General Industries Corpn. vs Income-Tax Officer.
1990 Latest Caselaw 117 Del

ORDER

Per Sharma - This appeal filed by the assessed it directed against the order dated 11-2-1987 passed by the CIT (A) for the assessment year 1982-83.

2. For the assessment year 1982-83, the assessed has been assessed in the status of URF. The assessed during the accounting year ending on 30th September, 1981 relevant to the assessment year under consideration wrote off an amount Rs. 1,42,404 and made corresponding credit entries in the profit and loss account. The income assessed at Rs. 1,71,000 by the ITO, thus, included an amount of Rs. 1,42,404 being sundry creditors written off. There is no discussion in the assessment order regarding this amount, But before the CIT (A) it was stated that before the ITO it was claimed that the said amount should be excluded from its income. Since, there was no discussion in the ITOs order regarding the amount of Rs. 1,42,404 and CIT (A) asked for the comments and report of the ITO who vide his report dated 28-1-1987 pointed out that the assessed wrote off the following amount :

Head of Account

Amount written off : Rs.

1. Shriram Associates Ltd. (HO) a/c (Now Shri Girdhari Associates Ltd.) (Partner)

87,533.09

2. Shriram Associates Ltd. (Taxes) A/c. (Partner)

10,355.62

3. Lala Bharat Ram (Outsider)

27,249.77

4. Bharat Ram Charat Ram P. L. (Outsider)

17,266.33

1,42,404.81

3. The ITO mentioned in his report that the amounts written off also included expenditure allowed to the assessed in the earlier years and, therefore, to the extent of the amount allowed as deduction, the same has to be treated as income u/s 41(1). He further reported that the account of Shriram Associates Ltd. was that of partners. Out of the account of Shriram Associates Ltd. (HO) Account, no details were furnished in respect of an amount of Rs. 30,849 and Rs. 25,430 (the correct amount should be as Rs. 20,650) was interest paid to the said partners, which was also allowed as a deduction. The ITO further reported that the remaining amount of Rs. 36,035 admittedly was not allowed as an expenditure in the earlier years. Similarly, in the account of Shriram Associates Ltd. (Taxes) Account, no details were furnished for Rs. 5,818 and a sum of Rs. 4,537 was on account of interest paid to the partner and which was allowed as a deduction in the earlier years. It was further reported that in the case of the account of Lala Bharat Ram, who was not a partner, a sum of Rs. 13,591 was not allowed as an expenditure, but the remaining amount of Rs. 13,659 was allowed as an expenditure. Out of the account of M/s. Bharat Ram Chand Ram Pvt. Ltd. a sum of Rs. 4,327 was not allowed as a deduction but Rs. 12,943 was the expenditure and the same was allowed as a deduction. Thus, as per report of the ITO, out of the total amount of Rs. 1,42,404 only on amount of Rs. 53,940 was not allowed as expenditure in the earlier years.

4. Before the CIT (A) it was submitted on behalf of the assessed that so far as the interest paid by the assessed-firm to its partner, namely, M/s. Shriram Associates Ltd. was concerned, this could not be regarded as an expenditure allowed, since, it got added back u/s. 40(b). In the alternative, it was pleaded that even if interest was allowed as a deduction, since, it was otherwise not allowable as deduction, it could not form part of the deemed income within the meaning of section 41(1). Regarding the remaining amount which represented other expenses in computing the income of the firm as well as regarding interest paid to the partners, a common argument was advanced to the effect that there was no remission of liability of expenses which could be brought to tax u/s. 41(1) because creditors incurred expenses on behalf of the firm and as far as the firm was concerned, remission was not by the creditors to whom the amounts were payable.

