JUDGMENT K.S. Jhaveri, J. - By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal preferred by the assessee and confirmed the order of CIT(A) and AO. 2. This court while admitting the appeal on 9.10.2017 framed following substantial question of law:- "Whether under the facts and circumstances of the case and in law, the Id. ITAT was justified in confirming the addition of Rs. 1,18,99,651/- made to the income of the appellant based on the finding that in the years of transfer to the Reserve Fund of the excess provisions made for establishment and other expenses in earlier years when the business income of the Appellant Bank was totally exempt under the section 80P of the Income Tax Act, 1961 amounts to cessation of those liabilities and therefore, chargeable to tax in the current year being 2007-08 under Section 41(1) of Income Tax Act, 1961. 3. The facts of the case are that the assessee is an apex Co-operative Bank of Rajasthan deriving income from Banking business. The income of assessee co-operative Bank was exempt under section 80P(2) of I.T. Act, 61 in all the earlier year(s) and from this assessment year 2007-08, the entire income from Banking business of assessee Bank became taxable on withdrawal of exemption by insertion of section 80P(4) by Finance Act, 2006 w.e.f 1-4-07. The original assessment was completed under section 143(3) at an income of Rs. 32,94,27,120/- making disallowance of Rs. 1,18,99,651/- on account of transfer to statutory Reserve out of carried forward account of provision for expenses treating the same as taxable under section 41 of I.T.Act, 1961 and disallowance of Rs. 1,00,21,000/- out of contribution to PAC Managers salary. 4. The matter was argued time and again and on 16.1.2018 following order was passed:- Prima facie, the argument canvassed by the counsel for the appellant is required to be viewed very seriously in view of the three decisions i.e. Kerala High Court in Commissioner of Agricultural Income Tax vs. Kerala Estate reported in (1974) 96 ITR 210 wherein it has been as under:- "5. As we understand this decision, the principle behind it is that money embezzled from an assessee retains the character of income of the assessee in the hands of the person who embezzled the money and when he either returns it to the assessee, or when it is recovered by the assessee, it comes back to the assessee as his income, the amount not having changed its character. In the meanwhile that income had not been taken into account in any assessment year as, under the Income Tax Act, it was deductible as a loss arising from the carrying on of the business. It is only in such peculiar cases, we think that the rule in that decision can be applied. We think the same principle has been applied by Finlay J. in Gray vs. Lord Penrhyn, [(1937) 21 T.C. 252 (K.B.) in a case of misappropriation committed by the officials of a slate quarry, but not detected by the auditors who later on made good the amount. The principle behind these decisions cannot be pressed into service in cases where the creditor due to generous considerations or to be more realistic when he finds that it is necessary for the very purpose of his business that the assessee from whom he had claimed large amounts by way of interest or price of goods or as remuneration payable for services rendered has to be helped in continuing his business and, therefore, either gives up his right to receive the amounts that had accrued due or returns the amounts which he had actually received. The money that had either been given up or had been refunded is money that belonged to the creditor which could no longer be the income of the assessee and it comes to the assessee in the form of a windfall. This aspect had been noticed very clearly in the judgment of Rowlatt J., his judgment which gave rise to the decision of the House of Lords in British Mexican Petroleum Co. vs. Jackson [1932] 16 T.C. 570 (HL). In such cases the money received is not the income of the assessee; we think that it is to cover cases of this nature that Subsection (2A) of Section 10 was introduced in the Indian Income Tax Act of 1922 and reintroduced in the form of Section 41 of the Income Tax Act, 1961. In such cases the money received is not the income of the assessee; we think that it is to cover cases of this nature that Subsection (2A) of Section 10 was introduced in the Indian Income Tax Act of 1922 and reintroduced in the form of Section 41 of the Income Tax Act, 1961. The learned judges of the Mysore High Court, on a very exhaustive survey of the decision in Commissioner of Income Tax vs. Lakshmamma (1964) 52 ITR 789 (Mys) , came to the conclusion that the general law even before Section 10 was amended by introducing Sub-section (2A) was such as to enable the benefit accruing from remissions or benefit accruing from payment made by a creditor being taxed. With very great respect we do not think this is a correct statement of the law. 7. Apart from the principle stated in the decision in Severne vs. Dadswell[1954] 35 T.C. 649; [1954] 3 ALL ER 243 (Ch. D) , when a year's account has been finally settled with reference to the liabilities, there can be no question of reopening that year's assessment made on that factual and real basis. The only question then is whether what has been given up by a creditor in favour of an assessee or returned to him can be said to be income of the assessee. We find it difficult to accept the proposition that it would be income. What was returned to the assessee has nothing to do with the activities of the assessee; it does not arise from the business nor docs it arise from agricultural operations when the assessee is an agriculturist. The principle of the decision of the House of Lords case must apply to such a case. 8. We answer the question referred to us in the affirmative, that is, in favour of the assessee and against the department. As we indicated at the beginning, since the question is a somewhat difficult one and the decisions have not all been uniform, the reference is justified and for these reasons we direct the parties to bear their costs. " Another decision of Allahabad High Court in Elgin Mills Co. Ltd. vs. Inspecting Assistant Commissioner of Income Tax (1992) 198 ITR 81 wherein it has been held as under:- "5. " Another decision of Allahabad High Court in Elgin Mills Co. Ltd. vs. Inspecting Assistant Commissioner of Income Tax (1992) 198 ITR 81 wherein it has been held as under:- "5. The petitioner's contention is that Section 41(1) was not attracted in the facts and circumstances of the case ; that the said amount of Rs. 51,61,166 was allowed as a deduction by the Tribunal in the assessment year 1972- 73 though the said amount represented the liability which accrued in the previous assessment years. The liability for which the said amount was set apart still exists ; it has not ceased. No reverse entries have also been made by the petitioner in his account books relating to the said amount. In such circumstances, Section 41(1) has absolutely no application. 6. Learned counsel for the petitioner submits that merely because the petitioner has reverted to the old practice of debiting to the profit and loss account, amounts actually paid or payable to workers retiring in that year, it cannot be said that the liability for which the aforesaid amount was provided, has ceased. It is true, says learned counsel, that prior to the assessment year 1972-73, the petitioner was following the practice of debiting the profit and loss account, with amounts actually paid or payable to the retiring workers in each year and had shifted to the actuarial valuation system from that assessment year onwards and has, in later years, shifted back to the old system, it does not follow therefrom that either the liability for which the said amount was provided has ceased or that there are any other facts or grounds attracting the provisions contained in Section 41(1) of the Act. Learned counsel also explains that the petitioner has transferred back the amount of Rs. 81,20,209 representing the amount which was set apart as a provision for meeting the retirement gratuity liability, on actuarial valuation, during the assessment years 1973-74 and 1974-75, but the company has not transferred back the said amount of Rs. 51,61,166, the amount which was set apart as provision during the assessment year 1972-73 in respect of liability which accrued in the previous years. In other words, the disputed amount has never been transferred back to the profit and loss account and, if so, there is no occasion for invoking Section 41(1). 