AUTO PINS (INDIA) REGD v. INSPECTING ASSISTANT COMMISSIONER
[Citation -1987-LL-0424-1]

Citation 1987-LL-0424-1
Appellant Name AUTO PINS (INDIA) REGD
Respondent Name INSPECTING ASSISTANT COMMISSIONER
Court ITAT
Relevant Act Income-tax
Date of Order 24/04/1987
Judgment View Judgment
Keyword Tags remission or cessation • consolidated account • trading liabilities • revenue expenditure • dissolution deed • mutual agreement • production bonus • current account • capital account • incentive bonus • advance tax • written off • ex gratia • bonus act
Bot Summary: The IAC noted in particular that liabilities to the extent of Rs.2,41, 29 8 had been transferred to the old firm s account along with the advances receivable to the extent of Rs. 11,48,020. All the same, the liabilities in question were clearly trading liabilities i.e. either on account of purchases made by the assessee firm or the liabilities represented goods returned by the customers. A part of the partners capital account i.e. the debit balances or credit balances standing in the current account of the partners were transferred to this account. The net result of the consolidating of these accounts into one account resulted in a balance of Rs. 8,89,073, shown in the balance-sheet as noted above. Similar adjustment on account of current accounts of the partners was made in the second period and this resulted in the balances outstanding in these accounts going to Rs. 9,79,073 as on 30th Sept., 1980. What has been done here was merely aggregation of certain accounts under one consolidated head i.e. the account with a balance of Rs. 8,89,073 was one of the assets taken over by the new firm as per the balance sheet as on 31st Dec., 1979. Consolidation of a certain account by itself did not change the character or obliterated the existence of the accounts.


S. NARAYANAN, V.P. These two appeals relating to same assessee were hearted together. They are disposed of by consolidated order. 2. assessee firm was carrying on business of manufacture of auto parts such as leaf springs used specially in heavy vehicles. It followed accounting year ending 30th of Sept. After 31st Dec., 1979 there was change in constitution of firm. Auto Pins (P) Ltd. was taken as partner w.e.f. 1st Jan., 1980 so that from this date there were 13 partners instead of 12. (Para Nos. 3 to 13 are omitted, not being worth reporting) ITA No. 336/D/1985, Asst. yr. 19th Jan., 1982 14. In this appeal by Revenue, first objection is that CIT(A) erred in deleting disallowance of Rs. 8,21,755 out payment of bonus to workers rightly made by ITO. IAC(Asst.) noted that, in assessment order for asst. yr. 1980-81, there was detailed discussion as to how payments made by assessee, which were in nature of bonus (described variously as production bonus, ex gratia payment , attendance incentive bonus) had to be within limits prescribed by s. 36(1)(Ii) of Act. Adopting reasons recorded there, IAC (Asst.) held that he would allow as deduction only bonus of 20 per cent being maximum permissible under Payment of Bonus Act. balance of Rs. 8,21,755 was therefore, disallowed by him. assessee appealed 15. CIT(A), following his order on same issue for asst. yr. 1979-80, held that restrictive provisions of s. 36(1)(ii) were not applicable to payments in question. He also noted that IAC(Asst.) had not doubted genuineness of payments made to workers or fact that expenditure in question had been laid out wholly and exclusively for purpose of business. In light of decision of Supreme Court in Baidyanath Ayurveda Bhawan (P) Ltd. (1984) 17 Taxman 19 (SC), CIT(A) deleted disallowance. He noted in particular, that Supreme Court had held in above decision that Payment of Bonus Act deals with only profit bonus and matters connected therewith and did not govern customary, traditional or contractual bonus. Revenue is in appeal. 1 6 . We have heard both Shri N.B. Singh and Shri R.K. Relan. departmental representative supported order of ITO. Shir Relan invited our attention to page 18 of paper book. This is copy of Tribunal s order in ITA No. 1950/Del/84 dt. 13th Sept., 1985 for asst. yr. 1979-80. In that appeal by Revenue, same objection, as now taken before us, had been taken by Revenue i.e. to deletion of disallowance of Rs. 6,53,865 made by ITO under s. 36(1)(Ii) on account of bonus payment in excess of limit. 17. Tribunal noted that amount in question involved payments of various kinds, viz. (a) payment to employees retrenched/ retired under Industrial Disputes Act, (b) payments to loyal workers during strike period, (c) production bonus and (d) overtime payments. Tribunal was of view that above kind of payments did not fall to be described as bonus within meaning of Payment of Bonus Act under s. 36(1)(Ii) of IT Act, 1961. That such payments were allowable as revenue expenditure incurred for purpose of business expediency. 