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2007 DIGILAW 1441 (RAJ)

Commissioner of Income v. Eid Mohd. Nizammuddin

2007-07-30

R.M.LODHA, R.S.CHAUHAN

body2007
JUDGMENT 1. The liability of Rs. 11,80,973 written back by the assessee in the profit and loss account was treated as income in the assessment year 1996-97 by the Assessing Officer relying upon Explanation 1 introduced in section 41(1) with effect from April 1, 1997. The Commissioner of Income-tax (Appeals), in appeal, at the instance of the assessee set aside that finding of the Assessing Officer. The Income-tax Appellate Tribunal in the appeal of the Department upheld the view of the Commissioner of Income-tax (Appeals). This is how this Income-tax appeal has been preferred under section 260A of the Income-tax Act, 1961. 2. Though counsel for the Revenue sought to rely upon section 28(iv) of the Income-tax Act, 1961, in support of her contention that the Assessing Officer was justified in treating the aforesaid amount written back by the assessee as the income, we are afraid that neither the said section was relied upon by the Assessing Officer nor was pressed into service by the Revenue in appeal before the Income-tax Appellate Tribunal. That section even otherwise has no application. 3. Section 41(1) of the Income-tax Act as was existing in the year of assessment (1996-97) before introduction of Explanation 1 came up for consideration before the Supreme Court in the case of CIT v. Sugauli Sugar Works P. Ltd. (1999) 236 ITR 518. The Supreme Court after referring to section 41(1) of the Income-tax Act, held thus (page 520) : " It will be seen that the following words in the section are important : ' the assessee had 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'. Thus, the section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the asses see has made an entry of transfer in his accounts 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. The reasoning of the High Court is correct and we are in agreement with the same." 4. It has been, thus, held in unequivocal terms by the Supreme Court that mere entry of transfer in his account by the assessee unilaterally would 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. The Supreme Court concurred with the reasoning of the Calcutta High Court reported in the case of CIT v. Sugauli Sugar Works P. Ltd. (1983) 140 ITR 286 where the Division Bench held thus (page 292) : "The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own uni lateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i. e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability." 5. The legal position laid down in the case of CIT v. Sugauli Sugar Works P. Ltd. (1999) 236 ITR 518 (SC) , has been applied subsequently by the Supreme Court in the case of Chief CIT v. Kesaria Tea Co. Ltd. (2002) 254 ITR 434. The legal position laid down in the case of CIT v. Sugauli Sugar Works P. Ltd. (1999) 236 ITR 518 (SC) , has been applied subsequently by the Supreme Court in the case of Chief CIT v. Kesaria Tea Co. Ltd. (2002) 254 ITR 434. This is what the Supreme Court said (page 437) : " 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 March 31, 1985, for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exist 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 the 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 the 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. 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 49 STC 249 (Ker), the other issues having a 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 the amount of Rs. 3,20,758 deeming the same as income of the year 1985-86 under section 41(1) is well justified of the Act. 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 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 CIT v. Sugauli Sugar Works (P.) Ltd. (1999) 236 ITR 518. We, there fore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Explanation 1 to section 41(1)." 6. We need not elaborate that the controversy relates to the period anterior to the introduction of Explanation 1 to section 41(1) has been dealt with and considered on the basis of the position obtaining in section 41(1) without reference to the said Explanation. It is trite saying that if there is a doubt about the taxing provision, the benefit of doubt must go to the assessee. The fact that clarification was introduced under section 41(1) with effect from April 1, 1997, clearly shows that the doubt prevailing in respect of section 41(1) has been clarified and that benefit must go to the assessee. It is trite saying that if there is a doubt about the taxing provision, the benefit of doubt must go to the assessee. The fact that clarification was introduced under section 41(1) with effect from April 1, 1997, clearly shows that the doubt prevailing in respect of section 41(1) has been clarified and that benefit must go to the assessee. As a matter of fact, this position is clarified by section 16 of the Finance (No. 2) Act, 1996, which clarifies that the amendment by way of Explanation 1 will take effect from April 1, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and not previous years. 7. The consideration of the matter by the Income-tax Appellate Tribunal does not suffer from any error of law. 8. The Income-tax appeal is dismissed in limine. *******