51,61,166, the amount which was set apart as provision during the assessment year 1972-73 in respect of liability which accrued in the previous years. In other words, the disputed amount has never been transferred back to the profit and loss account and, if so, there is no occasion for invoking Section 41(1). Decision of Supreme Court in Commissioner of Agricultural Income Tax vs. Kerala Estate Mooriad Chalapuram reported in (1986) 161 ITR 155 wherein it has been held as under:- 5. In order to eliminate such a controversy in cases falling under the Indian Income-tax Act, 1922 Subsection (2A) was added in Section 10 of that Act, whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business, profession or vocation. Subsection (2A) was inserted in Section 10 in 1955. Before that Chagla, C.J., speaking for the Court in Mohsin Rehan Penkar vs. Commissioner of Income-tax, Bombay City [1948] 16 ITR 183 (Bom) had observed: "It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation". This observation was noted by the Mysore High Court in C.I.T. vs. Lakshmamma (supra), and appears from what was said by them to have received that tacit approval of the learned Judges. It was made the basis of distinguishing the case before them from that decided by the Bombay High Court. However, counsel for the respondent has relied upon the decision of Supreme Court in Polyflex (India) Pvt. Ltd. vs. Commissioner of Income Tax, Karnataka reported in (2002) 257 ITR 343 (SC) wherein it has been held as under:- "7. We are inclined to think that in a case where a statutory levy in respect of goods dealt in by the assessee is discharged and subsequently the amount paid is refunded, it is the first clause that more appropriately applies. It will not be a case of benefit accruing to him on account of cessation or remission of trading liability. It will be a case which squarely falls under the earlier clause, namely, "obtained any amount in respect of such expenditure". It will not be a case of benefit accruing to him on account of cessation or remission of trading liability. It will be a case which squarely falls under the earlier clause, namely, "obtained any amount in respect of such expenditure". In other words, where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance had been given in the assessment for earlier period, the assessee is liable to disgorge that benefit as and when the obtains refund of the amount so paid. The consideration whether there is a possibility of the refund being set at naught on a future date will not be a relevant consideration. Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in Section 41(1) of the Act comes into play and it is not necessary that the Revenue should await the verdict of higher Court or Tribunal. If the Court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief. 8. True, expenditure and trading liability may be over-lapping concepts; but the law-makers apparently intended to deal with allied concepts separately and specifically so as to make the provision as comprehensive as possible in order to effectuate the objective underlying the provision. The anatomy of the Section and the collocation of the words employed therein would suggest that the test of cessation or remission of liability has to be applied vis-a-vis trading liability and it cannot be projected into the previous clause. 11. The High Court correctly appreciated the scope of Section 41(1) and applied the second limb of the sub-section to the fact situation. It may be noted that the assessee did neither pay the excise duty to the Government nor did it get refund of duty from the concerned authority. Notwithstanding the High Court's judgment in favour of the petitioner, the stage had not yet reached when it can be said that the liability for which allowance was given earlier ceased. The view taken by the High Court in substance is that the benefit in respect of the trading liability would accrue only when the liability definitely ceased after the termination of the proceedings in the Apex Court in favour of the petitioner. The view taken by the High Court in substance is that the benefit in respect of the trading liability would accrue only when the liability definitely ceased after the termination of the proceedings in the Apex Court in favour of the petitioner. This very decision of the Allahabad High Court was relied upon by the Tribunal without appreciating the correct ratio of the decision."At this stage, counsel for the respondent seeks time, list on 30.1.2018. 5. Mr. Pathak appearing for the assessee has taken us to the order of the AO who while passing the order in the first round of litigation observed as under:- (iii). Contribution to PACS Managers salary: The assessee was asked to file the details of provisions for expenses of Rs. 3,48,54,592/- made in F.Y. 2006-07. On perusal of details filed it was seen that it includes PACS Managers salary amounting to Rs. 1,00,21,000/-. Therefore, the assessee was asked to explain as to why PACS Managers salary had not yet been disbursed despite making a provision on this account. On perusal of the balance sheet it is seen that since inception every year assessee makes the provision on account of PACS manager salary, but no disbursement has been made out of this payment. On the face of it, it appears that it is either disputed or contingent liability and thus not allowable. In response to the issue raised the assessee has replied as under: "The amount lying in the said account is of the Registrar of Co-operative Society Rajasthan an the said authority can withdraw the same at any time as per their requirement. The account in assessee bank's book is like other liabilities for expenses account and the assessee bank ha no right to utilize the said amount for its own purpose." 5.1 He also taken us to the order of CIT(A) passed in first round of litigation where CIT (A) held as under:- Contention of the AR is that the facts of the case are that the assessee cooperative bank was statutorily required by Registrar of Cooperative Societies under Primary Agricultural Co-Op. Society Managers, selection, appointment & service condition rules, 2003 (PAC Managers salary) to contribute 0.15% of average outstanding loans of last year (the copy of said Rules are submitted herewith). Society Managers, selection, appointment & service condition rules, 2003 (PAC Managers salary) to contribute 0.15% of average outstanding loans of last year (the copy of said Rules are submitted herewith). The making of contribution by assessee bank is compulsory and contributed fund will be held by Apex Bank for and on behalf of Registrar of Co-Op. Societies. The Registrar of CoOp. Societies is to use the fund for payments of PAC Managers salary in case of sufficient funds are not available for their salary. The PAC Managers are appointed by authority for safeguarding the recovery of loans advanced by other co-operative Banks and Apex Bank. Thus the measure is for commercial benefit of assessee Bank who advances loans to such PACs. Thus the liability of contribution for PAC Managers salary is a statutory liability being crystalized at clos of every year and, the contribution after it is made becomes at the disposal of Registrar Co-operative Society which is payable as and when demanded by Registrar Co-operative Society. It will be clear and evident from copy of rules submitted that liability of contribution is statutory liability crystallizing at the end of every year and not in a nature of disputed/contingent liability. The contribution of assessee Bank to PAC Managers salary amounting to Rs. 10021000/- during the year is thus allowable deduction and AO is wrong and has erred in law in disallowing the same holding it as disputed/contingent liability. Allowability of contribution by the Apex Bank for PAC Managers salary is a statutory liability which is crystalized at the end of every year. The Contribution however, once made become at the disposal of Registrar of Co-operative Society which is payable as and when demanded by Registrar of Co-operative Society alongwith interest on it. Thus, it is not contingent liability but a statutory liability which is crystallized at the end of every year and hence the liability is allowable. The AO is, therefore, directed to delete the addition of Rs. 10021000/-. The 2nd ground of appeal is decided in favour of the appellant. 5.2 He has taken us to the order of the Tribunal passed in first round of litigation observing as under:- The intention of the assessee is that the amounts which have now been transferred from provisions to reserve funds were added back in earlier year. 10021000/-. The 2nd ground of appeal is decided in favour of the appellant. 