INCOME TAX OFFICER v. R.B. SETH MOOLCHAND NEMICHAND (P) LTD
[Citation -1985-LL-1104-1]

Citation 1985-LL-1104-1
Appellant Name INCOME TAX OFFICER
Respondent Name R.B. SETH MOOLCHAND NEMICHAND (P) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 04/11/1985
Assessment Year 1972-73
Judgment View Judgment
Keyword Tags profits and gains of business or profession • profit and loss appropriation account • genuineness of cash credit • non-charging of interest • outstanding liabilities • private limited company • cessation of liability • remission or cessation • judicial pronouncement • interest of business • trading liabilities • outstanding balance • revenue expenditure • capital expenditure • confirmation letter • unexplained credit • development rebate • cross-examination • engaged in mining • notional interest • national interest
Bot Summary: The loans are old one and the assessee is within its powers to write off the loans what to say of non-charging of interest if the assessee has decided so in the interest of business and sufficient cause and reason is there for the same. The entries in the books of account are not conclusive piece of evidence, rather these are made by the assessee in its books of account and these are exhibiting the stand of the assessee or the claim of the assessee. Moreover the creditor is in the service of the assessee and the assessee has nowhere alleged that his relations with him are strained or enemical and the ITO has collected the material to disprove the claim of the assessee regarding the cash credit. The ITO has confronted the report of the inspector to the assessee and the assessee has not at all made any comment except asking the ITO to summon the creditor for cross-examination. In view of our above discussion and reason thereto, we hold that the cash credit amounting to Rs. 40,000 is not explained as the entries regarding it are there in the books of account of the assessee and the explanation offered by the assessee for it is unsatisfactory. Further more, if the assessee has failed to explain the cash credit then section 68 says that the same is to be taken as the income of the assessee for the assessment year under consideration in which year the entries in the books of account are made regarding it. Section 41(1) reads as under: 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, and subsequently during any previous year the assessee 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 him 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.


department has preferred these appeals against even dated orders dated 21-6-1983 of Shri S.C. Agarwal, Commissioner (Appeals) who allowed appeal for assessment year 1972-73; while he partly allowed appeals for assessment years 1973-74, 1978-79 and 1979-80 against orders dated 19-8-1981, 17-9-1981 and 29-7-1982 of Shri A.M. Lunia, ITO, for assessment years 1972-73, 1978-79 and 1979-80 and for assessment year 1973-74 against order giving effect to Tribunal's order by Commissioner (Appeals). 2. We are disposing of these appeals on consolidating these together and thereby passing consolidated order for sake of convenience since issues involved in these appeals are common so much so that contentions and submissions of parties are also common. 3. First of all, we decide appeal for assessment year 1972-73. first issue in this appeal is regarding detection of additional made on account of accrued interest to assessee on interest free loans to its directors. This issue is determined by Commissioner (Appeals) in favour of assessee and against revenue in his order in paragraph No. 2 on grounds that ITO had not established any nexus in borrowings and advances made. Moreover, submissions made by assessee were having force. Therefore, accordingly, he deleted addition made by ITO amounting to Rs. 85,017 observing as under: "Against disallowance made it was submitted that Tribunal for assessment years 1969-70 and 1970-71 had approved non-charging of interest from various debtors as recovery was doubtful, inference drawn by ITO was not correct. Moreover it was submitted that interest of Rs. 1,200 w s paid to Shri Ugamlal Parekh from whom loan of Rs. 40,000 was taken during accounting year relevant to this assessment year for business purposes and was directly deposited in Government treasury. Similarly interest was paid to tune of Rs. 5,524 to Pioneer Minerals, from whom also money was taken for business during accounting year. Another submission made in this connection was that capital of company was Rs. 2,87,000 with development rebate reserve of Rs. 80,000 besides interest free creditors of Rs. 12,50,000. If these facts were taken into consideration, no disallowance was called for. Yet another submission made in this connection was that ITO has not established any nexus between borrowings and advances made. advances were made in earlier years while borrowings are relating to accounting year of assessment year. Hence, it was submitted that addition was uncalled for and has been made on guess work. I find that there is force in submissions made by assessee on this point. ITO has not established any nexus in borrowings and advances made and, accordingly, addition made by him cannot be sustained. Accordingly, addition or Rs. 8,517 is deleted." 3.1 department being aggrieved for detection of addition made by ITO referred to above has preferred this appeal. 4. Shri Ruhela, learned departmental representative, contends that learned Commissioner (Appeals) has erred in holding that onus is on department. He further contends that in case of assessee on issue, provisions of section 36(2)(iv) of Income-tax Act, 1961 ('the Act') are applicable. Reliance is placed on decisions in case of Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC) and Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC). 5. On other hand, Shri Gargieya, learned counsel for assessee, contends that issue of interest on loans to directors of assessee- company is very old as loans were given to them in year 1950. No doubt earlier notional interest was charged but in year 1961, resolution was passed by shareholders that no interest is to be charged from directors on loans advanced to them in year 1950 and, accordingly, it was not charged in assessment year 1965-66 and department accepted it. Therefore, department is to be consistent in its approach and as such in assessment year 1972-73 there is no basis for inconsistency. Moreover, loan is old one and, therefore, it cannot be held that amount of loan is diverted by assessee for non-business purposes in previous year, relevant to assessment years under consideration. He further contends that cases relied upon by department are not relevant to decide issue as these cases are distinguishable. He relies on paper book from pages 1 to 4 and 62 to 82 which is order of Tribunal in assessee's own case for assessment year 1973-74. 