5. The CIT (A) held that in respect of those amount written off for which no details were furnished by the assessed in spite of the specific opportunities given, it has to be presumed that they may also represent expenses incurred on behalf of the firm. Which may have been allowed in computation of the firms income in the earlier years. These amounts are Rs. 30,849 out of the account of Shriram Associates Ltd. (HO) account and Rs. 5,818 out of the account of Shriram Associates Ltd. (Taxes Account). Regarding the amount of Rs. 25,430 and Rs. 4,537 representing interest allowed to the partners, the CIT (A) observed that the assesseds contention that these amounts were added back u/s. 40(b) was not supported by any evidence and, therefore, it could not be said that they were not allowed as deduction in computing the assesseds income. The CIT (A) then pointed out that the firm received interest from the partners as well as paid interest to the partners and that the ITO in the assessment of the firm for the earlier years included interest only in excess of what was paid by the partners to the firm. This was evident from the assessment orders for the asst. years 1975-76 and 1976-77. The CIT (A) was of the opinion that if the difference has been added as income, it was apparent that no disallowance u/s. 40(b) has been made. Thus, the CIT (A) concluded that the interest paid by the assessed to its partners has been allowed as deduction in the earlier years. The CIT (A) thus, concluded that so far as the amounts of interest to the said partners are concerned, it fell within the ambit of section 41(1) and that in respect of these amounts, there has been a cessation of liability. The CIT (A) further held that barring the amount of Rs. 59,349 remaining amounts written off by the creditors would have been treated u/s 41(1). The CIT (A) therefore, directed that as against Rs. 1,42,404, Rs. 88,455 was to be included in the income of the assessed. Aggrieved, the assessed has come up in second appeal before the Tribunal.

6. Though the CIT (A) has held that out of the amounts of Rs. 1,42,404 only Rs. 88,455 were includible as income, the assessed in the grounds of appeal raised before us has challenged this part of the order of the CIT (A) relating to an aggregate amount of Rs. 75,515 out of Rs. 1,42,405 representing the following sundry creditors written off as income of the assessed :

Rs.

Rs.

Shriram Associates Ltd. (HO) Account

51,498.00

Shriram Associates Ltd. (Taxes) Account

10,358.00

Lala Bharat Ram

13,659.00

75,513.00

7. Ground Nos. 2 to 4 challenge the order of the CIT (A) treating the said amount of Rs. 75,515 as income of the assessed. Shri G. C. Sharma, Advocate, appearing for the assessed stated before us that out of the amount of Rs. 51,498 the sum of Rs. 30,849 represented a brought forward item in the account of the partner and the balance amount of Rs. 20,650 was the amount of interest paid to the partner. Shri Sharma in course of his arguments did not challenge the finding of the first appellate authority to the effect that interest paid to the partner by the assessed firm was allowed as a deduction in the earlier years in computation of the assesseds income. It was, however, argued by Shri Sharma that section 40(b) put an express embargo in the matter of allowing interest paid to a partner as a deduction and that in view of this provision deduction on account of interest paid to the partner could not have been allowed in the computation of income of the assessed. According to Shri Sharma, section 41(1) has no application to a case where an allowance or deduction has been wrongly allowed or has been allowed in violation of the express provisions of law. So, his contention is that section 41(1) is called into play only when an allowance or deduction has been allowed in the earlier years in accordance with law. If a deduction has been wrongly made, according to Shri Sharma, section 41(1) would not apply and according to him, in such a case the remedy for the department is to reopen the assessment and not to invoke section 41(1). In this connection reference has also been made to circular No. 882 dated 25-9-75 issued by the CBDT.

8. Shri D. C. Aggarwal, learned Sr. DR, on the other hand, fully supported the impugned order of the CIT (A) on the point under consideration. It was submitted that since the assessed itself treated the amount in question as its income, it was for the assessed to show that it was not its income and, therefore, the entire amount of Rs. 1,42,404 was rightly included by the ITO in the income of the assessed. In this connection, reliance has been placed on the decision of the Allahabad High Court in Pioneer Consolidated Co. of India Ltd. v. CIT [1976] 104 ITR 686.

9. We have considered the rival submissions as also the facts on record. It was stated before us on behalf of the assessed by Shri Sharma that the assessed was a defunct firm and it did not carry on any business for the last two years and that its business had been taken over by Bengal Potteries Ltd.

10. Section 41(1) of the I. T. Act, 1961 provides that where an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability and subsequently during any previous year, the assessed has received whether in cash or in any manner, whatsoever, any amount in respect of such loss or expenditure, or the assessed is benefited by the remission or the cessation thereof, the amount, thus, obtained by him or the value of the benefit thus accruing to him, shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year whether the business in respect of which the allowance or deduction had been made is in existence in the year in which the liability arises or not. Thus, this subsection enables the revenue to tax as income what it had allowed as a deduction in the earlier years. It should, therefore, be established that the receipt sought to be assessed represented the allowance or deduction granted or the remission or cessation of the trading liability allowed to be deducted in any year prior to the previous year in which the amount for the benefit was received.