5.2 He has taken us to the order of the Tribunal passed in first round of litigation observing as under:- The intention of the assessee is that the amounts which have now been transferred from provisions to reserve funds were added back in earlier year. However, the amount credited to reserve from the provisions has not been identified in respect of the provisions credited for a particular assessment year. The carried forward provision has been debited and reserve fund has been credited. In case the amounts which have now been transferred from provision to reserve has been added back in the year in which such provision was credited then the same cannot be taxed now in the assessment year when the same is being transferred from provision to reserve. There must be some correspondence to show as to why provisions is being transferred to reserve as it is not required for meeting the liability. We are neither having the necessary details nor the details of quantum of provisions which has been transferred during the year was debited in the P & L A/c of which year. We are also not aware as to whether the provisions are being entered below the net profit. If it is a part of P & L A/c appropriation then it is to be considered as added back because the appropriation from P & L A/c cannot be considered as an admissible expenditure. The Hon'ble Apex Court in the case of Commissioner of Income Tax vs. State Bank of Patiala, 219 ITR 706 had an occasion to consider the distinction between the provision and reserve. If the transfer of amount is made adhoc where there is no information or anticipated liability, such fund can only be treated as reserve that where a fund has been credited to meet the liability which has actually arisen and is known on the date of preparation of the balance sheet , it would obviously be a provision. Provisions made against the anticipated loss and contingencies are charges against profits and to be taken into account in course of receipt and P & L A/c in the balance sheet while reserves are appropriation of profits. We are not aware as to how the assessees is crediting amount under reserve and provisions by the assessee. Provisions made against the anticipated loss and contingencies are charges against profits and to be taken into account in course of receipt and P & L A/c in the balance sheet while reserves are appropriation of profits. We are not aware as to how the assessees is crediting amount under reserve and provisions by the assessee. Since the accounts are being audited and are being prepared as per Reserve Bank of India guidelines therefore, we feel that the reserve and surplus are made by the assessee as understood in commercial parlance. Thus the issue is not to be decided simply on the basis that the entrires have been made in the balance sheet and not in the P & L A/c. We are not having sufficient details to decide the issue before us as to whether the amount could have been added or not and therefore, we restore back the issue on the file of the AO. The AO will ascertain the nature of the provisions which has been written back during the year and will also ascertain as to whether such provision was added back in the year in which such provision was credited in the balance sheet. Thus this issue is restored back on the file of the AO and AO will decide as to whether provision written back was included in expenses claimed in the year in which such provision created. If it was claimed then amount written back will be income. 3.1 The second ground of appeal of the revenue is that the ld. CIT(A) has erred in deleting the addition of Rs. 1,00,21,000/- holding that PACS Manager salary is not contingent liability but a statutory liability. Whereas as per the provisions it is in the nature of contingent/ disputed liability as no disbursement out of the said liabilities was made. 3.3 Before the ld. CIT(A),it was submitted that the assessee cooperative bank was statutorily required by the Registrar of Cooperative Societies under Primary Agricultural Cooperative Society Managers, selection, appointment and service condition rules, 2003 to contribute 0.15% of average outstanding loans of last year. The copy of this Rules were made available to the ld. CIT(A). Such contribution is compulsory and contributed fund will be held by Apex Bank for and on behalf of Registrar of Cooperative Societies. The copy of this Rules were made available to the ld. CIT(A). Such contribution is compulsory and contributed fund will be held by Apex Bank for and on behalf of Registrar of Cooperative Societies. The liability of contribution for PAC Managers salary is a statutory liability being crystallized at close of every year and the contribution is payable as and when demanded by Registrar of Cooperative Society. The ld. CIT(A) after considering the contention of the assessee allowed the liability after observing as under:- "Allowability of contribution by the Apex Bank for PAC Managers salary is a statutory liability which is crystallized at the end of every year. The contribution however once made become at the disposal of Registrar of Cooperative Society which is payable as and when demanded by Registrar of Cooperative Society alongwith interest on it. Thus, it is not contingent liability but a statutory liability which is crystallized at the end of every year and hence the liability is allowable." 5.3 He has also taken us to the order of AO passed in second round of litigation observing as under:- 6.1 In response to the queries reply of the assessee dated 14.12.2011 is reproduced hereunder:- "The facts of the amount Rs. 1,18,99,651/- are that the assessee bank carried forward reserve and provision under various heads created from the exempted profits of the earlier year, amongst them the assessee co-operative bank as on 01.04.2006 had brought forward Statutory Reserve of Rs. 80,99,16,594.12/- and brought forward provisions under the head 'provisions for establishment' of Rs. 1,18,99,651/-" On finding by the assessee bank that the said brought forward provision under the head provision for establishment is no longer required and accordingly the said amount was transferred to Statutory Reserve in this year i.e. F.Y. 2006-07. Copy of statutory and provision for establishment account are enclosed. From the said copy of accounts it is evident and verifiable that the said provision was made out of/from earlier years exempted profits of the assessee bank and not from the income or profits of the A.Y. 2007-08. 8.1 In respect of observation of the Hon'ble ITAT that 'in case the amounts which have now been transferred from provisions to reserve has been added bank in the year in which such provisions was credited them the same cannot be taxed now in the A.Y. when the same is being transferred from the provision to reserve'. 8.1 In respect of observation of the Hon'ble ITAT that 'in case the amounts which have now been transferred from provisions to reserve has been added bank in the year in which such provisions was credited them the same cannot be taxed now in the A.Y. when the same is being transferred from the provision to reserve'. The answer is that the provision transferred to reserve has not been added back in computation of income in respective assessment years, therefore, the written back of provisions for expenses in the year under consideration amounts to cessation of liability and become income in view of provision of section 41(1) of the I.T. Act, 1961. 8.2 The contention of the assessee that addition of amount of provisions to the income as per profit and loss account and then claim of deduction under section 80P(2) would result in NIL taxable income. This exercise was omitted by note appended to the computation of income. 9. In view of the above facts observed and discussed as per the direction of the Hon'ble ITAT it is concluded that provisions for establishment expenses and other expenses to the extent of Rs. 1,18,99,651/- has been claimed and allowed as expenditure in the profit and loss account in preceding assessment years. The provisions for expenses have not been added back in computation of income. Therefore, the transfer of liability of expenses (provision for establishment expenses and other expenses total Rs. 1,18,99,651/-) directly to reserve amounts to cessation of liabilities of expenses and is taxable as income in the year in which it is transferred to reserve. 5.4 He contended that AO has committed serious error in arriving at conclusion to add the amount of Rs. 1,18,99,651/- towards provisions for expenses transferred to reserve fund. 5.5 He relied on the provisions of Section 41(1) of the Income Tax Act which reads as under:- 41. 5.4 He contended that AO has committed serious error in arriving at conclusion to add the amount of Rs. 1,18,99,651/- towards provisions for expenses transferred to reserve fund. 5.5 He relied on the provisions of Section 41(1) of the Income Tax Act which reads as under:- 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. 