6. In rebuttal, learned departmental representative merely stated that copy of resolution referred to above was not filed before ITO. 7. We have heard rival submissions and have gone through record before us. From record it is clear to us that ITO made addition which has been deleted by Commissioner (Appeals) for amount of interest payable by directors on loans advanced to them. loans were advanced to directors in year 1950 and assessee charged national interest thereafter. However, in year 1961 shareholders of assessee-company passed resolution for non-charging of interest on loans advanced to directors of company. On basis of it, assessee did not charge interest and ITO accepted it. Thereafter it is admitted that in assessment year 1965-66 no interest was charged by company on loans to directors and ITO did not make any addition and, therefore, accepted claim of assessee. Further, this is not case whether amount of loan taken by company for business purposes has advanced to directors as these are old loans since 1950. Apart from it there is no material brought on record by department to rebut findings of Commissioner (Appeals) who accepted contentions of representative of assessee before him which we have seen and are well founded. Therefore, we hold that there is no nexus between amount of loans advanced to directors and loans taken by assessee on which assessee is paying interest. Moreover, loans are old one and assessee is within its powers to write off loans what to say of non-charging of interest if assessee has decided so in interest of business and sufficient cause and reason is there for same. In this case there is resolution of shareholders of company vide which they decided that no interest is to be charged from directors on loans advanced to them as directors are financially poor. This resolution was acted upon by company and ITO did not make any addition for non-charging of interest up to 1965-66. Further provisions of section 36(2)(iv) are not applicable in this case at all. Moreover, past record of case is in favour of applicable in this case at all. Moreover, past record of case is in favour of t h e assessee and against revenue and, therefore, principle of consistency demands from department that it should not make inconsistency without basis. In view of our above discussion and reasons, we hold that Commissioner (Appeals) is justified in deleting addition made by ITO for non-charging of interest on loans advanced to directors by company. Hence, we confirm impugned order on this issue. cases relied upon by department mentioned above are not applicable to facts of case and, therefore, we do not deem it proper to discuss them as these are distinguishable. 8. next issue in this appeal is regarding cash credit of Rs. 40,000 and same is in ground No. 2 which is as under: "The Commissioner (Appeals) erred on facts in holding cash credit of R s . 40,000 genuine in name of Ugamlal Parekh, employee of company who denied credit in statement recorded." 8.1 ITO asked assessee to explain cash credit and assessee filed confirmative letter of creditor Shri Ugamlal Parekh. Further ITO asked assessee to produce creditor before him to verify genuineness of cash credit. assessee requested ITO to summon him under section 181 of Act at its cost. In situation of matter, ITO deputed inspector to investigate and to report. According to report of inspector he was employee of company. Before inspector, he denied fact that he gave any loan to assessee. inspector confronted him with his confirmation and his signatures but he stated before inspector that he had not given any loan to assessee. ITO sent copy of statement recorded by inspector to assessee for giving his comments. T h e assessee replied to ITO and requested that Shri Ugamlal Parekh, creditor, should be called for cross-examination failing which no adverse inference should be drawn against it. ITO took view that it was for assessee to prove that credits were genuine by producing Shri Ugamlal Parekh, and, thus, onus has not been discharged by assessee and, therefore, genuineness of credit remained unexplained and burden remained undischarged. Accordingly, he made addition of Rs. 40,000 plus amount of interest Rs. 1,757, totalling Rs. 41,757. 8.2 assessee went in appeal before Commissioner (Appeals) who deleted it on grounds that question of addition could have been properly determined if Shri Ugamlal Parekh was examined by ITO and subjected to cross-examination by assessee, which had not been done; that in absence of same, question comes down to fact whether his verbal statement before inspector is to be accepted or documentary evidence placed in support of claim by assessee should be accepted with reference to books of account in which entries have been passed, and position turns to be in favour of assessee as evidence produced had not been controverted by cross-examination; that between two positions, position as per documentary evidence had to be accepted and if that is accepted addition cannot be sustained. Thus, on these reasons he deleted addition made by ITO mentioned above. 9. revenue being aggrieved has preferred this appeal. 10. In this case creditors is in service of assessee. No doubt creditor is given confirmation letter regarding cash credit of Rs. 40,000 to assessee which was field before ITO to prove genuineness of cash credit. ITO asked assessee to produce creditor so that genuineness of confirmatory letter and cash credit be verified. assessee did not do so rather asked creditor to be summoned on his expenses. ITO ordered inspector to verify and to report to him. inspector went on spot and recorded statement of creditor who denied advancement of loan to assessee amounting to Rs. 40,000. Regarding confirmatory letter he stated that confirmatory letter is not genuine as his signature has been taken in deception. copy of this report was sent to assessee who asked creditor to be summoned as he wanted to cross- examine creditor. ITO took view that onus is upon assessee to prove genuineness of cash credit as well as credit-worthiness of creditor. Therefore, he relied upon report of inspector and held that cash credit amounting to Rs. 40,000 is not proved and, therefore, he made additions of Rs. 41,757 which is total of cash credit amount