The Chief Commissioner of Income Tax, Cochin Vs. M/s. Kesaria Tea Co. Ltd.
EmailAppeal: Civil Appeal No. 1581 of 2001
(From the Judgment and Order dated 19.11.99 of the Kerala High Court in T.T.R. No 16 of 1997)
(From the Judgment and Order dated 19.11.99 of the Kerala High Court in T.T.R. No 16 of 1997)
Petitioner: The Chief Commissioner of Income Tax, Cochin
Respondent: M/s. Kesaria Tea Co. Ltd.
Apeal: Civil Appeal No. 1581 of 2001
(From the Judgment and Order dated 19.11.99 of the Kerala High Court in T.T.R. No 16 of 1997)
(From the Judgment and Order dated 19.11.99 of the Kerala High Court in T.T.R. No 16 of 1997)
Judges: S. RAJENDRA BABU, K.G. BALAKRISHNAN & P. VENKATARAMA REDDI, JJ.
Date of Judgment: Mar 19, 2002
Appearances:
Mr. R.P. Bhatt, Senior Advocate, Mr. Rajiv Tyagi and Mr. B.V. Balram Das, Advocates with him for the Appellant.
Ms. Asha Gopalan Nair, Advocate for the Respondent.
Head Note:
INCOME TAX
Income-tax Act, 1961
Section 41(1) – Profits and gains from business – Profits charge-able to tax – Scope of section 41(1) prior to insertion of the explanation thereunder – Provision made for purchase tax li-ability – Assessee reversing the provision and making entries in the books – In income-tax assessment, assessing officer adding the purchase tax provision as income of the assessee treating the same to be profits, chargeable to tax – AAC uphold-ing the addition pertaining to the assessment year 1978-79 on the ground that there was no cessation of liability – Tribunal holding that the unilateral act of the assessee in writing off the liability would not have the effect of extinguishing the statutory liability and accordingly deleting the addition – On reference, High Court approving the decision of the tribunal and holding that section 41(1) cannot be invoked. Held, agreeing with the High Court that since the dispute between the assessee and the sales tax department continued with regard to purchase tax liability, and the purchase tax liability did not cease, the question of applying section 41(1) would not arise. Tribunal was justified in deleting the addition and High Court was correct in approving the decision of the tribunal.
Held:
It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31.3.1985 for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exists so as to enable the revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e 1985-86. In order to apply section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view: (1) In the course of assessment for an earlier year, allowance or deduc-tion has been made in respect of trading liability incurred by the assessee; (2)Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3)In that situation, the value of benefit accruing to the asses-see is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of bene-fit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the tribunal, rightly held that the resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the tribunal, the tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills’ case, the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the sales-tax department was still going on. There is no material on record to rebut these factual observations made by the tribunal. Nor can it be said that the reasons given by the tribunal are irrelevant. (Para 4)
What the assessee has done is not conclusive. As observed by the tribunal, an unilateral action on the part of the assessee by way of writing-off the liabili-ty in its accounts does not necessarily mean that the liability ceased in the eye of law. (Para 5)
We affirm the opinion ex-pressed by the High Court and dismiss the appeal filed by the revenue. (Para 7)
Cases Reffered:
1. CIT v. Sugauli Sugar Works (P) Ltd. (JT 1999 (1) SC 329) (Para 5)
2. Commissioner of Income Tax v. T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344) (Para 6)
2. Commissioner of Income Tax v. T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344) (Para 6)
JUDGEMENT:
P. VENKATARAMA REDDI, J.
1. The opinion recorded by the Kerala High Court in ITR No. 16 of 1997 has given rise to this appeal filed by the chief commissioner of income tax. The dispute relates to the assessment year 1985-86. At the instance of the revenue, the following question was referred under section 256(1) of the Income-tax Act for the opinion of the High Court.
“Whether on the facts and in the circumstances of the case, the tribunal is right in law and fact in holding that Rs.3,02,758/- cannot be brought to tax and in deleting the addition of Rs.3,02,758/- sustained by CIT(Appeals)?”
The High Court accepted the view of the tribunal which partly allowed the appeal of the assessee and answered the question in favour of the assessee.
