Against The Order/Judgment In Ra ... vs By Adv. Sri.Anil D. Nair
2021 Latest Caselaw 6980 Ker

         IN THE HIGH COURT OF KERALA AT ERNAKULAM

                            PRESENT

              THE HONOURABLE MR.JUSTICE S.V.BHATTI

                               &

      THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS

 MONDAY, THE 01ST DAY OF MARCH 2021 / 10TH PHALGUNA, 1942

                       ITR.No.70 OF 2000

     AGAINST THE ORDER/JUDGMENT IN RA 289/Coch/1997 OF
                I.T.A.TRIBUNAL,COCHIN BENCH


APPLICANT:

              M/S.CARBON AND CHEMICALS (INDIA) LTD.,
              KOCHI

              BY ADV. SRI.ANIL D. NAIR

RESPONDENT:

              THE COMMISSIONER OF INCOMETAX,
              KOCHI


              BY ADV. SRI.P.K.R.MENON SR.COUNSEL FOR IT
              BY ADV. SRI.GEORGE K. GEORGE, SC, FOR IT

     THIS INCOME TAX REFERENCE HAVING BEEN FINALLY HEARD ON
28-01-2021, THE COURT ON 01-03-2021 PASSED THE FOLLOWING:
 I.T.R. No.70/2000                      -:2:-



                                                                        "C.R."



                                    ORDER

Dated this the 1st day of March, 2021

Bechu Kurian Thomas, J.

The Income Tax Appellate Tribunal has referred the following

questions of law to this Court, under Section 256(1) of the Income

Tax Act, 1963. (for short 'the Act') relating to the assessment year

1995-96.

"1. Whether on the facts and circumstances of the case, was the Appellate Tribunal right in holding that the amount that has ceased to be a liability under section 41(1) of the Income Tax Act to be assessed as income is Rs.53,71,650/- or Rs.30,68,152/- is not a debatable issue and can be the subject matter of adjustment under sec.143(1)(a) of the Income Tax Act?

2. Whether on the facts and circumstances of the case was the Tribunal right in holding that the assessee is not entitled to deduction of the tax and interest amounting to Rs.23,03,498/- paid by the assessee from out of the gross royalty amount of Rs.53,71,650/- credited to the account of the foreign collaborator in 1990 and written back in the previous year relevant to the assessment year 1995-96?

3. Whether, on the facts and circumstances of the case should not the Tribunal have held that the cessation of liability and value of benefit that accrued to the assessee is only the differential amount of Rs.30,68,152/- which is the net amount that has accrued to the assessee after paying an amount of Rs.23,03,498/- to the Income Tax Department towards tax and interest on behalf of the foreign collaborator?"

2. The issue relates to the assessment year 1995-96.

However, the sequence of events that led to the present reference

has its genesis in the assessment year (for short AY) 1990-91. The

assessee claimed a deduction of Rs.53,71,650/-, for the AY 1990-91

as an expenditure, being royalty payable to a foreign collaborator.

Though deduction was allowed, the amount was not actually remitted

outside India. In the meantime, an amount of Rs.13,65,060/- was

paid towards TDS payable on the royalty amount and a further

amount of Rs.9,38,438/- towards interest, as per orders issued under

Section 201(1A) of the Act. Thus, a total amount of Rs.23,03,498/-

was paid by the assessee towards tax and interest due to the

department against the deduction claimed towards royalty payable to

the foreign collaborator. In the AY 1995-96, the amount claimed as

deduction for the AY 1990-91, excluding TDS and interest paid, was

written back by the assessee into its accounts, on account of the

cessation of liability. To state in figures, the assessee had written

back Rs.30,68,152/- instead of Rs.53,71,650/-.

3. In the return filed for the AY 1995-96, assessee had thus

written back only Rs.30,68,152/- under Section 41(1) of the Act. The

Assessing Officer found that the entire amount of Rs.53,71,650/-

ought to be treated as a deemed profit under Section 41(1)(a) of the

Act and that the amount paid towards tax and interest was not liable

to be deducted while returning the entry due to cessation of liability

with the foreign collaborator.

4. On appeal, the First Appellate Authority held that the issue

whether the entire sum of Rs.53,71,650/- or whether the said amount

excluding the tax and interest paid, alone, could be regarded as a

profit under Section 41(1) of the Act, was a debatable issue. It

further held that since a debatable issue cannot be made the subject

matter of adjustment under Section 143(1)(a), the First Appeal was

allowed by deleting the addition directed by the Assessing Officer.