5.6 He contended that the said provision will not apply to the facts of the case as there is no entry in the books of account for transferring the amount in reserve fund. Merely, it has been done in view of the decision of the Supreme Court in State Bank of Patiala vs. Commissioner of Income Tax reported in (1996) 219 ITR 706 for which matter was remitted back. 5.7 He has also taken us to the order of the CIT(A) wherein it has been observed as under:- 7. It is not disputed by the appellant that the Provisions totaling to Rs. 5.7 He has also taken us to the order of the CIT(A) wherein it has been observed as under:- 7. It is not disputed by the appellant that the Provisions totaling to Rs. 1,18,99,651/- were not added back in the Computations of Income of the returns filed for earlier assessment years. It is also not disputed that the Provisions were debited in the P & L account, therefore, the conclusion in the assessment order of taxing the Provisions totaling to Rs. 1,18,99,651/- because they have been transferred to Reserve in the year under consideration is upheld, as Hon'ble ITAT direction was only to confirm whether the Provisions were added back to income in earlier years or not. The answer is No they had not been added back. The addition of Rs. 1,18,99,651/- is thus upheld. 5.8 The aforesaid order is subject matter of appeal before the tribunal wherein while considering the case, the tribunal observed as under:- 5. We have heard the rival submissions and pursued the material available on record. The principle contention raised by the ld. AR is that the assessee's income from its banking business was wholly exempt under section 80P(2) of the Act in the earlier years (prior A.Y 2007-08) and by way of a note to the computation of income filed with return of each of the prior assessment years, it has stated that "as income from its banking business is wholly exempt under section 80P(2) of the Income Tax Act, it has not been considered necessary to disturb and add back items of profit and loss account in conformity with the Income Tax Act/Income Tax Rules including appropriation of profit in reserve funds". It was submitted that the assessment for most of the prior years were completed under section 143(3) wherein the return of income filed by the assessee was accepted including the acceptance of the above said note appended to the computation of income. It was submitted that by way of said note to the computation of income, all disallowable expenses/deductions etc. were deemed to have been considered and added back to the computation of income and as resultant income would have been exempt under section 80P(2), exercise of adding all disallowable expenses/deductions etc. in assessment was not done. It was submitted that by way of said note to the computation of income, all disallowable expenses/deductions etc. were deemed to have been considered and added back to the computation of income and as resultant income would have been exempt under section 80P(2), exercise of adding all disallowable expenses/deductions etc. in assessment was not done. 5.3 Applying the same analogy to the first limb of section 41(1) which talks about "any allowance or deduction made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee", it means the actual deduction which has been claimed/made in the computation of income and thereafter upheld in the assessment order for the relevant assessment year. The same cannot be extended to include any loss, expenditure or trading liability deemed to have been claimed and allowed to the assessee. Extending the said analogy further, it cannot be said that certain expenditure though claimed initially in the profit/loss account were deemed to have been disallowed either in the computation of income by the assessee or subsequently by the AO in the assessment order. Further, the note to the computation of income is totally silent about nature and quantum of provisions for administrative expenses which has been made subject matter of section 41(1) of the Act. Unless and until there is one to one correlation between the expenses disallowed earlier and benefit obtained now by way of reversal of such provision for expenses, it cannot be held that the provisions of section 41(1) are not applicable. Therefore, the above said contention of the ld AR in respect of deemed disallowance of the provisions of expenses by way of a note in the computation of income and hence, not applicability of section 41(1) cannot be accepted. 5.5 We have given a careful consideration to the said contention raised by the ld. AR but we are unable to accept the same. Section 41(1) talks about allowances/deductions which has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The said allowance/deduction under section 41(1) has not been made subject to deduction under Chapter-VIA of the Act as claimed ld. AR. If the contention raised by the ld. Section 41(1) talks about allowances/deductions which has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The said allowance/deduction under section 41(1) has not been made subject to deduction under Chapter-VIA of the Act as claimed ld. AR. If the contention raised by the ld. AR is accepted, then it leads to the situation where no allowance or deduction will have be claimed by the assessee and further, in such circumstances, provisions of section 41(1) cannot be invoked where an assessee is eligible for deduction under Chapter-VI-A of the Act. In our view, the said contention of the ld AR will make section 41(1) infructous in such cases. 5.7 In light of above discussions, it is clear that the income that is eligible for deduction under section 80P has to be computed in accordance with the provisions of Act and which includes section 41(1) of the Act. Therefore, firstly the income has to be computed taking into consideration the provisions of section 41(1) of the Act and thereafter, the deduction under Section 80P has to be determined. It may so happen that the whole of the income so computed in accordance with the provisions of the Act is held eligible for deduction under section 80P of the Act however, the same cannot be a basis to hold that provisions of section 41(1) are not applicable. There could also be situations where the business which is eligible for section 80P is no more in existence and the assessee has obtained some benefit, provision of section 41(1) continues to apply. Similarly, where the assessee continues to carry on the same business but in the later years, it is not eligible for section 80P due to amendment in the law as has happened in the instant case, it cannot be held that the provisions of section 41(1) are not applicable. The provisions of the Act, therefore, have to be read harmoniously and in such a manner that none of the provisions are rendered infructuous. In light above discussions, we do not see any infirmity in the order of the AO who has rightly followed the directions of the Coordinate Bench and the order of the ld. CIT(A) which is hereby confirmed. The ground taken by the assessee is thus dismissed. 6. In light above discussions, we do not see any infirmity in the order of the AO who has rightly followed the directions of the Coordinate Bench and the order of the ld. CIT(A) which is hereby confirmed. The ground taken by the assessee is thus dismissed. 6. He has relied upon the following decisions:- 6.1 In Elgin Mills Co. Ltd. vs. Inspecting Assistant Commissioner of Income Tax (1992) 198 ITR 81 , it has been held as under:- 5. This note constitutes the basis for the impugned notice issued by the respondent under Section 148. Soon after receiving the impugned notice, the petitioner addressed a letter dated March 31, 1980, to the respondent stating that the impugned notice does not contain any reasons or grounds for which the assessment is sought to be reopened and asserting further that none of the grounds relevant for reopening of the assessment mentioned in either of the two clauses in Section 147 are attracted in this case. The representative of the petitioner also personally met the respondents. The respondents informed the petitioner's representative that he proposes to include the aforesaid amount of Rs. 51,61,166 in the income of the petitioner-company in the assessment year 197677 under Section 41(1) of the Act. The petitioner's representative was also apprised of the fact that action is sought to be taken under Clause (b) of Section 147. Subsequently, the petitioner received a letter dated April 8, 1980, from the respondents stating merely that he has initiated the proceedings under Clause (b) of Section 147 but without giving or setting out the reasons on the basis of which he assumed the jurisdiction in the matter. Under the said letter, the respondents called upon the petitioner to submit his return before he could consider the petitioner's request for supplying the "reasons" recorded under Sub-section (2) of Section 148. The petitioner's contention is that Section 41(1) was not attracted in the facts and circumstances of the case ; that the said amount of Rs. 51,61,166 was allowed as a deduction by the Tribunal in the assessment year 1972-73 though the said amount represented the liability which accrued in the previous assessment years. The liability for which the said amount was set apart still exists ; it has not ceased. No reverse entries have also been made by the petitioner in his account books relating to the said amount. The liability for which the said amount was set apart still exists ; it has not ceased. No reverse entries have also been made by the petitioner in his account books relating to the said amount. In such circumstances, Section 41(1) has absolutely no application. 