and interest thereon. On appeal Commissioner (Appeals) has held that confirmatory letter is documentary evidence and, therefore, statement made before inspector cannot be relied upon as same is verbal. He further held that it was for ITO to summon cash creditor for cross-examination of assessee. Moreover there is entry of cash credit in books of account and, therefore, whatever has been stated by cash creditor before inspector cannot be relied upon in view of documentary evidence in name of confirmatory letter and entries in books of account. These reasons ascertained by Commissioner (Appeals) for accepting cash credit are erroneous in law and on facts. entries in books of account are not conclusive piece of evidence, rather these are made by assessee in its books of account and, therefore, these are exhibiting stand of assessee or claim of assessee. confirmatory letter has been issued by creditor to prove that amount of credit is belonging to him and he has advanced it to assessee. But ITO is within his powers to verify it and, therefore, competent to ask assessee to produce cash creditor for testing veracity of transaction and genuineness of confirmatory letter. It is for assessee to prove that genuineness of transaction vis-a-vis cash credit between assessee and creditor and also to prove identity of creditor and creditworthiness of creditor. No doubt in this case assessee has prima facie proved identity of creditor by making entry in books of account as well as filing confirmatory letter, but it has failed to prove creditworthiness of creditor and genuineness of transaction between assessee and creditor. reason is that creditor has stated that he did not advance any loan to assessee at all. He further stated that he is not in position to advance loan to assessee and facts stated in statement and recorded make it clear. It is also clear to us that creditor denied issuance of confirmatory letter to assessee as he has stated in statement that assessee has taken his signature in deception. Moreover creditor is in service of assessee and assessee has nowhere alleged that his relations with him are strained or enemical and, therefore, ITO has collected material to disprove claim of assessee regarding cash credit. Furthermore, ITO has confronted report of inspector to assessee and assessee has not at all made any comment except asking ITO to summon creditor for cross-examination. This request has no basis in view of fact that firstly, assessee failed to produce creditor and secondly, he failed to make any comment in respect of report showing therein that creditor is enemical to him. Moreover, it is proved beyond doubt that creditor is in service of assessee while assessee has stated that he is not in service of assessee. learned departmental representative from record proved it and when this fact is brought to knowledge of learned counsel for assessee, then he has not answered except to feel sorry. Therefore, confirmatory letter and entries in books of account have been disproved by creditor himself. When creditor is denying advance of loan and making statement that signature on confirmatory letter has been taken by assessee in deception then there is no duty on ITO to summon creditor again and again as ITO has proved that claim of assessee for cash credit amounting to Rs. 40,000 is not genuine. 11. Commissioner (Appeals) has committed error in law and on facts in holding that confirmatory letter is documentary evidence but this documentary evidence is made by creditor who has denied making of document stating that signature on confirmatory letter has been taken by assessee in deception. ITO has confronted this statement to assessee who has not contradicted it even by filing affidavit or alleging any enemity against creditor who is still in service of assessee. Therefore, t h e confirmatory letter has no value and as such it cannot be relied upon. Similarly entries in books of account cannot be relied upon. Furthermore, statement recorded by inspector is there and inspector has made report to ITO holding therein that cash credits are not genuine. There is no allegation against inspector that he is having any grudge against assessee, except stating that he is subordinate to ITO. This plea has no force at all as inspector has made report in performance of his duty under statute and rules. As we have observed above that entries in books of account are not conclusive and it is for assessee to prove these and in this case these have been disproved by statement of cash creditor and report of inspector. Moreover, Commissioner (Appeals) was in error in saying that statement of creditor is verbal and, therefore, it cannot be taken over as documentary evidence-the confirmatory letter. Firstly, statement is conclusive piece of evidence if it goes unrebutted and free from discrepancies and contradictions. Moreover, there is report of inspector which says that cash credit is not genuine which is documentary evidence more valuable than that of confirmatory letter and entries in books of account as inspector has made report in performance of his duties and law and rules assign such duty on him. Therefore, in this view of matter, we hold that Commissioner (Appeals) has committed error in law and on facts in deleting additions. Hence, we set aside his order. 12. Now question arises that whether matter should go back or not. As assessment year is 1973-74, Tribunal has sent back matter on issue. issue in assessment year 1973-74 is distinguishable than issue over here in view of fact that plea therein is for adjustment entry, while over here it is genuineness of cash credit of Rs. 40,000. Therefore, year under consideration is distinguishable with year 1973-74 on issue of cash credit on account of this factual position. In view of our above discussion and reason thereto, we hold that cash credit amounting to Rs. 40,000 is not explained as entries regarding it are there in books of account of assessee and explanation offered by assessee for it is unsatisfactory. Therefore, provisions of section 68 of Act are applicable to facts and circumstances of case. Accordingly, we hold that amount of Rs. 40,000 is to be added in income of assessee for assessment year under consideration under section 68, and as such ITO was justified. Regarding question of interest on this amount as taken by ITO amounting to Rs. 1,757, we feel same is to be answered in negative in view of fact that to add interest on cash credit is too much. Further more, if assessee has failed to explain cash credit then section 68 says that same is to be taken as income of assessee for assessment year under consideration in which year entries in books of account are made regarding it. Secondly, we hold that there is no basis to make addition for interest on such amount. Accordingly we hold that amount of Rs. 40,000 has to be added in hands of assessee in assessment year and to this extent we restore order of ITO and set aside that of AAC as he has committed error in law and on facts in deleting amount of cash credit. 