5. The Revenue preferred an appeal to the Tribunal. It was

held by the Tribunal that the deduction claimed for tax and interest

already paid was inadmissible and the appeal was allowed, thereby

restoring the order of the Assessing Officer. Briefly prefaced the

controversy for a decision on the points referred by the Tribunal

centers around whether the assessee has to write back entry of

Rs.53,71,650/- upon cessation of liability or should it be the actual

amount of Rs.30,68,152/- to be written back as deemed profits under

Section 41(1) of the Act for the AY 1995-96.

6. We have heard Mr. Raja Kannan, the learned counsel for

the assessee as well as Sri. P.K.Raveendranatha Menon, the learned

Senior Advocate for the department duly instructed by Adv. Navneeth

Pai.

7. The learned counsel for the assessee submitted that the

profits chargeable to tax as per Section 41(1)(a) of the Act ought to

be the amount after deducting the tax and interest already paid to the

department, as per the orders issued under Section 201 of the Act

and not the entire amount inclusive of the tax and interest. He

submitted that a contrary interpretation, if adopted, in the instant

case, would cause great hardship and prejudice to the assessee

including double taxation. It was also contended that when there is a

doubt as to whether it is the net amount or the gross amount of the

ceased liability that should be treated as the amount obtained under

Section 41(1)(a) of the Act, section 143(1)(a) of the Act will have no

application, as the question falls within the realm of a debatable

issue. According to the learned counsel for the assessee, an issue,

which is debatable or has two possible views, could not be the

subject matter of a summary adjustment under Section 143(1)(a) of

the Act.

8. Learned Senior Counsel for the department, on the other

hand, submitted that the amount contemplated under Section 41(1)

(a) is inclusive of the tax since income tax is always levied on the

amount received without deducting the tax. He further submitted that

Section 41(1) is a deeming provision, which makes the amount, as

contemplated under the said provision, if received by the assessee,

be deemed to be the profit and gains of business and chargeable to

income tax in the manner contemplated therein.

9. While considering the above controversy, it is necessary to

refer to Section 41(1)(a) of the Act, which is extracted 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;"

10. A reading of the above provision indicates that a legal

fiction is created to treat the amount which was once deducted as an

expenditure, if received back in another assessment year, as an

income from profits and gains of business. For the purpose of

attracting Section 41(1), it is necessary that the following conditions

are satisfied:

(i) The assessee had made an allowance or any

deduction in respect of any loss, expenditure, or trading

liability incurred by him.

(ii) Any amount is obtained in respect of such loss or

expenditure or any benefit is obtained in respect of such

trading facility by way of remission or cessation thereof;

       and,

              (iii)    Such amount or benefit is obtained by the

       assessee in a subsequent year.

11. Once the aforesaid conditions are satisfied, the deeming

provision enacted in the closing part of Section 41(1)(a) of the Act

gets attracted and the amount obtained becomes chargeable to

income tax as profits and gains of business or profession. Reference

to the above propositions can be derived from the decisions laid

down by the Supreme Court in CIT v. Haryana Co-operative Sugar

Mills Ltd. [1985) 154 ITR 751] and Polyflex (India) Pvt. Ltd. v. CIT

[(2002) 257 ITR 343].

12. A glance at the history of Section 41 will reveal the purpose

behind the enactment of this provision. Section 41(1) of the 1961 Act

corresponds to Section 10(2)(A) of the Income Tax Act of 1922. In the

decision in British Mexican Petroleum Co. Ltd. v. Jackson (1932)

16 TC 570 (HL), it was held that once a loss or expenditure is

allowed as a deduction or as a trading liability, recoupment of the

loss or expenditure or remission of the trading liability would be a

capital receipt and not a business receipt. By virtue of the fiction

enacted under Section 41(1) of the 1963 Act, the difficulty created by

the decision in British Mexican Petroleum case was overcome. The

provision now by a legal fiction makes the amount so received to be

treated as profits and gains includable in the total income of the

assessee for the previous year in which such recoupment is

obtained.

13. The purpose behind creating a fiction under Section 41(1)

(a) of the Act is to tax the amount, earlier deducted but subsequently

received back, to the extent recouped. It is a measure of taxing the

amount recouped.

14. Though a legal fiction must be given full effect to it should

not be extended beyond the purpose for which it is created. As held

in Bengal Immunity Co. Ltd. v. State of Bihar (AIR 1955 SC 661)

and in Maganlal v. Jaiswal Industries [(1989) 4 SCC 344], legal

fictions are created only for some definite purpose and it must be

limited to the purpose for which it was created and should not be

extended beyond that legitimate field. Explaining the scope of legal

fictions, in the decision in Vodafone International Holdings BV v.