11. Section 41(1) speaks of an allowance or deduction which has been made in the assessment for any year in respect of the loss, expenditure or trading liability incurred by the assessed. In our opinion, it is an allowance or deduction, which is permissible under law, which is covered u/s. 41(1). We are fortified in taking this view by the decision of the Madras High Court in the case of CIT v. India Cements Ltd. [1975] 98 ITR 69. In this case, in calculating the remuneration payable to the managing agents of the assessed-company for the year ended March, 31, 1960, depreciation on the basis of the rules in force on that date was deducted from the total profits. The amount arrived at on that basis was actually paid to the managing agents. However, by a subsequent notification issued on 23-9-1960, the rules relating to 1-4-1960. In the assessment proceedings for the assessment year 1960-61, the assessing officer took note of the amended rules and held that on the basis of the amended rules a higher amount of depreciation would have to be deducted from the total profits to arrive at the net profits for calculating the amount of remuneration payable to the managing agents. Accordingly, he was of the view that a sum of Rs. 73,272 was paid to the managing agent over and above what they were entitled to under the agreement and disallowed the same. On appeal, the AAC held that the amount was allowable and the Appellate Tribunal also agreed with this view. On a reference made to the High Court at the instance of the revenue, it was held by the High Court that the amount over-paid to the managing agents was not an allowable deduction u/s. 10(2) (xv) of the Income-tax Act, 1922. It was further held by their Lordships of the Madras High Court that section 10(2A) of the I. T. Act, 1922 (which corresponds to section 41(1) of the Income-tax Act, 1961) does not cover a mistaken payment or a mistaken calculation. Here it may be pointed out that before the High Court, one of the contentions raised on behalf of the assessed was that on the analogy of section 10(2A) any amount paid in excess of the amount due to the managing agent would in law be deemed to be held by them as trustees and liable to be paid to the company and that as and when the amount was paid back by the managing agents to the company or the company was able to recover the same, it could be assessed in their hands as income of the year in which the sum was received. Refuting this contention, it was held by their Lordships that section 10(2A) does not cover a mistaken payment or mistaken calculation. It was further held that the amount was not deductible as allowance u/s. 10(2) (v) in the year of assessment and there was no question of applicability of section 10(2A). This authority, thus, fully supports the view that if an expenditure is not deductible under the provisions of the Income-tax Act in respect of that amount, the provision of section 41(1) would not apply. So if the deduction in respect of an amount has been wrongly allowed, it would not attract the provisions of section 41(1). In the instant case, interest paid by the assessed-firm to its partner was clearly disallowable u/s. 40(b) and, therefore, in respect of the amount of interest wrongly allowed as a deduction in the assessment of the assessed-firm in earlier years, section 41(1) cannot be invoked. We, therefore, uphold the submissions made in this regard on behalf of the assessed. The amount of Rs. 20,650 paid to the partners as interest would not, therefore, fall within the mischief of section 41(1) with the result that it could not be treated as deemed profit of the assessed for the assessment under consideration.

12. The sum of Rs. 30,849 representing the brought forward item in the account of the partner has also been treated as deemed profit on the ground that the assessed itself wrote off this amount and treated it as part of its income in the profit and loss account, by making a corresponding entry. The question whether an amount is taxable or not under the provisions of section 41(1) does not depend upon mere book entries made by the assessed. It has to be shown that in respect of the amount which is sought to be treated as deemed profit u/s. 41(1) allowance or deduction had been allowed in the assessment of the assessed in any earlier year. It was submitted before us on behalf of the assessed that onus lay upon the assessed to show that what has been written off has been allowed as a deduction in the earlier years and in support of this contention reliance has been placed before us on the decision of the Delhi High Court which is the jurisdictional High Court in the instant case in Steel & General Mills Co. Ltd. v. CIT [1974] 96 ITR 438 and the decision of the Kerala High Court in CIT v. Ancherry Paboo Kakku [1974] 96 ITR 88. It was submitted that the assessed cannot be called upon to show that in respect of the amounts ought to be taxed u/s. 41(1), no deduction was allowed in the past. Ld. Sr. DR, on the other hand submitted that since the amount in question was treated by the assessed itself as part of its income, it necessarily followed that in respect of the amount of Rs. 20,650 allowance had been granted in the past. In this connection, reliance has been placed on the decision of the Delhi High Court in CIT v. Phool Chand Jiwan Ram [1981] 131 ITR 37 and the decision of the Punjab and Haryana High Court in CIT v. Haryana Co-operative Sugar Mills Ltd. [1985] 154 ITR 751. It was submitted that since the amount has been written off the burden was on the assessed to show that it was not its income.