13. Now we come to assessment year 1973-74. In this appeal only ground us as under: "On facts and in circumstances of case Commissioner (Appeals) erred in deleting addition made on account of unexplained credit in account of Shri Choggalal Akodia." This issue was there before Tribunal in assessee's appeal for assessment year 1973-74 wherein Tribunal set aside impugned order and sent back matters to be decided afresh. Accordingly, we hold that appeal of revenue for this year is to be decided along with that of assessee as per directions of Tribunal for assessment year 1973-74 in assessee's own appeal. Accordingly, we set aside order of Commissioner (Appeals) on this issue and direct him to do as Tribunal has asked to do in assessment year 1973-74 in assessee's own appeal. 14. Now we come to assessment years 1978-79 and 1979-80. 15. common ground in these years is regarding expenditure incurred for prospecting of mines is whether revenue expenditure or capital expenditure. 15.1 ITO took expenditure as capital in both years for reasons recorded in his order in paragraph Nos. 5, 5.1 and 5.2. 15.2 On appeal Commissioner (Appeals) held as revenue expenditure for reasons recorded in assessment year 1979-80. That faces and as ITO mentioned above (sic). 15.3 In assessment year 1979-80 in paragraph No. 3 Commissioner (Appeals) observed as under: "Against this disallowance it has been submitted that lease held by assessee is one. operations are carried in these lease areas from time to time. At some places operations are on wider scale while on some areas operations are started afresh. However, fact remains that whole mining area given on lease is actually under operation and any expenses incurred are o f revenue nature. It was admitted by ARs that nomenclature given to th e s e expenses in books of account was incorrect but that was not determinative of their true nature. It was further submitted that for prospecting of mines, Government grants separate lease. This is not case here. lease is one and is covered for taking our mica from mines in whole area given under lease. Hence, it was submitted that ITO's conclusion was not correct. He was influenced by wrong name given to expenses. I find that submissions made have force. addition made by ITO cannot be sustained. lease is one with company which is for working out mines. It is not lease for prospecting operations. Hence, assessee is entitled to work out mining operations in leased area and any expenditure incurred in that connection will be necessarily revenue expenditure. It is not case of ITO that this expenditure was not incurred. Accordingly, addition made by ITO by treating expenses as of capital nature cannot be sustained and is, therefore, deleted." 16. departmental representative has not brought any material to rebut aforesaid findings of Commissioner (Appeals) though he reiterated stand of ITO before us. Further it is admitted position that assessee was engaged in business for last 40 years and is mining on one lease since then. Therefore, Commissioner (Appeals) is justified in holding that expenditure in question is revenue expenditure and is extended in carrying out business for assessment years under consideration. Accordingly, we hold that reasons assigned by Commissioner (Appeals) for taking expenditure as revenue are cogent as these go unrebutted and, therefore, we agree with these reasons and even adopt for holding that expenditure in dispute is revenue expenditure and not at all capital expenditure in view of facts mentioned above. Hence, we confirm impugned order on issue. 17. Now we decide other issues in assessment year 1978-79. 18. second issue in this year is regarding car expenses for personal use of directors. Commissioner (Appeals) sustained disallowance of car expenses for use of directors at Rs. 9,700, i.e., one-sixth. This disallowance is in accordance with past record of case but is excessive as it is admitted by both parties that in past it was made and sustained at one-fifth of total expenses. Accordingly, we sustain disallowance at one-fifth instead of one-sixth in respect of car expenses for use of directors. 19. third issue in this appeal is regarding deletion of addition of Rs. 20,495 which was shown by assessee-company in its profits and loss account. 19.1 Commissioner (Appeals) determined this issue in his order in paragraph No. 8 observing as under: "Ground No. 7: This relates to addition of Rs. 20,495 which was also part of total amount written back to profit and loss appropriation account of Rs. 1,08,436 mentioned above. This was constituted of three figures of Rs. 10,687 for creditors' credit balances, Rs. 8,667 for directors' credit balances and Rs. 1,150 for employees' credit balances. It is submitted against this addition that these items were not originally passed through that profit and loss account and, therefore, provisions of section 41(1) were not applicable. Moreover it was submitted that this point is covered by orders of Tribunal, Jaipur Bench, for assessment year 1973-74 in case of assessee. I find that submission is correct in view of Tribunal's order for assessment year 1973-74 in case of assessee, addition made by ITO cannot be sustained and is, therefore, deleted." It is clear from aforesaid findings of Commissioner (Appeals) that h e arrived at his conclusion on following decision of Tribunal in assessment year 1973-74 and, therefore, we hold that he is justified in his conclusion and as such we confirm it. 20. fourth ground in this appeal is regarding deletion of Rs. 86,169. This ground is in respect of unpaid wages. ITO in making addition held that name and address to whom wages are to be paid are not given and details were also not furnished. Therefore, he held that amount is taxable under section 41(1) of Act, as same was not payable. 