Union of India, [(2012) 6 SCC 613], it was held that the legal fiction

has a limited scope and cannot be expanded by giving a purposive

interpretation to the same, particularly if the result of such

interpretation is to transform the concept of chargeability.

15. It is true that income tax is a portion of the profits payable to

the State and the tax payable is not a permissible deduction and also

that Section 198 of the Act provides that all sums deducted for the

purpose of computing income of an assessee, including the tax

deducted at source, shall be treated as income received. However,

the aforesaid principle cannot be applied while determining the

amount to be deemed as profits and gains under Section 41(1)(a) of

the Act. Such an interpretation, if adopted, will in fact be expanding

the fiction created and even transform the chargeability.

16. The amount deducted in 1990-91 as an expenditure

consisted of an element of tax being TDS. The words employed in

Section 41(1)(a) are "amount obtained by such person or the value of

benefits accruing to him". The "amount obtained" can only mean the

actual amount obtained. The fiction created under the provision

cannot be expanded to even include amounts that may be obtained

in the future. The legal fiction is intended to deem the actual amount

obtained as profits and gains from business and to tax the said actual

amount.

17. Section 41(1) employs, on the one hand, words such as

"allowance" or "deduction" and on the other hand "loss",

"expenditure", or "trading liability". These words are of general import

and are understandably employed to take care of several fluid

dynamics. These expressions are relatable to words used in Section

41(1)(a) i.e., "the amount obtained by such person or the value of

benefit accruing to him shall be deemed to be profits, gains etc.".

Therefore an entry made in one previous year as an allowance or

deduction towards "loss", "expenditure" or "trading liability" when

written back in a subsequent previous year, on account of the

cessation of such liability, becomes taxable as profit or gains of

business. But the tax liability should be commensurate to the actual

amount received or the value of benefit accrued to the assessee in

that financial year and not on the unrecovered amount or

unacknowledged benefit by the assessee. The unrecovered amount

becomes taxable only in the previous year when it is recovered or

actually obtained.

18. The amounts paid as tax has not been obtained in 1995-

96 as the same had not been refunded. Until the amount of TDS is

refunded, that amount cannot be treated as amount obtained by the

assessee. The amount of TDS and interest can be deemed to be

profits and gains and chargeable to tax only on refund. Until actual

receipt, it is not "amount obtained" and cannot be deemed to be

profits and gains from business. In other words, if it is assumed that

the TDS paid by the assessee, for the royalty payable, is ordered to

be refunded due to the cessation of liability and the refund is

received by the assessee, the actual amount of refund when

received will have to be treated as the amount obtained in the

previous year of receipt and not prior to that.

19. The above concept can be illustrated as follows; if an

assessee deducts Rs.10,000/- as an expenditure in 1990-91 for

which Rs.1,000/- was paid as TDS. Subsequently, due to cessation

of the liability, the assessee writes back Rs.9000/- in 1995-96 and

applies for a refund of TDS. Refund gets ordered and is received

only in 1996-97. The amount deemed to be profit under section 41(1)

(a) for 1995-96 can only be Rs.9,000/- it being the actual amount

received in that year. The TDS refund of Rs.1,000/-.will be the

deemed profits for 1996-97. If on the other hand, the entire

Rs.10,000/- in the above illustration was deemed to be profit for

1995-96, the tax refund when received becomes impossible to

account for.

20. From the above, it is clear that the amount paid by the

assessee as TDS comes back to the assessee only when the TDS is

refunded. The amount obtained by the assessee under Section 41(1)

(a) is thus the actual amount obtained.

21. Since we have held that the amount obtained under

Section 41(1) shall be the actual amount obtained by the assessee

exclusive of the tax paid and not refunded, the contention regarding

whether the issue is a debatable one or not, does not strictly arise.

However, for the purpose of complete appreciation, it is necessary to

deal with the said contention also. Interpretation of the words

employed in Section 41(1) required a deeper analysis and whether

the section contemplates the net amount or the gross amount, was

certainly a matter of debate. It cannot be held that the question

raised by the assessee was a non-debatable issue. In the said

circumstances, we are of the view that the First Appellate Authority

was correct while the Tribunal erred in coming to the conclusion that

the issue was not a debatable one.

22. In view of the above, the questions of law raised by the

assessee are answered in the affirmative, i.e., against the revenue.

and in favour of the assessee.

The reference is ordered accordingly.

Sd/-

S.V.BHATTI, JUDGE

Sd/-

                                 BECHU KURIAN THOMAS, JUDGE
vps

                          /True Copy/                     PS to Judge