FIRST INCOME TAX OFFICER v. BRIGHT SPINNERS (P.) LTD
[Citation -1985-LL-0306-6]

Citation 1985-LL-0306-6
Appellant Name FIRST INCOME TAX OFFICER
Respondent Name BRIGHT SPINNERS (P.) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 06/03/1985
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags mercantile system of accounting • provident fund contribution • carry forward and set off • employees provident fund • unabsorbed depreciation • investment allowance • sales tax liability • development rebate • service of notice • extra liability • legal liability • accrual basis • business loss • demand notice • voting power • excise duty • tea estate • net loss
Bot Summary: The ITO disallowed the amount on the ground that the amount related to the earlier years for the period May, 1976 to Dec., 1977 On appeal before the Commissioner it was contended by the assessee that there was dispute regarding the contribution payable to the Regional Commissioner for Employees provident Fund and the dispute was settled in Oct., 1978 and the amount was remitted on 31st Dec., 1978. The Commissioner accepted the claim of the assessee as there was an honest difference of opinion regarding interpretation of law between the assessee and the Provident Fund Commissioner. In the grounds it has been urged that the decision of the Commissioner is contrary to the decision of the Supreme Court in the case of Kedaranth Jute Mfg. Co. Ltd. and the Kerala High Court decision in the case of L.J. Patel Co. vs. CIT 97 ITR 152. Counsel for the assessee on the other hand supported the order of the Commissioner and submitted that the decision of the Supreme Court in kejarnath Jute Mfg. Co. actually supports the assessee s case. The ratio of the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. cited supra is that an assessee who follows mercantile system of accounting is entitled to deduct from the profits and gains of the business the sales tax liability which had accrued during the period for which the profit and gains were being computed. The Madras High Court held that the assessee had incurred an enforceable legal liability on and from the date on which the assessee received the Collector s demand for payment and his endeavour to get out of liability by preferring appeals could not in any way detract from or retard efficacy of he liability which had been imposed upon him by the competent excise authority. The dispute in the case of the assessee before us having been settled in the year of account, there was an enforceable liability incurred by the assessee during the relevant year for the asst.


In this appeal by Revenue which is directed against order of CIT(A) several grounds were taken to urge that CIT(A) erred in deleting disallowances of Rs. 2,474 representing contribution made by assessee for period May, 1976 to December, 1977 and directing ITO to bring forward business losses and other allowance determined in earlier assessment years for purpose of set-off. assessee is company in which public are not substantially interested. It carries on business of spinning of yarn from waste cotton and sale of yarn. For asst. yr. 1979-80, for which accounting year ended on 31st Dec., 1978, assessee claimed deduction of provident fund contribution of Rs. 2,474. ITO disallowed amount on ground that amount related to earlier years for period May, 1976 to Dec., 1977 On appeal before Commissioner (Appeals) it was contended by assessee that there was dispute regarding contribution payable to Regional Commissioner for Employees provident Fund and dispute was settled in Oct., 1978 and amount was remitted on 31st Dec., 1978. Commissioner (Appeals) accepted claim of assessee as there was honest difference of opinion regarding interpretation of law between assessee and Provident Fund Commissioner. He also found that there was no case of double claim so far as this amount is concerned and dispute was settled in Oct., 1978 and amount was remitted in Dec., 1978. Therefore, he held that amount could be claimed either in year in which liability arose or in year in which demand was raised or in year in which payment was made. Reliance was placed on decisions of Supreme Court in case of Nonsuch Tea Estate Ltd. vs. CIT 1975 CTR (SC) 20: (1975) 98 ITR 189 (SC) and Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) and Madras High Court decision in CIT vs. Woodlands Hotel (1980) 128 ITR 603 (Med). In grounds it has been urged that decision of Commissioner (Appeals) is contrary to decision of Supreme Court in case of Kedaranth Jute Mfg. Co. Ltd. and Kerala High Court decision in case of L.J. Patel & Co. vs. CIT (1974) 97 ITR 152 (Ker). At time of hearing, learned Departmental Representative reiterated grounds and urged that undisputed liability was claimed and allowed in asst. yr. 1978-79 and only extra liability was disputed and paid in asst. yr. 1979-80 under consideration, ld. counsel for assessee on other hand supported order of Commissioner (Appeals) and submitted that decision of Supreme Court in kejarnath Jute Mfg. Co. (supra) actually supports assessee s case. After due consideration, we are of opinion that order of he Commissioner (Appeals) is justified in facts and circumstances of case and does not call for any interference. provisions of Employees Provident Fund Act and exact details of dispute were not brought on record for appreciation. ratio of Supreme Court decision in case of Kedarnath Jute Mfg. Co. Ltd. cited supra is that assessee who follows mercantile system of accounting is entitled to deduct from profits and gains of business sales tax liability which had accrued during period for which profit and gains were being computed . It was pointed out by Supreme Court that moment dealer makes either purchases or sales which are subject to sales tax obligation to pay tax arises and taxability is attracted. However, facts of that case show that assessee received demand notice from sales tax authorities on 21st Now., 1957 long after end of accounting year in respect of previous year ending 31st Dec., 1954 and this amount was claimed in revised return filed on 9th Now., 1959, i.e., after nearly two years from date of demand. This liability was allowed by observing that assessee who was maintaining accounts on mercantile system was fully justified in claiming deduction of sum being