6. Learned counsel for the petitioner submits that merely because the petitioner has reverted to the old practice of debiting to the profit and loss account, amounts actually paid or payable to workers retiring in that year, it cannot be said that the liability for which the aforesaid amount was provided, has ceased. It is true, says learned counsel, that prior to the assessment year 1972-73, the petitioner was following the practice of debiting the profit and loss account, with amounts actually paid or payable to the retiring workers in each year and had shifted to the actuarial valuation system from that assessment year onwards and has, in later years, shifted back to the old system, it does not follow therefrom that either the liability for which the said amount was provided has ceased or that there are any other facts or grounds attracting the provisions contained in Section 41(1) of the Act. Learned counsel also explains that the petitioner has transferred back the amount of Rs. 81,20,209 representing the amount which was set apart as a provision for meeting the retirement gratuity liability, on actuarial valuation, during the assessment years 1973-74 and 1974-75, but the company has not transferred back the said amount of Rs. 51,61,166, the amount which was set apart as provision during the assessment year 1972-73 in respect of liability which accrued in the previous years. In other words, the disputed amount has never been transferred back to the profit and loss account and, if so, there is no occasion for invoking Section 41(1). 6.2 In Commissioner of Agricultural Income Tax vs. Kerala Estate reported in (1974) 96 ITR 210, it has been held as under:- 5. As we understand this decision, the principle behind it is that money embezzled from an assessee retains the character of income of the assessee in the hands of the person who embezzled the money and when he either returns it to the assessee, or when it is recovered by the assessee, it comes back to the assessee as his income, the amount not having changed its character. In the meanwhile that income had not been taken into account in any assessment year as, under the Income-tax Act, it was deductible as a loss arising from the carrying on of the business. It is only in such peculiar cases, we think that the rule in that decision can be applied. We think the same principle has been applied by Finlay J. in Gray vs. Lord Penrhyn, [1937] 21 T.C. 252 (K.B.) in a case of misappropriation committed by the officials of a slate quarry, but not detected by the auditors who later on made good the amount. The principle behind these decisions cannot be pressed into service in cases where the creditor due to generous considerations or to be more realistic when he finds that it is necessary for the very purpose of his business that the assessee from whom he had claimed large amounts by way of interest or price of goods or as remuneration payable for services rendered has to be helped in continuing his business and, therefore, either gives up his right to receive the amounts that had accrued due or returns the amounts which he had actually received. The money that had either been given up or had been refunded is money that belonged to the creditor which could no longer be the income of the assessee and it comes to the assessee in the form of a windfall. This aspect had been noticed very clearly in the judgment of Rowlatt J., his judgment which gave rise to the decision of the House of Lords in British Mexican Petroleum Co. vs. Jackson [1932] 16 T.C. 570 (HL). In such cases the money received is not the income of the assessee; we think that it is to cover cases of this nature that Subsection (2A) of Section 10 was introduced in the Indian Income-tax Act of 1922 and reintroduced in the form of Section 41 of the Income-tax Act, 1961. The learned judges of the Mysore High Court, on a very exhaustive survey of the decision in Commissioner of Income-tax vs. Lakshmamma, came to the conclusion that the general law even before Section 10was amended by introducing Sub-section (2A) was such as to enable the benefit accruing from remissions or benefit accruing from payment made by a creditor being taxed. The learned judges of the Mysore High Court, on a very exhaustive survey of the decision in Commissioner of Income-tax vs. Lakshmamma, came to the conclusion that the general law even before Section 10was amended by introducing Sub-section (2A) was such as to enable the benefit accruing from remissions or benefit accruing from payment made by a creditor being taxed. With very great respect we do not think this is a correct statement of the law. 7. Apart from the principle stated in the decision in Severne vs. Dadswell [1954] 3 ALL ER 243 (Ch. D); [1954] 35 TC 649 , when a year's account has been finally settled with reference ;to the liabilities, there can be no question of reopening that year's assessment made on that factual and real basis. The only question then is whether what has been given up by a creditor in favour of an assessee or returned to him can be said to be income of the assessee. We find it difficult to accept the proposition that it would be income. What was returned to the assessee has nothing to do with the activities of the assessee; it does not arise from the business nor docs it arise from agricultural operations when the assessee is an agriculturist. The principle of the decision of the House of Lords case must apply to such a case. 8. We answer the question referred to us in the affirmative, that is, in favour of the assessce and against the department. As we indicated at the beginning, since the question is a somewhat difficult one and the decisions have not all been uniform, the reference is justified and for these reasons we direct the parties to bear their costs. 6.3 In Commissioner of Agricultural Income Tax vs. Kerala Estate Mooriad Chalapuram (1986) 161 ITR 155 , it has been held as under:- 5. In order to eliminate such a controversy in cases falling under the Indian Income-tax Act, 1922 Sub-section (2A) was added in Section 10 of that Act, whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business, profession or vocation. Sub-section (2A) was inserted in Section 10 in 1955. In order to eliminate such a controversy in cases falling under the Indian Income-tax Act, 1922 Sub-section (2A) was added in Section 10 of that Act, whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business, profession or vocation. Sub-section (2A) was inserted in Section 10 in 1955. Before that Chagla, C.J., speaking for the Court in Mohsin Rehan Penkar vs. Commissioner of Income-tax, Bombay City [1948] 16 ITR 183 (Bom) had observed: "It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation". This observation was noted by the Mysore High Court in C.I.T. vs. Lakshmamma (supra), and appears from what was said by them to have received that tacit approval of the learned Judges. It was made the basis of distinguishing the case before them from that decided by the Bombay High Court. 6.4 In State Bank of Patiala vs. Commissioner of Income Tax (1996) 219 ITR 706 , it has been as under:- 12. A fair reading of the above decisions would go to show that if the transfer of amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as 'reserve'. In this case, substantial amounts were set apart as reserves. No amount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the assessee by way of capital and the assessee treated the said amounts as "reserves" and not as "provisions" designed to meet liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of balance sheets. These facts have been found by the Tribunal. On the facts, the amount set apart as reserves cannot be said to be so earmarked, when any liability has actually arisen or was anticipated by the assessee. It cannot be said either, that the amounts set apart out of the profits were designed to meet any known liability, that existed at the date of the balance-sheet. On the facts, the amount set apart as reserves cannot be said to be so earmarked, when any liability has actually arisen or was anticipated by the assessee. It cannot be said either, that the amounts set apart out of the profits were designed to meet any known liability, that existed at the date of the balance-sheet. Tested in the light of the decisions of this Court, referred to hereinabove, it appears to us, that the amounts set apart towards bad and doubtful debts in these cases are "reserves" qualifying for appropriate relief under Rule 1(xi)(b) of the first Schedule and Rule 1(iii) of the Second Schedule of the Act. 14. The High Court has taken the view that the "fund created or a sum of money set apart to meet any liability which the assessee "can reasonably and legitimately anticipate on the date of preparation of the balance sheet, is the same, as in a case "where the liability has actually arisen", (a present known