20.1 On appeal Commissioner (Appeals) deleted it on ground that details of amount had been filed before him to show that closing balance at close of year was Rs. 1,05,319 and amount of Rs. 86,169 was opening balance in account; that certain payments were not made in this connection during accounting year, while certain credit entries were passed; that there was no writing back of this amount in profit and loss account, hence, it was admitted that provisions of section 41(1) were not applicable; that payments are still being made from balance outstanding. Therefore, he, on these facts, held that ITO was not entitled to apply provisions of section 41(1) observing further that ITO could not make addition unless account is transferred to profit and loss account. 21. On appeal before us, it is pleaded that amount in dispute, no doubt, is representing liability but liability has ceased and, therefore, provisions of section 41(1) are applicable. Further onus is upon assessee to prove liability and in this case it is not proved and reasons assigned by Commissioner (Appeals) are contrary to facts on record, viz., that assessee has not furnished addresses and names of labourers to whom amount is paid. Moreover amount has not been paid, that too to labourers. Therefore, liability to pay is ceased as payments are old one and, therefore, ITO has disputed that amount is not representing liability and, therefore, this cannot be recovered under process of law. Furthermore, ITO has disputed that amount is not representing liability and, therefore it has become income of assessee for its non-payment and if assessee has not brought it to profit and loss account, then it cannot be held that liability is there and provisions of section 41(1) are not applicable. 21.1 On other hand, learned counsel for assessee contends that liability has been accepted by department as is evident from page 35 o f paper book and from assessment orders for assessment years 1974-75 and 1976-77. He, therefore, contends that books of account have not been rejected and, therefore, ITO has no right to add this as income of assessee. Reliance is placed on pages 18 and 20. He further contends that there is affidavit dated 6-2-1980 at page 19 of paper book which has not been rebutted by department and, therefore, in view of these facts amount represents liability and as such it is not subject-matter of section 41(1). 22. We have heard rival submissions and have gone through record before us. At time of hearing, we asked learned counsel for assessee that whether amount has been paid to-date and answer is in negative. We further asked learned counsel for assessee that whether assessee is in position to furnish details and also addresses of payee, he answered in positive stating that matter be sent back for this purpose. However, he has admitted that amounts represents payments of labour wages to labourers and they are there but have so far not come to collect. He has also admitted that these are old amounts to be paid to labourers for their wages and have not been paid for last 10 to 15 years. It is also clear from record that assessee has filed affidavit dated 6-2- 1980 and contends that contents have not been rebutted and, therefore, affidavit should be accepted. contents of affidavit need not to be rebutted in view of fact that assessee has admitted that amounts to labourers have not been paid even up-to-date. Moreover, assessee was asked by ITO to give names and addresses of labourers but he failed to do so. No doubt, these amounts are to be paid since long and they were there in assessment years 1974-75 and 1975-76 and revenue accepted these as payments to labourers and, therefore, liability of assessee to pay has become obsolete. If liability is not discharged even up-to-date and amount is lying with assessee, who is using it in business and, therefore, it is amount of assessee for purpose of business. It is admitted by assessee that amount has not been deposited in bank in names of labourers rather assessee is using it for business purposes in each year. Moreover India is welfare State and one of poorest country in world. Therefore, if wages are not paid to daily wagers in time, then it cannot be held that assessee is keen to discharge its liability and running business on principle and humanitarian basis. Further, assessee did not give names and address of labourers and books of account show that they do not contain names and addresses of labourers. When this is so then it cannot be ascertained whether those labourers are alive or not. Furthermore, amount of wages cannot be recovered under process of law and limitation as prescribed for it. provisions of section 41(1) makes it clear that if liability is not discharged then liability ceases. In this case, totality of facts and circumstances of case shows that assessee is not keen to discharge liability as up-to-date assessee has not paid amount to labourers. Moreover, names and addresses for labourers are not furnished to ITO. Accordingly, we hold that ITO is justified in taking this amount for purpose of tax in assessment year under consideration. Moreover, assessee has already obtained deduction for these expenses and if assessee pays same, he has remedy before income-tax authorities to show and prove that payment is made to labourers. Therefore, justice demands that claim of assessee should not be accepted and as such we reject claim of assessee and hold that Commissioner (Appeals) has committed error in deleting addition made b y ITO. Hence, we restore order of ITO and set aside that of Commissioner (Appeals) for reasons which we have mentioned above. Hence, we decide this issue in favour of revenue and against assessee. 23. fifth issue in this appeal is regarding deletion of addition of Rs. 79,555. This amount is also in respect of unpaid wages. ITO and Commissioner (Appeals) added and deleted above amount on grounds which they have adopted and assigned for sum of Rs. 86,169 mentioned above. (The fourth issue as discussed above in this appeal). For same reasons, we set aside order of Commissioner (Appeals) on this issue also and restore that of ITO, as we have mentioned for deciding issue of Rs. 86,169. Hence, we set aside impugned order on this issue and thereby hold that contentions of learned departmental representative mentioned above are well founded and hence tenable. 