13. In the case of Steel & General Mills Co. Ltd. (supra), it has been held by their Lordships of the Delhi High Court that u/s. 10(2A) of the Income-tax Act, 1922 the burden of proving that an allowance or deduction had been given for the sum of Rs. 21,107 in the earlier year lay upon the department.

14. The Kerala High Court in the case of Ancherry Paboo Kakku (supra) has held that the AAC was not justified in issuing a direction to the assessed to produce the looks of accounts of the relevant years in order that the ITO may be able to examine whether the receipt said to be assessed represented allowance or deduction granted in any year prior to the previous year in which the amount was received. In view of the aforesaid decision of the jurisdictional High Court it must be held that the onus lay upon the assessing office to show that the amounts sought to be taxed u/s. 41(1) had been allowed as deduction in any earlier year. In this case, no material has been brought on record by the ITO to discharge this onus and, therefore, there is no escape from the conclusion that it could not be established on record that the amount of Rs. 30,849 had been allowed in any year prior to the accounting year relevant to the assessment year under consideration as a deduction and, therefore, this amount cannot be treated as income of the assessed u/s. 41(1). The authorities cited on behalf of the department may now be briefly considered.

15. In the case of Phool Chand Jiwan Ram (supra), the Delhi High Court has held that section 10(2A) of the Income-tax Act, 1922 enacts a statutory fiction. The operation of this fiction should be limited to the language of the section. It is only where the assessed has incurred a trading liability and this trading liability has been allowed in earlier assessment years that section 10(2A) is attracted. This authority instead of helping the revenue goes in aid of the contention advanced before us on behalf of the assessed that it is only when a liability has been allowed in an earlier year that section 41(1) is attracted.

16. The Punjab and Haryana High Court in the case of Haryana Co-operative Sugar Mills Ltd. (supra) held that an amount could be brought to tax u/s. 41(1) if two conditions are satisfied : (i) that the amount had been allowed as deduction in some earlier year, and (ii) that during the assessment year in question the assessed had received the benefit representing given amount by way of remission or cessation of the liability in regard to the said amount. It was further held that in a case where the assessed had treated the given amount as his own income in the profit and loss account and had also mentioned that the said amount became his own income as result of forfeiting the same himself, then prima facie, the assessing officer would be entitled to hold that the second condition stood satisfied. In this case, the amount which sought to be taxed u/s. 41(1) was forfeited by the assessed himself and the same was entered in the profit and loss account. So, in this case, the amount in question was not only credited to the profit and loss account but the amount was forfeited by the assessed. In view of these facts, the High Court held that the second condition, namely, that there was a remission or cessation of liability stood satisfied. This authority does not lay down a proposition that if an amount is shown as income in the profit and loss account, it would in all cases, be a prima facie evidence of the fact that in respect of that amount, a deduction had been allowed in an earlier year. In our opinion, this authority, therefore, does not support the view canvassed before us on behalf of the Department. So, the amount of Rs. 30,849 also cannot be subjected to tax u/s. 41(1).

17. The next item relates to the amount of Rs. 10,356 which is comprised of two amounts of Rs. 5,818 in respect of which no details were furnished and a sum of Rs. 4,537 paid as interest to the partner and which was allowed as a deduction in the assessment of the assessed in earlier years. The facts relating to these two items are the same as in respect of the amounts of Rs. 30,849 and Rs. 20,650. In view of the reasons given above, we hold that both these amounts cannot be brought to tax u/s. 41(1).