liability) and the fund to meet such liability cannot be treated as reserve". In the view of the High Court, since the assessee is a banking company, it would be reasonable and legitimate to assume" that in the course of its business, "it is bound to have" bad and doubtful debts for which "it may", in anticipation, make a provision in the balance sheet by having a separate fund or an account to meet such anticipated liability. We are afraid that the aforesaid assumption is totally unjustified and proceeds on mere surmises and conjectures. This is not a case, when at the time fund is earmarked, there is a known liability - one which has either arisen or anticipated legitimately, by the assessee - and the fund to meet such eventuality cannot be treated as "reserves". The observations of this Court that the liability should be one "which has actually arisen or is anticipated legitimately by the assessee", cannot be extended to hold, that in the case of an assessee carrying on banking business, it is "bound" or "can reasonably anticipate" on the date of the preparation of balance sheet "bad and doubtful debts", for which "it ought", in anticipation, make a provision and such provision for anticipated liability should be equated with known and existing liability and should be construed as a provision. The question in such cases, is whether the liability was "known" or "anticipated" on the date when the balance sheet was prepared. The question is not whether the assessee "can anticipate" or "reasonably anticipate" on the date when the balance sheet was prepared about "the bad and doubtful debts". The High Court was in error in surmising that the assessee being a banking company is bound to have bad and doubtful debts. It need not necessarily be so. It is not bound to anticipate on the date of preparation of balance sheet that all or any of its debts "are bound to be bad and doubtful". It all depends upon facts and circumstances. We are of the view that the High Court misunderstood the scope of the observations in Saran Engineering Co.'s case (supra) and surmised that the observations quoted at page 748 will even cover cases, where the liability was not factually anticipated on the date of the preparation of the balance sheet, but also will apply to cases, where the company "ought and can" anticipate on the date of preparation of the balance sheet. 6.5 In Commissioner of Income Tax vs. India Discount Co. Ltd. reported in (1970) 75 ITR 191 , it has been held as under:- 5. It was said that the assessee had itself credited the amount of Rs. 43,925/- to the profit and loss appropriation account and thereafter transferred the same to a reserve fund in the accounting year ending September 30, 1955. No adjustment was made in the share purchase account on account of the receipt of dividend. But it is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit and loss account. [see Commissioner of Income-tax, Bombay City I vs. M/s. Shoorji Vallabhdas & Co.(1962) 46 ITR 144 (SC) ]. The assessee's case, had all along been that the amount of arrear dividends received could not be treated as income of the assessee liable to tax for the assessment year 1956-57. As we have already shown the consideration paid by the assessee was given not only for the shares but also for share dividends amounting to Rs. 43,925/- and the amount of Rs. 1,12,575/- was paid not only for the share scrips but also for the arrear dividends. As we have already shown the consideration paid by the assessee was given not only for the shares but also for share dividends amounting to Rs. 43,925/- and the amount of Rs. 1,12,575/- was paid not only for the share scrips but also for the arrear dividends. In other words there was capital purchase by the assessee. of the shares together with arrear dividends due on the shares for the years 1936 to 1945. It is therefore not possible to treat the payment of Rs. 43,925/- as income liable to tax either as profit under section 10 of the Act or as dividend under section 12 of the Act. 6.6 In Sutlej Cotton Mills Ltd. vs. Commissioner of Income Tax (1979) 116 ITR 1 , it has been held as under:- 3. The first question that arises for consideration is whether the assessee suffered any loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000/- in Pakistani currency from West Pakistan. These two amounts admittedly came out of Pakistan profit for the assessment year 1954-55 and the equivalent of these two amounts in Indian currency, namely, Rs. 36 lakhs and Rs. 18 lakhs respectively, was included in the assessment of the assessee as part of Pakistan profit. But by the time these two amounts came to be repatriated to India, the rate of exchange had undergone change on account of devaluation of Pakistani rupee and, therefore, on repatriation, the assessee received only Rs. 25 lakhs and Rs. 12,50,000/- in Indian currency instead of Rs. 36 lakhs and Rs. 18 lakhs. The assessee thus suffered a loss Rs. 11 lakhs in one case and Rs. 5,50,000/- in other in the process of conversion of Pakistani currency into Indian currency. It is no doubt true-and this was strongly relied upon by the High Court for taking the view that no loss was suffered by the assessee-that the books of account of the assessee did not disclose any loss nor was any loss reflected in the balance-sheet or profit and loss account of the assessee. The reason was that though, according to the then prevailing rate of exchange, the equivalent of Pakistani profit in terms of Indian rupee was Rs. The reason was that though, according to the then prevailing rate of exchange, the equivalent of Pakistani profit in terms of Indian rupee was Rs. 1,68,97,232/- and that was the amount included in the assessment of the assessee for the assessment year 1954-55, the assessee in its books of account maintained at the Head Office did not credit the Pakistani profit at the figure of Rs. 1,68,97,232/-, but credited it at the same figure as in Pakistani currency. The result was that the loss arising on account of the depreciation of Pakistani rupee vis-a-vis Indian rupee was not reflected in the books of account of the assessee and hence it could not figure in the balance-sheet and Profit and Loss Account. But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessees has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Here, it is clear that the assessee earned Rs. 36 lakhs and Rs. 18 lakhs in terms of Indian rupees in the assessment year 1954-55 and retained them in West Pakistan in Pakistani currency and when they were subsequently remitted to India, the assessee received only Rs. 25 lakhs and Rs. 12,50,000/- and thus suffered loss of Rs. 11 lakhs and Rs. 5,50,000/- in the process of conversion on account of alteration in the rate of exchange. It is, therefore, not possible to accept the view of the High Court that no loss was suffered by the assessee on the remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000/- from West Pakistan. This view which we are taking is clearly supported by the decision of this Court in Commissioner of Income Tax vs. Tata Locomotive Engineering Company [1966] 60 ITR 405 (SC) which we shall discuss a little later. 4. That takes us to the next and more important question whether the loss sustained by the assessee was a trading loss. This view which we are taking is clearly supported by the decision of this Court in Commissioner of Income Tax vs. Tata Locomotive Engineering Company [1966] 60 ITR 405 (SC) which we shall discuss a little later. 4. That takes us to the next and more important question whether the loss sustained by the assessee was a trading loss. Now this loss was obviously not an allowable deduction under any express provision of Section 10(2), but if it was a trading loss, it would be liable to be deducted in computing the taxable profit of the assessee under Section 10(1). This indeed was not disputed on behalf of the Revenue but the serious controversy raised by the Revenue was whether the loss could at all be regarded as a trading loss. The argument which found favour with the High Court was that the loss was caused on account of devaluation of the Pakistani rupee which was an act of the sovereign power and it could not, therefore, be regarded as a loss arising in the course of the business of the assessee or incidental to such business. This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Iyer, J., speaking on behalf, of this Court in Badri Das Dage vs. C.I.T. [1958] 34 ITR 10 (SC) but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. The loss is as much a trading loss as any other and it makes no difference that it is occasioned by devaluation brought about by an act of State. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. Take for example the stock-in-trade of a business which is sold at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasioned by external agency or act of God, would equally be a trading loss. The cause which occasions the loss would be immaterial : the loss, being in respect of a trading asset, would be a trading loss. Consequently, we find it impossible to agree with the High Court that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee. Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the query whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss, but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is of course not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well recognised distinction between the two concepts. Adam Smith in his 'Wealth of Nations' describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. Adam Smith in his 'Wealth of Nations' describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. 'Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while 'fixed capital means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (new) Ltd. vs. Thurgood 18 T.C. 280 ., If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. This is clearly borne out by the decided cases which we shall presently discuss. 10. The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the Tribunal as to whether the sums of Rs. 25 lakhs and Rs. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the Tribunal as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000/- were held by the assessee in West Pakistan on capital account or Revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000/- resulting to the assessee on remission of these two amounts to India, on account of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for a supplementary statement of case from the Tribunal giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the Revenue Authorities and the Tribunal and hence it would be desirable that the matter should go back to the Tribunal with a direction to the Tribunal either to take additional evidence itself or to direct the Income Tax Officer to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50.000/- were held in West Pakistan as capital asset or as trading asset or in other words, as part of fixed capital or part of circulating capital in the business. 25 lakhs and Rs. 12,50.000/- were held in West Pakistan as capital asset or as trading asset or in other words, as part of fixed capital or part of circulating capital in the business. The Tribunal will, on the basis of this additional evidence and in the light of the law laid down by us in this judgment determine whether the loss suffered by the assessee on remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000/- was a trading loss or a capital loss. 6.7 In Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. Commissioner of Income Tax (1997) 227ITR 172, it has been held as under:- 10. There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. Pondkherry Railway Co. Ltd. vs. C.I.T [1931] 1 Comp Cas 314 (PC). 12. It is difficult to follow this reasoning. If a person borrows money for business purpose but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary of its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way. 6.8 In Commissioner of Income Tax vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144, it has been held as under:- 10. In Commissioner of Income-tax vs. Chamanlal Mangaldas & Co. 1956 (29) ITR 987 (Bom), the assessee was also the managing agent of a company, and under the agreement was entitled to receive commission at a certain rate. By another agreement, the commission earned by the managing agent for the calendar year 1950 was reduced by Rs. 1 lakh. That agreement took place during the previous year, and the resolution of the board of directors of the managed company was also in the previous year. It was, however, made final on April 8, 1951, at a meeting of the board of directors, but that was beyond the previous year. The High Court of Bombay held that by reason of the resolution during the currency of the previous year, the right of the assessee to commission ceased to be under the original agreement and depended upon and arose only after the decision of the board of directors to reduce the commission. The assessee was, therefore, not held liable on the larger sum which, it was held, was only a hypothetical income, which it might have earned if the old agreement had continued to subsist. The facts of the present case are almost identical, and the principle applied by the Bombay High Court governs this case. The reason is plain. Income tax is a levy on income. The facts of the present case are almost identical, and the principle applied by the Bombay High Court governs this case. The reason is plain. Income tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income, if income does not result at all, there cannot be a tax, even tough in bookkeeping, an entry is made about a " hypothetical income " which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there s obviously neither accrual nor receipt of. Income, even though an entry to that, effect might, incineration circumstances, have been made in the books of, account. This is exactly what has happened in this case, as it happened in the Bombay case, which was approved by this court. Here too, the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account A mere bookkeeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This; was not a. gift by the assessee firm to the manager companies. The reduction was a part of the agreement entered into by the assesses firm to secure a long-term managing agency arrangement for the two companies which it had floated. 6.9 In Commissioner of Income Tax vs. Triveni Engineering & Industries Ltd. (2009) 181 Taxman 5, it has been held as under:- 5. After hearing the arguments on behalf of the assessee as well as the revenue, the tribunal observed that there was no dispute about the fact that the assessee had been carrying on its sugar business in a number of units, including its units at Deoband and Ramkola. The assessee had modernized these two units with a view to achieve a greater capacity. The assessee had modernized these two units with a view to achieve a greater capacity. In this process, certain capital expenditure was incurred and administrative expenses had been allocated on an estimate basis towards the renovation and modernization of the said units. The tribunal held that though the expenses had been capitalized in the books of accounts of the assessee, this would not be conclusive of the nature as to whether the expenditure was of a capital nature or a revenue nature. The tribunal followed the decision of the Supreme Court in the case of The Kedarnath Jute Manufacturing Co. Limited vs. The Commissioner of Income Tax (Central), Calcutta [1971] 82 ITR 363 (SC) to hold that entries in the books of accounts of the assessee were not conclusive of the nature of expenses. The tribunal thereafter examined the issue as to whether in a continuing business, when expenditure is incurred for renovation of its existing units, the said expenditure would be of a capital or a revenue nature. The tribunal followed the decision of this court in the case of Commissioner of Income Tax vs. Relaxo Footwears Limited [2007] 293 ITR 231 (Delhi) . In that decision, this court, following its earlier decision in the case of Commissioner of Income Tax vs. Modi Industries Limited [1993] 200 ITR 341 (Delhi) , held that as the new unit was part of the existing business and there was no dispute that there was unity of control and interlacing of the units, the expenses incurred by the assessee for the setting up of a new unit, would be of a revenue nature. We find that, in the present case, the tribunal has correctly applied the decision of this court in Relaxo Footwears Limited (supra). The administrative expenses would be of a revenue nature as there was continuity of business. The tribunal, in our view, has correctly concluded that the authorities below had erred in holding the said expenditure to be of a capital nature. We agree with the conclusion of the tribunal that the whole of the expenditure is to be allowed as revenue expenditure and consequently there would be no question of grant of depreciation on such expenditure. 6. In these circumstances, we feel that no interference with the impugned order of the tribunal is called for. We agree with the conclusion of the tribunal that the whole of the expenditure is to be allowed as revenue expenditure and consequently there would be no question of grant of depreciation on such expenditure. 6. In these circumstances, we feel that no interference with the impugned order of the tribunal is called for. The tribunal has correctly appreciated the law on the point and has applied the same to the undisputed facts. 7. No substantial question of law arises for our consideration. The appeals are dismissed. 7. He contended that issue is required to be answered in favour of the assessee and against the department. 