24. last issue in this appeal is regarding deletion of addition of Rs. 39,835. This amount is also representing unpaid wages for various entries in books of account. contentions and submissions of parties are same as those for issue of Rs. 86,169 mentioned above (fourth issue). As this as those for issue of Rs. 86,169 mentioned above (fourth issue). As this amount has not been paid so far and, therefore, for same reasons, we hold that liability to pay this amount has ceased and as such these are to be added in income of assessee under section 41(1). Accordingly, we set aside order of Commissioner (Appeals) on this issue and restore that of ITO. 25. Now we come to appeal for assessment year 1979-80. first ground in this appeal is as under: "The Commissioner (Appeals) erred on facts and in law in holding that expenditure incurred for prospecting of mines is revenue expenditure and thereby deleting same." This issue we have determined in deciding appeal for assessment y e r 1978-79 taking it as common ground in that year. Accordingly, we determine it over here. 26. second ground in this appeal is as under: "The Commissioner (Appeals) erred on facts and in law in deleting addition made on account of accrued interest to assessee on interest-free loans to its directors." 27. This issue we have determined for assessment year 1972-73 and for same reasons, we determine it over here and that too in favour of assessee. Hence, we confirm impugned order on this issue and thereby reject this ground. 28. In result, appeals for assessment years 1972-73 and 1978- 79 are partly allowed. appeal for assessment year 1973-74 is treated as allowed for statistical purpose only. appeal for assessment year 1979-80 is dismissed. Per Shri A. Kalyanasundharam, Accountant Member-I have gone through order of my learned brother. I am unable to agree with views expressed by my learned brother regarding unpaid wages which has been considered by him in paragraph Nos. 20 to 24, for assessment year 1978-79 for Rs. 86,169 was opening balance in unpaid account, Rs. 79,555 representing amount unpaid to various creditors and Rs. 39,835 representing unpaid expenses of earlier years. ITO in respect of unpaid wages wanted assessee to file details in respect of names and addresses of various employees in whose names amounts were shown as outstanding as also establish their identities. ITO has not disputed fact that there were amounts brought forward from earlier years for which provision was made in various respective years. ITO was of view that since assessee could not provide names and addresses establishing identities of various persons, these are not liabilities. Commissioner (Appeals) deleted said sum as liability has not been distinguished. 2. Regarding second item of Rs. 79,555, ITO did not dispute that these were brought forward balances in names of various creditors, as under unpaid wages account he made similar demands of addresses as well as identities of creditors. According to ITO no explanation was offered and, therefore, he treated these sums which were outstanding as not liabilities and, hence, treated same as income under section 41(1). 3. last item is in respect of certain expenses provided for in earlier years which remained unpaid. Similar question was asked and ITO treated various sums as income under section 41(1). Commissioner (Appeals) deleted second and third items for same reasons as he had deleted unpaid wages. 4. My learned brother has gone on extraneous consideration such as welfare State and that country is very poor. It is admitted fact that all above items have been charged as expenditure and allowed as such by department in earlier years and provided for. It is also admitted fact that department has no evidence in its possession that parties concerned have remitted liability in favour of assessee. It is also admitted fact that as far as assessee-company is concerned, there is no cessation of liability. It is also admitted fact that details of outstanding have been furnished to department. It is also admitted fact that these are shown as liabilities not only in this year but also in earlier years. only reasoning given for treating these as income is that these are used by assessee for its business and, therefore, assessee is not keen in discharging his liability and, therefore, they have to be treated as income under section 41(1). This in my opinion is presumption and not finding of fact. Section 41(1) reads as under: "(1) Where allowance or deduction has been made in assessment for any year in respect of loss, expenditure or trading liability incurred by assessee, and subsequently during any previous year assessee 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, amount obtained by him or 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 income of that previous year, whether business or profession in respect of which allowance or deduction has been made is in existence in that year or not." reading of section clearly indicates following requirements: (a) Expenditure or loss or trading liability must have been incurred by assessee and allowed as deduction in assessment year. (b) In subsequent year assessee must have obtained either in cash or in any other manner, 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. (c) It would then be treated as income in year of receipt or accrual of benefit. 5. Thus, it can be seen in instant case that only first requirement of section 41(1) has been satisfied is that assessee was allowed impugned expenditure against its income in earlier years. second requirement, i.e., receipt of cash or remission or cessation has not occurred. In such situation section 41(1) cannot be applied. In case of CIT v. Punjab Oil Mills [1976] 102 ITR 332 (Punj. & Har.) it was held 'as regards trading liabilities it is only upon remission or cessation that this sub-section comes into operation'. 5.1 question of liability becoming barred by law of limitation was examined in case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) and in case of Bhagwat Prasad & Co. v. CIT [1975] 99 ITR 111 (All.). It was held that 'when liability becomes barred by law of limitation, there is neither remission nor cessation of liability; liability is not extinguished, only creditor's remedy becomes barred'. Therefore, if amount of trade-in-debt was allowed as expense to assessee, amount cannot be taxed under this sub-section as income of year in which debt due by assessee becomes time barred. 5.2 In cases of J. K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 (Bom.), CIT v. V.T. Kuttappu & Sons [1974] 96 ITR 327 (Ker.) and Gannon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 (Bom.), they had gone step further. In first two cases amount that was unpaid was credited to partner's capital account and in last case of company amount was transferred to its general reserve account. Even in that situation it was held that amount could not be taxed under section 41(1) even if amount is credited to profit and loss account or to reserve account. In case of J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 (All.) it was held that cessation of liability would arise only when liability has finally ceased without there being chance of their being revived. 