amount of sales tax which it was liable under law to pay during relevant accounting year. In other words, Supreme Court held that quantified tax liability by way of demand notice is liability payable during relevant accounting year on basis of sales effected. In case of pope King match Factory vs. CIT (1963) 50 ITR 495 (Mad), demand for excise duty was served on assessee and though he was objecting to it and seeking to get order of Collector of Excise reversed, he debited that amount in accounts on last day of he accounting year and claimed that amount as deductible allowance on ground that he was keeping his accounts on mercantile basis. Madras High Court held that assessee had incurred enforceable legal liability on and from date on which assessee received Collector s demand for payment and his endeavour to get out of liability by preferring appeals could not in any way detract from or retard efficacy of he liability which had been imposed upon him by competent excise authority. Supreme Court referred to this decision of Madras High Court and observed that decision of Madras High Court lays down law correctly. From atoresaid decision, it is clear that assessee who is following mercantile system of accounting can claim statutory liablity such as sales tax or excise duty on accrual basis or on basis of enforceable liability by way of service of demand notice. In this case of Kedaranath Jute Mfg.Co. Ltd. (supra) demand notice as served long after end of accounting year and such liability was claimed by way of revised return which was allowed. dispute in case of assessee before us having been settled in year of account, there was enforceable liability incurred by assessee during relevant year for asst. yr. 1979-80 and therefore liability should be allowed as deduction for asst. yr. 1979-80. decision of Madras High Court in case of CIT vs. Woodlands Hotel (1980) 128 ITR 603 (Med) shows that in respect of urban service of notice and not year after year. This case also supports decision of Commissioner (Appeals). Therefore, we uphold order of Commissioner (Appeals) and reject grounds taken by Revenue. Another issue in this appeal pertains to carry forward of set-off of unabsorbed business losses, depreciation and other allowances. ITO determined net loss from business at Rs. 44,108 but declined to carry forward business loss, unabsorbed depreciation and investment allowance on ground that during year of account shares of he company carrying 51per cent of voting power were acquired by Shri KN. K.S. KN, Chockalingam Chettiar and seven of his relatives and, therefore, s. 79 bars carry forward and set off of losses. According to ITO, not only there was change in share holdings in terms of s. 79(a) but also he was satisfied that change in share holding was effected with view to avoid or reduce tax liability. On appeal Commissioner (Appeals) held that assessee could avoid damage contemplated in s. 79 by satisfying either of he two conditions in s. 79 For this proposition he relied on ratio of Bombay High Court decision in case of Italindia Cotton Co. Pvt. Ltd. vs. CIT 1978 (Bom) 168: (1978) 113 ITR 58 (Bom). Further, he pointed out that s. 79 applied only to business losses and not to depreciation, development rebate and investment allowance. For this proposition, he relied upon decision of Madars High Court in case of CIT vs. Concord Industries Ltd. (1979) 13 CTR (Mad) 312: (1979) 119 ITR 458 (Mad). Thereafter, Commissioner (Appeals) set out to find out whether change in share holding was effected with view to avoiding or reducing any liability to tax and observed that new share holders had income below exemption limit and they were not big income-tax payers and they were mainly agriculturists deriving taxable income from moneylending business. It was also pointed out that there was no allocation of losses determined in assessment of company among new shareholders and in fact new shareholders sold away their shares to others in 1982. Therefore, he held that ITO was not justified in applying provisions of s. 79 of IT Act, 1961. Revenue has taken grounds to urge that provisions in s. 79 were cumulative and not exclusive and decision of Madras High Court in case of Concord Industries Ltd. (supra) relied upon by Commissioner (Appeals) had not become final. At time of hearing ld. Departmental Representative reiterated grounds. After due consideration, we hold that Commissioner (Appeals) is justified with decision of he Madras High Court and Bombay High Court decision cited supra. Commissioner (Appeals) has actually gone into question of finding out whether share holding was effected with view to avoiding or reducing any liability to tax and gave categorical finding that it was not done so. ITO has simply observed that change in share holding was done for purpose of reducing or avoiding tax liability without bringing on record relevant facts. Therefore, finding given by Commissioner (Appeals) is to be accepted and even before us no contrary material was brought to our notice to dispute veracity of finding given by Commissioner (Appeals). observation of Commissioner (Appeals) that assessee could avoid damage in s. 79 by satisfying either of conditions has presumably given rise to presumption that he meant that conditions in s. 79 are mutually exclusive. As matter of fact there is no warrant for such assumption of resumption inasmuch as decision relied upon by Commissioner (Appeals) viz, Italinadia Cotton Co. Pvt. Ltd. vs. CIT 1978 CTR (Bom) 166: (1978) 113 ITR 38 (Bom) clearly shows that sub-cl. (b) of s. 79 is not independent of sub-cl. (a) of that section and that both conditions should be satisfied for any exemption form s. 79 Madras High Court has likewise held in case of CIT vs. Saravanabhava Mills Ltd. (1983) 143 ITR 856 (Med) that conditions in cl. (a) and (b) of s. 79 are cumulative in effect and unless both conditions are satisfied assessee cannot be deprived of he benefit of s. 72. Therefore, we uphold order of Commissioner (Appeals) and reject grounds taken. Revenue has taken grounds only to keep mater alive although it is covered by decision of he Madras High Court in case of Cncord Industries Ltd. (supra). In result, appeal is dismissed. *** FIRST INCOME TAX OFFICER v. BRIGHT SPINNERS (P.) LTD.
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