18. Attention was then invited to page 23 of paper book. This is also order of Tribunal in this case for asst. yr. 1980-81 (ITA No. 2633/Del/84 dt. 12th Dec., 1986). For that year, Revenue came up with similar objection relating to disallowance of Rs. 4,11,871 made by assessing authority in terms of s. 36(1)(Ii) of Act. Tribunal rejected this objection taken for Revenue, following its prior order dt. 30th Sept., 1985 on this issue for asst. yr. 1979-80. Shir Relan then invites attention to page 13 of paper book. This gives details of total payments made by assessee for this assessment year. details are as under : " 1981-82 Wages Salaries & D.A. 39,70,663 Bonus & 5,32,331 exgratia 1,08,751 Production Bonus 5,99,770 Attendance Bonus 20,589 Incentive Bonus 92,646 . 13,54,087" According to Shri Relan, following prior orders of Tribunal, CIT(A) was justified in deleting disallowance in question. 19. We have considered position. We find that issue is squarely covered by prior orders of Tribunal, referred to above. Following reasoning recorded in said orders, we would reasoning recorded in said orders, we would maintain order of CIT(A) in this regard. objection for Revenue s therefore, rejected. 2 0 . next objection for Revenue relates to deletion of addition of Rs. 2,41, 29 8 made by IAC (Asst.). This addition came to be made by IAC (Asst.) after scrutinising details of advances recoverable shown by assessee in books for this year. IAC noted that there was entry of Rs. 9,79,073 shown as due from Auto Pins (I) (Regd.), old firm. He then looked into capital gains of partners of firm. He noted that on 31st Dec., 1979, partners were credited with certain amounts and assessee, in explanation, filed following extract : " As on 31st Dec., 1979 To partners capital a/c 5,28, 527.39 . (As per list) By partners capital . 5,46,175.52 a/cs To advance (as per 11,48,020.00 . list) By sundry creditors . 2,41, 29 8.01 To balance . 8,89,073.86 . 16,76,547.39 16,76,547.39 As on 30th Sept., 1980 1st Jan., 1980 to 8,89,073.86 . Balance To partners capital a/cs 90,000.00 . 30th Sept., 1980 by . 9,790,073.86 balance . 9,79,073.86 9,79,073.86 It may be noted here that, as explained by assessee in its letter to IAC (Asst.) dt. 22nd March,, 1984, old firm was dissolved on 31st Dec., 1979. dissolution deed was also executed. After dissolution, another firm was constituted by taking in M/s Auto pins (I) as additional partner. It was because of this, partners of old firm drew up balance-sheet as on 31st Dec,. 1979 and amounts owing to and from old partners were ascertained as on that date; that partners of old firm as per mutual agreement, took over amongst themselves certain assets and liabilities which they did not want to transfer to new firm. With effect from 30th Sept., 1980 entire business was taken over by M/s Auto Pins(I) Regd. It was decided that Rs. 40 lakhs be agreed upon for being raised as goodwill in balance-sheet. Out of this, Rs. 18,07,317 was adjusted out of advance tax account as appearing in balance-sheet as on 30th Sept., 1980. balance was too be as liability fund so as to meet possible liability that might accrue after dissolution of old firm and upto 30th Sept., 1980. 2 1 . IAC (Asst.) noted in particular that liabilities to extent of Rs.2,41, 29 8 had been transferred to old firm s account along with advances receivable to extent of Rs. 11,48,020. He asked assessee to explain why Rs. 2,41, 29 8 should not be treated as assessee s income under s. 41(1). Presumably, he was of view that there was remission or cessation of old liabilities to extent in favour of assessee firm and hence same should be taxed. assessee explained that amount in question had not been written off in book and that it had merely been transferred to old firm s account. It was also pointed out that assessee had not derived any benefit in any past assessment with regard to such liabilities so as to bring in s. 41(1). IAC did not find these submissions acceptable. He brought to tax said amount for following reasons briefly : (i) It was incorrect on part of assessee to say that it never received benefit of above amounts. Complete details how and when liabilities arose was asked for but same were not given on ground that they related to very old balances. All same, liabilities in question were clearly trading liabilities i.e. either on account of purchases made by assessee firm or liabilities represented goods returned by customers. They have been allowed as deduction in assessments to assessee. (ii) Even though amount in question has not been formally written off, some of partners of firm have been credited with Rs. 5,28,527 as on 1st Jan., 1980. Hence liabilities that have been removed and credited to extent of Rs. 2,41, 29 8 has to be added as assessee s income (See Indian Motor Transport Co. Vs. CIT 1978 CTR (All) 301 : (1978) 114 ITR 677 (All). assessee contested disallowance in appeal. 