6. From various judgments mentioned above it is clear, unless and until all conditions as has been brought out in section 41 are satisfied, assessing of income under section 41(1) would be illegal and unlawful. Therefore, I am of view that amount of unpaid wages of Rs. 86,169, Rs. 79,555 of sundry creditors and Rs. 39,835 of unpaid expenses cannot be assessed as income under section 41(1) and additions made are, therefore, deleted. THIRD MEMBER ORDER Per Shri Ch. G. Krishnamurthy, Senior Vice President-My learned brothers constituting Jaipur Bench could not agree on following point and as such difference of opinion was referred by them to President who nominated me as Third Member for my opinion. point of difference is succinctly put by my learned brothers as follows: "Whether, on facts and in circumstances of case, amounts of Rs. 86,169, Rs. 79,555 and Rs. 39,835 are subject-matter of section 41(1) of Income-tax Act, 1961?" 2. assessee in this appeal is private limited company engaged in mining of mica. dispute, inter alia, before ITO was whether outstanding liabilities towards wages could be treated as income of assessee under provisions of section 41(1). assessee's balance sheet showed outstanding amount for expenses (viz., payable to labourers) of Rs. 1,05,619 as at end of previous year relevant for assessment year 1978-79 (as is understood from order of ITO). Of this it was noticed that sum of Rs. 86,169 related to amounts payable in earlier years. assessee was asked to give names and addresses of parties to whom these amounts were payable with view to establish their identities. assessee's reply was that as it did not have old accounts, it was unable to supply information. Then ITO made certain observations which I thought are very pertinent to quote: "It appears that assessee is following practice of writing off of these expenses amounts as and when it suits its best. It has credited them in profit and loss account without submitting them for taxation. These liabilities are old and assessee is not having any details about these liabilities. It is clear from discussion, that assessee has claimed excessive expenses in earlier years and has not paid correct taxes on its real income of these years." He then held that since assessee failed to give details, there did not exist any liability for these expenses and that claim for allowance of these amounts was made wrongly in earlier years. assessee relied upon certain case law before ITO but he did not consider it advisable to refer to them on ground that case law did not consider it advisable to refer to them on ground that case law did not help assessee when no liability existed. Thus, invoking provisions of section 41(1), sum of Rs. 86,169 which related to earlier years was added back as income of assessee. Then ITO noticed another item of expenditure under head 'Unpaid mandal' creditors for Rs. 79,555. Here also ITO required assessee to furnish details of names of parties to whom amounts were owing but assessee could not furnish details. Again for same reasons as were adduced in support of addition for earlier sum of Rs. 86,169, ITO added this sum of Rs. 79,555 also as income of assessee under section 41(1). Again there is another liability under head 'Current liabilities' which included another item of Rs. 39,835 as again relating to earlier years and again for exactly similar reasons given for above two additions, this amount also was added back as income of assessee under section 41(1). Thus, total sum of Rs. 2,05,579 was added as income of assessee under section 41(1). Aggrieved assessee filed appeal before Commissioner (Appeals). Commissioner (Appeals) found that out of opening balance of Rs. 1,05,319 certain payments were being made and it was not correct to say that no payments were being made out of these opening balances and further sums in question were never treated by assessee as its income by transferring sums to profit and loss account and, therefore, provisions of section 41(1) were not at all attracted. He also recorded statement as fact that ITO did not dispute fact that payments were being made out of these outstanding amounts. For these reasons he deleted addition. For more or less similar reasons other two additions also were deleted. most important finding recorded by Commissioner (Appeals) was that genuineness of payment made out of these outstanding balances was not doubted by ITO at any stage even though credit balance related to earlier years, in other words being carried forward from earlier years. In other words, finding of Commissioner (Appeals) was that unpaid balances were being carried forward from year to year and being cleared in subsequent year sand stage that they remained unpaid and treated as income of assessee never arose. It was by this finding of Commissioner (Appeals) that department felt aggrieved and field appeal before Tribunal. matter was argued at length. 3. learned Judicial Member was of opinion that for reasons given by ITO amount was rightly added back as income of assessee and Commissioner (Appeals) was wrong in deleting it. In particular he pointed out in paragraph No. 22 of his order that in reply to question put by Bench, learned counsel for assessee answered that matter could be sent back to ITO so that details of amounts could be furnished to ITO and that it was asserted that labourers were existing and payments were outstanding and did not cease to be liabilities except that they became old balances. He expressed opinion that since these amounts were to be paid f o r long and they were not paid and since revenue accepted them as payments in earlier years, liability of assessee to pay has ended not having been discharged even till date of appeal. assessee was using this sum in business and it, therefore, became amount of assessee for purpose of business. He was of opinion that assessee should have deposited these sums in bank in names of labourers instead of utilizing same for business purpose. On ground that names of labourers were not furnished, he expressed doubt whether labourers were alive or not. He, therefore, held that Commissioner (Appeals) was not justified in deleting these additions and that ITO was justified in treating these sums as income of assessee. So sum and substance of view expressed by learned Judicial Member as I gathered is that since assessee had delayed discharge of these liabilities to labourers, he was not keen to pay money to labourers and