2. The facts in brief are: The respondent-assessee is engaged in the business of tea, spices etc. During the assessment year 1985-86(previous year ending on 31.3.1985) the assessee ‘wrote-back’ in its accounts a sum of Rs.14,65,997/- represent-ing the provision made during earlier years(1978-1981) towards its purchase tax liability. It appears that the liability to pay purchase tax on certain goods was in dispute and, therefore, the provision was made.Further, it appears that the assessee, in support of its claim for purchase tax relief, inter alia, relied on the decision of the Kerala High Court in Neroth Oil Mills’ case. The SLP filed by the Kerala state against the decision of the High Court in the said case was rejected by this Court in November,1984. Apparently, for that reason, the assessee thought it fit to reverse the provision made earlier towards purchase tax and therefore, made the entries in the books of account during the year ending on 31.3.1985. The assessing officer added the sum of Rs.14,65,997/- which represents the provision made towards purchase tax during the assessment years 1978-79,1979-80 and 1980-81, treating the same as the income of the previous year ending on 31.3.1985. In the first appeal, the CIT(appeals) held that there was no justification to include the sums which were already included in the course of reassessments made for the years 1979-80 and 1980-81. However, he upheld the addition of Rs.3,02,758/- pertaining to the assessment year 1978-79. The appellate commissioner held that the liability of the assessee finally ceased during the year 1985-86 in view of the rejection of SLP in Neroth Oil Mills’ case in November, 1984. Certain ob-servations were also made as regards the includibility of the sums pertaining to assessment years 1980-81 and 1981-82 in re-spect of which reassessments were made. However, in this ap-peal, we need not go into the details thereof.
3. On further appeal by the assessee, the tribunal set aside the addition of Rs.3,02,758/- which was upheld by the appellate commissioner. The tribunal did not agree with the view taken by the first appellate authority that there was no cessation of liability within the meaning of section 41(1) of the Income-tax Act during the relevant year on account of dismissal of SLP in another case.The tribunal observed that for claiming exemption from purchase tax on the ground that transaction was in the course of export, two conditions were required to be ful-filled: (1)things purchased and exported are one and the same and (2) the purchases were against firm orders for export. Neroth Oil Mills’ case was concerned only with the first aspect and not the second aspect. Therefore, the tribunal observed that the judgment in Neroth Oil Mills’ case, even if it had attained finality does not put an end to the disputed issue involved in the respondent-assessee’s case. The tribunal further noticed that as late as 1993, the sales tax department was pursuing the issue relating to purchase tax liability of the assessee from the assessment year 1974-75 onwards and the cases were still pending decision before the sales tax authorities. The tribunal pointed out that the unilateral action on the part of the asses-see in writing-back the amounts could not have the fact of extin-guishing the statutory liability. On reference, the High Court approved the view taken by the tribunal and held that section 41(1) cannot be invoked in the instant case. Hence, this appeal by revenue by special leave.
4. It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31.3.1985 for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exists so as to enable the revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e 1985-86. In order to apply section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view: (1) In the course of assessment for an earlier year, allowance or deduc-tion has been made in respect of trading liability incurred by the assessee; (2)Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3)In that situation the value of benefit accruing to the asses-see is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of bene-fit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the tribunal, rightly held that the resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the tribunal, the tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills’ case, the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the sales-tax department was still going on. There is no material on record to rebut these factual observations made by the tribunal. Nor can it be said that the reasons given by the tribunal are irrelevant.
5. The learned senior counsel appearing for the income tax department has contended that the assessee itself took steps to write-off the liability on account of purchase tax by making necessary adjustments in the books, which itself is indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of amount of Rs3,20,758/- deeming the same as income of the year 1985-86 under section 41(1) is well justified of the Act. But, what the assessee has done is not conclusive. As observed by the tribunal, an unilateral action on the part of the assessee by way of writing-off the liabili-ty in its accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this Court in CIT v. Sugauli Sugar Works (P) Ltd.1 (236 ITR 518).We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of explanation 1 to section 41(1).
6. The decision of this Court in Commissioner of Income Tax v. T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344) has been cited by the learned counsel for the appellant. We find no rele-vance of this decision to the determination of the question in the present case. The factual matrix and the provision of law considered therein is entirely different.
7. For the reasons aforesaid, we affirm the opinion ex-pressed by the High Court and dismiss the appeal filed by the revenue. There shall be no order as to costs.
1. The opinion recorded by the Kerala High Court in ITR No. 16 of 1997 has given rise to this appeal filed by the chief commissioner of income tax. The dispute relates to the assessment year 1985-86. At the instance of the revenue, the following question was referred under section 256(1) of the Income-tax Act for the opinion of the High Court.
“Whether on the facts and in the circumstances of the case, the tribunal is right in law and fact in holding that Rs.3,02,758/- cannot be brought to tax and in deleting the addition of Rs.3,02,758/- sustained by CIT(Appeals)?”