8. Mr. Mathur appearing for the department has strongly contended that in view of the concurrent finding of all the authorities and also the observations made by AO after remand which reads as under:- ii. The provisions for establishment of Rs. 1,18,99,651/- comprises provisions for establishments expenses of Rs. 1,12,02,831.40/- (provisions for establishment expenses of Rs. 30,00,000/- for the period ending on 31.3.2004, Rs. 40,00,000/-) for the period ending on 31.3.2005 and Rs. 40,00,000/- for the period ending on 31.3.2006) balance amount of Rs. 2,02,831/- pertains to the period prior to F.Y. 2003-04 Rs. 6,96,819/- relates to provision for expenses like water, postage, telephone etc. included with expenses under respective head and debited to Profit and Loss account for the F.Y. 2005-06. iii. The above amount of provisions for establishment expenses are included with the expenditure of salary and allowances and provident fund, for example, provision for establishment expenses Rs. 40,00,000/- is included with salary expenses total of Rs. 2,87,07,784.56/- and coupled with other expenses total Rs. 5,51,08,851.53/- is debited to profit and loss account for the period ending on 31.3.2006 under head 'salaries and allowances and provident fund'. 8.1 He also taken us to the order of the tribunal wherein tribunal has observed which has been reproduced above which is subject matter of this appeal. 8.2 He has relied upon the decision of Supreme Court in CIT, Madurai vs. T.V. Sundaram Iyengar & Sons Ltd. reported in (1996) 222 ITR 344 (SC) wherein it has been observed as under:- 17. There is no dispute that the deposits in the case before us were received from trade parties who had not made any claim for repayment of the balance. There is no dispute that the deposits in the case before us were received from trade parties who had not made any claim for repayment of the balance. The Income Tax Officer has pointed out that the amount had arisen as a result of trading transaction and had a character of income. The Tribunal has, however, held that the amount received in course of trade was of capital nature. The Tribunal, thereafter, straightaway applied the principle of Motley vs. Tattersall (1939) 7 ITR 316 (CA) (supra) and held since it was of a capital nature at the time of the receipt, it could not become assessee's income later on. 18. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constituents, As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The Commissioner of Income Tax (Appeal) found that the assessee wrote back the amounts to its profit and loss account because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss account. The Commissioner of Income Tax (Appeal) held that these amounts were not revenue receipts but were of capital nature. Provisions of Section 41(1) were not attracted in the facts of this case because the assessee's liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view. 19. We fail to see how these deposits were in any way different from the deposits which came for consideration in the case of Punjab Distilling Industries Ltd. vs. Commissioner of Income Tax, Simla [1959] 35 ITR 519 (SC) . The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits were taken in course of the trade and adjustments were made against these deposits in course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account. 22. There is no finding to that effect. The deposits were taken in course of the trade and adjustments were made against these deposits in course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account. 22. The principle laid down by Atkinson, J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson, J. pointed out that in Tattersall's case no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into bring automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if 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. 23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson, J. pointed out that what the assessee did was the common-sense way of dealing with the amounts. 8.3 He also relied upon the decision of Supreme Court in Polyflex (India) Pvt. Ltd. vs. Commissioner of Income Tax, Karnataka reported in (2002) 257 ITR 343 (SC), it has been held as under:- 7. We are inclined to think that in a case where a statutory levy in respect of goods dealt in by the assessee is discharged and subsequently the amount paid is refunded, it is the first clause that more appropriately applies. It will not be a case of benefit accruing to him on account of cessation or remission of trading liability. It will be a case which squarely falls under the earlier clause, namely, "obtained any amount in respect of such expenditure". In other words, where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance had been given in the assessment for earlier period, the assessee is liable to disgorge that benefit as and when the obtains refund of the amount so paid. The consideration whether there is a possibility of the refund being set at naught on a future date will not be a relevant consideration. Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in Section 41(1) of the Act comes into play and it is not necessary that the Revenue should await the verdict of higher Court or Tribunal. If the Court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief. 8. True, expenditure and trading liability may be over-lapping concepts; but the lawmakers apparently intended to deal with allied concepts separately and specifically so as to make the provision as comprehensive as possible in order to effectuate the objective underlying the provision. 8. True, expenditure and trading liability may be over-lapping concepts; but the lawmakers apparently intended to deal with allied concepts separately and specifically so as to make the provision as comprehensive as possible in order to effectuate the objective underlying the provision. The anatomy of the Section and the collocation of the words employed therein would suggest that the test of cessation or remission of liability has to be applied vis-a-vis trading liability and it cannot be projected into the previous clause. 11. The High Court correctly appreciated the scope of Section 41(1) and applied the second limb of the sub-section to the fact situation. It may be noted that the assessee did neither pay the excise duty to the Government nor did it get refund of duty from the concerned authority. Notwithstanding the High Court's judgment in favour of the petitioner, the stage had not yet reached when it can be said that the liability for which allowance was given earlier ceased. The view taken by the High Court in substance is that the benefit in respect of the trading liability would accrue only when the liability definitely ceased after the termination of the proceedings in the Apex Court in favour of the petitioner. This very decision of the Allahabad High Court was relied upon by the Tribunal without appreciating the correct ratio of the decision. 9. We have heard counsel for the parties. 10. The question arises because of amendment which has come into force w.e.f. 1.4.2006 prior to that the income of the Cooperative society was totally exempted, therefore, question of keeping it in reserve fund would not make any difference. The contention of Mr. Pathak that in view of the decision of State Bank of Patiala (supra), an entry should have been made prior to 2006 is supported by the observations made by the AO which reads as under:- i. Statutory reserve of Rs. 80,99,16,594.12/- as on 1.4.2006 has increase to Rs. 82,41,83,630.49/-. The increase in the amount of statutory reserve is contributed by transferred of Rs. 1,18,99,651/- from carried forward provisions written back in the relevant financial year by transferring the said amount to the statutory reserve account. 11. His further contention that for different assessment years 2003-04, 2004-05, 200506 & 2006-07, the entries could not have been made as on 31.3.2006 and the same has been made for the A.Y. 2007-08. 1,18,99,651/- from carried forward provisions written back in the relevant financial year by transferring the said amount to the statutory reserve account. 11. His further contention that for different assessment years 2003-04, 2004-05, 200506 & 2006-07, the entries could not have been made as on 31.3.2006 and the same has been made for the A.Y. 2007-08. In that view of the matter, we are of the opinion that case is covered by provisions of Section 41(1) of the Act as reproduced hereinabove. 12. The further contention which has been raised by counsel for the appellant that this exemption of income and entries already made are only to rectify the book entry, in our considered opinion, at the relevant time, the said contention would have been valid because the total income was exempted but when the entries were made in the books of account, the said income was not totally exempted. In that view of the matter, the view taken by all the authorities is required to be upheld. 13. In that view of the matter, the issue is answered in favour of the department and against the assessee. 14. The appeal stands dismissed.