]
11. The aforesaid provisions of the income tax Act came up for further consideration before a Larger Bench of the Apex Court in the case of the Kesaria Tea Co. Ltd.''s case (supra) where the Supreme Court reiterated the views taken in the case of Sugauli Sugar Works (P.) Ltd. (supra). The following observations of the Court are relevant and quoted below:
It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31-3-1985 for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exists so as to enable the revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e., 1985-86. In order to apply section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view : (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills'' case, the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the sales-tax department was still going on. There is no material on record to rebut these factual observations made by the Tribunal. Nor can it be said that the reasons given by the Tribunal are irrelevant.
The learned senior counsel appearing for the income tax Department has contended that the assessee itself took steps to write-off the liability on account of purchase tax by making necessary adjustments in the books, which itself is indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of amount of Rs. 3,20,758 deeming the same as income of the year 1985-86 u/s 41(1) is well justified of the Act. But, what the assessee has done is not conclusive. As observed by the Tribunal, an unilateral action on the part of the assessee by way of writing-off the liability in its 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
[Emphasis supplied]
12. The case before us also relates to the period anterior to the introduction of the Explanation 1 to section 41(1) of the Act.
13. We, therefore, find that the learned Tribunal below totally misconstrued the provisions contained in section 41(1) of the Act in adding the disputed amount as the income of the assessee for the relevant year.
14. In the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) relied upon by Mr. Bhowmick appearing for the revenue, the principle that was enunciated has been reflected from the following observations made therein:
In other words, the principle appears to be that it an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character the amount changes its character when the amount becomes the assessee''s own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.
[Emphasis supplied].
15. In the case before us, it has not been established that for non-encashment of the cheques in question, the money involved has become the money of the assessee because of limitation or by any other statutory or contractual right. Incidentally, it may be mentioned here that the aforesaid decision in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), was also relied upon by the learned counsel for the revenue in the case of Kesaria Tea Co. Ltd. (supra) and the Supreme Court in paragraph 6 of the judgment dealt with the decision by making the following observations:
The decision of this Court in
16. We also propose to adopt the same observations in the above decision. Moreover, as pointed out in the case of Sugauli Sugar Works (P.) Ltd. (supra), vide the last five lines of the paragraph 6 of the judgment, the question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee''s case alone but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act.
17. We, thus, find that the views taken by the Tribunal are totally opposite the ones taken by the Supreme Court mentioned above and consequently, are not tenable. The order of the Tribunal below is, thus, set aside and the Assessing Officer is directed to delete the aforesaid amount involved from the income of the assessee for the relevant year.
18. The appeal is, consequently, allowed by answering the first formulated question in the affirmative and against the assessee and the second question in the negative and against the revenue. In the facts and circumstances, there will be, however, no order as to costs.
Sambuddha Chakrabarti, J.
I agree.