The High Court accepted the view of the tribunal which partly allowed the appeal of the assessee and answered the question in favour of the assessee.
2. The facts in brief are: The respondent-assessee is engaged in the business of tea, spices etc. During the assessment year 1985-86(previous year ending on 31.3.1985) the assessee ‘wrote-back’ in its accounts a sum of Rs.14,65,997/- represent-ing the provision made during earlier years(1978-1981) towards its purchase tax liability. It appears that the liability to pay purchase tax on certain goods was in dispute and, therefore, the provision was made.Further, it appears that the assessee, in support of its claim for purchase tax relief, inter alia, relied on the decision of the Kerala High Court in Neroth Oil Mills’ case. The SLP filed by the Kerala state against the decision of the High Court in the said case was rejected by this Court in November,1984. Apparently, for that reason, the assessee thought it fit to reverse the provision made earlier towards purchase tax and therefore, made the entries in the books of account during the year ending on 31.3.1985. The assessing officer added the sum of Rs.14,65,997/- which represents the provision made towards purchase tax during the assessment years 1978-79,1979-80 and 1980-81, treating the same as the income of the previous year ending on 31.3.1985. In the first appeal, the CIT(appeals) held that there was no justification to include the sums which were already included in the course of reassessments made for the years 1979-80 and 1980-81. However, he upheld the addition of Rs.3,02,758/- pertaining to the assessment year 1978-79. The appellate commissioner held that the liability of the assessee finally ceased during the year 1985-86 in view of the rejection of SLP in Neroth Oil Mills’ case in November, 1984. Certain ob-servations were also made as regards the includibility of the sums pertaining to assessment years 1980-81 and 1981-82 in re-spect of which reassessments were made. However, in this ap-peal, we need not go into the details thereof.
3. On further appeal by the assessee, the tribunal set aside the addition of Rs.3,02,758/- which was upheld by the appellate commissioner. The tribunal did not agree with the view taken by the first appellate authority that there was no cessation of liability within the meaning of section 41(1) of the Income-tax Act during the relevant year on account of dismissal of SLP in another case.The tribunal observed that for claiming exemption from purchase tax on the ground that transaction was in the course of export, two conditions were required to be ful-filled: (1)things purchased and exported are one and the same and (2) the purchases were against firm orders for export. Neroth Oil Mills’ case was concerned only with the first aspect and not the second aspect. Therefore, the tribunal observed that the judgment in Neroth Oil Mills’ case, even if it had attained finality does not put an end to the disputed issue involved in the respondent-assessee’s case. The tribunal further noticed that as late as 1993, the sales tax department was pursuing the issue relating to purchase tax liability of the assessee from the assessment year 1974-75 onwards and the cases were still pending decision before the sales tax authorities. The tribunal pointed out that the unilateral action on the part of the asses-see in writing-back the amounts could not have the fact of extin-guishing the statutory liability. On reference, the High Court approved the view taken by the tribunal and held that section 41(1) cannot be invoked in the instant case. Hence, this appeal by revenue by special leave.
4. It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31.3.1985 for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exists so as to enable the revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e 1985-86. In order to apply section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view: (1) In the course of assessment for an earlier year, allowance or deduc-tion has been made in respect of trading liability incurred by the assessee; (2)Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3)In that situation the value of benefit accruing to the asses-see is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of bene-fit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the tribunal, rightly held that the resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the tribunal, the tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills’ case, the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the sales-tax department was still going on. There is no material on record to rebut these factual observations made by the tribunal. Nor can it be said that the reasons given by the tribunal are irrelevant.
5. The learned senior counsel appearing for the income tax department has contended that the assessee itself took steps to write-off the liability on account of purchase tax by making necessary adjustments in the books, which itself is indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of amount of Rs3,20,758/- deeming the same as income of the year 1985-86 under section 41(1) is well justified of the Act. But, what the assessee has done is not conclusive. As observed by the tribunal, an unilateral action on the part of the assessee by way of writing-off the liabili-ty in its accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this Court in CIT v. Sugauli Sugar Works (P) Ltd.1 (236 ITR 518).We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of explanation 1 to section 41(1).
6. The decision of this Court in Commissioner of Income Tax v. T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344) has been cited by the learned counsel for the appellant. We find no rele-vance of this decision to the determination of the question in the present case. The factual matrix and the provision of law considered therein is entirely different.
7. For the reasons aforesaid, we affirm the opinion ex-pressed by the High Court and dismiss the appeal filed by the revenue. There shall be no order as to costs.