that fact proved that liability ceased to exist and, consequently, provisions of section 41(1) were attracted. learned Accountant Member, on other hand, took different view. He pointed out that in respect of sum of Rs. 86,169 was amount brought forward from earlier years and except for reason given by ITO that names were not available in books, fact of matter was that details were available and payments were being made in discharge of these liabilities. In regard to second item of Rs. 79,555, though these were brought forward balances, names of creditors were available in books under head 'Unpaid wages.' Since these labourers were not produced, ITO treated them as unexplained and, therefore, income under section 41(1). In regard to third item he pointed out that they represented expenses provided for in earlier years which remained unpaid and ITO treated them as income because those liabilities for expenses remained undischarged. He then pointed our that department has absolutely no proof even of semblance even to suggest that parties concerned remitted liability in favour of assessee so as to be called as income within meaning of section 41(1). He held that as far as assessee was concerned, there was no cessation of liability. Another important fact recorded by him in his order was that it was admitted fact that details of outstanding were furnished to department and that these amounts were shown as liabilities in past also and except for reason that assessee was using these sums in its business, there was nothing else in possession of department to show that these sums ceased to be liability so as to be treated as income under section 41(1), He pointed out that this was only presumption but not finding of fact. He held that requirement of section 41(1), namely, that assessee obtained either any cash or in any other manner any amount in respect of such loss or expenditure or some benefit in respect of such liability by way of remission or cessation thereof was not satisfied and therefore, these amounts were miles away from application of section 41(1). Then he made reference to some cases-Punjab Oil Mills (supra), Kohinoor Mills Co. Ltd. (supra) and Bhagawat Prasad & Co. (supra)-to show that when liability became barred by law of limitation, there was neither remission nor cessation of liability and that liability was not extinguished except that creditor's remedy became barred. 4. I have considered matter very carefully, perused orders of authorities below and of my learned brothers, considered arguments addressed to me and I am of opinion that these sums could not be treated as income under section 41(1) at all. As rightly pointed out on behalf of assessee, these sums were not transferred to profit and loss account at all by assessee, which is admitted fact. Even ITO does not say that these amounts were transferred to profit and loss account. Transfer to profit and loss account becomes significant only to show that there is cessation of liability at least from point of view of assessee if not under law. When assessee treated these liabilities as payable and outstanding, I wonder whether it is open to department to say that liability ceased to exist all because there was delay in payment. Moreover fact mentioned by learned Accountant Member in his order that details of outstanding amounts were furnished before authorities below was not disputed. Another important fact that requires mention in this context is that assessee has been making payments out of these outstanding amounts and that also was not disputed. learned Judicial Member also pointed out in his order as I have observed short while ago that assessee offered to give details if case was sent back to ITO but yet that request was not granted. On these admitted facts I find it difficult to agree with view that liability ceased to exist so as to bring these sums in question within meaning of section 41(1) as income. law on subject is now fairly settled and I do not have to refer to entire case law but all I would say that cases referred to by learned Accountant Member in his order are opposite and lay down correct principle of law, namely, that liability though became barred under law of limitation, there could neither be remission nor cessation of liability and that liability did not exist except that creditor's remedy became barred. So mere time barring of debt or liability did not automatically mean that it became income of assessee within meaning of section 41(1). words used in section 41(1) are very clear and unambiguous that cesser of trading must be by way of remission or cessation thereof. Without there being remission or cessation of trading liability amount in question could not be treated as income under section 41(1). remission or cessation of liability was not proved in this case neither as fact nor as law. object behind section 41(1) is clear. revenue seeks to take back benefit which had been granted earlier when subsequent events show that benefit need not have been granted or assessee got benefit out of grant of benefit earlier. In other words, this is recognition of principle of bringing as income recoupment of loss. It is pertinent to mention here that even transfer of entries, i.e., outstanding balance to profit and loss account was not considered by Courts as resulting any income within meaning of section 41(1) because that was unilateral act, i.e., to say for section to apply there must be bilateral act which means that liability must be given up by recipient. Courts have held that there was distinction between remission and cessation. While remission means positive conduct on part of creditor, cessation may result even from outside agency, e.g., when assessee is absolved of liability by judicial pronouncement or by statute. Since there is neither remission by positive conduct on part of assessee or creditors nor cessation and as it was found as fact that payments were being made out of these liabilities, though belatedly, I am unable to agree that there was cessation of liability or remission thereof so as to bring these sums within ambit of section 41(1). I, therefore, express my agreement with view expressed by learned Accountant Member. Before I close matter, I would like to add that from order of learned Accountant Member which was not particularly refuted, it would appear that this was no more case where details of outstanding liabilities were not available. 5. matter will now go back to original Bench for disposal according to majority view. *** INCOME TAX OFFICER v. R.B. SETH MOOLCHAND NEMICHAND (P) LTD.
Report Error