18. The last item relates to the amount of Rs. 13,659. The facts relating to this amount may be briefly stated. Shri Bharat Ram, who was not a partner in the firm, advanced loan to the assessed firm to enable it to incur certain expenses. The expenditure incurred by the assessed with the help of the loan advanced by Shri Bharat Ram was, no doubt, allowed as a deduction in the assessment of the assessed for earlier years. It was contended by Shri Sharma that the advancing of loan by Shri Bharat Ram was, no doubt, allowed as a deduction in the assessment of the assessed for earlier years. It was contended by Shri Sharma that the advancing of loan by Shri Bharat Ram to the assessed firm and incurring of expenditure by the firm with the help of that loan were two distinct and separate transactions. The expenditure was, no doubt, allowed in the past as a deduction but no such deduction has been allowed in respect of the loan advanced by Shri Bharat Ram and, therefore, the amount of Rs. 13,639 was not hit by the provisions of section 139(1). It was further submitted that unilateral write off of this amount by the assessed did not amount to remission or cessation of liability and for this reason also, the amount could not be treated as deemed profit of the year u/s. 41(1).

19. Ld. Sr. DR, on the other hand, submitted that since the amount has been written off by the assessed itself and has been treated its income it fell within the mischief of section 41(1).

20. We have considered the rival submissions as also the facts on record. In view of the facts stated above, there can be no doubt that this amount does not fall within the mischief of section 41(1). So far as the amount advanced by Shri Bharat Ram is concerned, it was never allowed as a deduction in the assessment of the assessed in an earlier year. Deduction was allowed in respect of the expenditure incurred by or on behalf of the assessed with the help of the loan so advanced. As rightly pointed out on behalf of the assessed advancement of the loan by the creditor to the assessed is something separate and distinct from the transaction relating to incurring of expenditure by or on behalf of the assessed with the help of that loan. It was the amount of expenditure, which had been allowed in the past as a deduction. So on the facts of the case, section 41(1) is not attracted. Further, unilateral action on the part of the assessed does not amount to remission or cessation of the liability in respect of the loan advanced by Shri Bharat Ram. If any authority is required on the point, reference may be made to the decision of the Calcutta High Court in CIT v. B. N. Elias & Co. (P.) Ltd. [1986] 160 ITR 45. In this case, the assessed owned certain amounts to its creditors by way of sundry trading liabilities. The dues remained unclaimed for more than three years and that in the relevant assessment year, the assessed wrote off the debts in the profit and loss account making corresponding entries. The assays claimed that the amounts written off were not income assessable to tax. There was neither remission nor cessation of the liability of the assessed. The ITO did not accept this contention and assessed the amounts as income of the assessed u/s. 41(1). It was held by the High Court that there was neither a remission nor a cessation of trading liability of the assessed, even, though the same had become barred by limitation and, therefore, the amounts written off could not be included in the total income of the assessed. We, thus, hold that the amount of Rs. 13,659 cannot also be included in the income of the assessed u/s. 41(1).

21. The next ground relates to the deposit of Rs. 9,935 which is added to the income of the assessed. The ITO added this amount to the income of the assessed as "deposit in the bank". The order of the CIT (A) shows that the addition was made as this deposit could not be explained by the assays. Before him, it was explained on behalf of the assessed that in 1979, the assessed-firm had sold its business to M/s. Bengal Potteries, but its possession was taken over in 1977 and that the said receipt was from Bengal Potteries. The CIT (A) observing that no evidence in this regard had been adduced at any stage, confirmed the addition.

22. Before us, it was submitted by Shri Sharma that the aforesaid amount represented receipts from Bengal Potteries Ltd. It was further contended that in support of the assesseds case, a copy of the bank statement was filed before the ITO. We have also heard the Sr. DR who has fully supported the addition made by the ITO.

23. The paper book filed by the assessed includes a copy of the bank statement at pages 12 and 13, which clearly shows that during the relevant accounting year two deposits of Rs. 1262.80 and Rs. 9600.92 were made in the bank account of the assessed on 29-10-80 and 29-12-80 respectively by transfer from the Bengal Potteries Ltd. The amount added by the ITO was in deposit in the bank account of the assessed on 29-6-87. Considering the bank statement and the submissions made on behalf of parties, we are of the opinion that the bank deposit was fully explained and that there was no justification for making the said addition. The addition of Rs. 9,935 is accordingly deleted.

24. Ground No. 6 has not been pressed before us and the same is accordingly rejected.

25. In view of what has been said above, the appeal stands partly allowed to the extent indicated above.