22. Before CIT(A), following factual submissions were raised : (a) correct factual position was not understood by assessing officer. When firm was undergoing structural changes, certain accounts were decided to be clubbed under general head "Old firm Account". part of partners capital account i.e. debit balances or credit balances standing in current account of partners were transferred to this account. Assets in form of certain advances and loans totalling Rs. 11,48,020 were also transferred to this account. One of reasons for doing so was, some of these loans were friendly loans given by partners, some had become otherwise irrecoverable. liabilities to extent of Rs. 2,41, 29 8 which were of similar nature, were also transferred to this account. (b) net result of consolidating of these accounts into one account resulted in balance of Rs. 8,89,073, shown in balance-sheet as noted above. Similar adjustment on account of current accounts of partners was made in second period (after 31st Dec., 1979) and this resulted in balances outstanding in these accounts going to Rs. 9,79,073 as on 30th Sept., 1980. (c) What has been done here was merely aggregation of certain accounts under one consolidated head i.e. account with balance of Rs. 8,89,073 was one of assets taken over by new firm as per balance sheet as on 31st Dec., 1979. On second dissolution of new firm on 30th Sept., 1980, where by all partners retired and business was taken over by Limited Company, assets standing at Rs. 9,79,073 were taken over by Ltd. Company. In fact, this was duly reflected in balance-sheet of Ltd. Company as on 30th Sept., 1981. (d) Mere consolidation of several accounts for sake of convenience of partners would not amount to writing off either assets or liabilities included therein. Through consolidated account, individual components also survived. Hence it was wrong to invoke s. 41(1) with regard to Rs. 2,41, 29 8. 23. CIT(A) considered above position. He found no case for addition at all. He deleted same with following observations : (a) two Dissolution Deeds and intermediate deed of partnership dt. 1st Jan., 1980 were looked into. Sec. 41 and ruling relied upon by IAC (Asst.) (Indian Motor Transport Co. vs. CIT 1978 CTR (All) 301: (1978) 114 ITR 677 (All) (supra) were both found to have been misapplied. Unlike in Allahabad case, relied upon by IAC (Asst.) in instant case, no amount stood credited to Profit and Loss account. (b) debit and credit balances of partners current accounts transferred to this consolidated account were also widely divergent figures bearing no relation to their profit sharing ratio. Consolidation of certain account by itself did not change character or obliterated existence of accounts. (c) There is not evidence at all to hold that any liability has ceased to exist, even Ltd. Company is carrying forward this amount in its books, if ultimately it may turn out to be fictitious asset in its hands. Notwithstanding this factually, case does not fall under s. 41(1). Revenue is in further appeal. 24. We have heard parties. While Departmental Representative supported order of IAC (Asst.), Shri Relan relied upon CIT(A) s order. He also drew our attention to fact that in balances-sheet of Ltd. Co. as on 30th Sept., 1981, advances recoverable are shown at total of Rs. 52, 29 ,174, break-up of this is also filed before us. It is seen, included in above amount is time of Rs. 9,79,073.86 shown as recoverable from Auto Pins old firm. In our view, order of CIT(A) does not call for any interference. basic finding of CIT(A) is that there is no evidence at all here to hold that any liability has ceased to exist. We agree with CIT(A) that mere consolidation of various account is not equivalent to writing off of liabilities that consequent to credits being raised in Profit and Loss A/c, s. 41(1) is totally inapplicable on facts on record. We also agree with facts in Indian Motors Transport Co. (Supra) being distinguishable, ratio of that decision does not help Revenue. This objection for Revenue is, therefore, rejected. 25. next objection of Revenue is to reduction of addition of Rs. 2,05,470 made by IAC (Asst.) on account of scrap sold outside books to Rs. 1,39,000. We have already held in paragraph 24 (supra) that no addition was called for at all on this count. We would, therefore, reject this objection for Revenue. 26. In result, ITA No. 5089/84 is allowed in part and ITA No. 336/85 is dismissed. *** AUTO PINS (INDIA) REGD v. INSPECTING ASSISTANT COMMISSIONER
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