Full Judgment Text
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PETITIONER:
POONJABHAI VARMALIDAS
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, AHMEDABAD
DATE OF JUDGMENT09/10/1990
BENCH:
THOMMEN, T.K. (J)
BENCH:
THOMMEN, T.K. (J)
SAHAI, R.M. (J)
CITATION:
1991 AIR 1 1990 SCR Supl. (2) 206
1992 SCC Supl. (1) 182 JT 1990 (4) 106
1990 SCALE (2)698
ACT:
Income Tax Act, 1922: S. 10(2)(xi)/ Income Tax Act,
1961: ss 36(1)(vii), 36(2) and 41(4): Bad debts written off
subsequently recovered--Business discontinued--Amounts
whether assessable to tax.
HEADNOTE:
Section 10(2)(xi) of the Income Tax Act, 1922 provided
for deduction of bad and doubtful debts. The proviso thereto
laid down that if the amount ultimately recovered on any
such debt was greater than the difference between the whole
debt and the amount allowed the excess shall be deemed to be
a profit of the year in which it was recovered. These provi-
sions were re-enacted in the Income Tax, Act, 1961 as s.
36(1)(vii) provides, subject to the provisions of sub-s.
(2), for deduction of amount of any debt established to have
become a bad debt in the previous year, whereas s. 41(4)
provides for bringing to tax amounts of such bad debts, if
recovered subsequently, as the income of the previous year
in which it was recovered, whether the business in respect
of which the deduction had been allowed was in existence in
that year or not.
Certain amounts which had been allowed to be written off
as bad debts in terms of s. 10(2)(xi) of the Income Tax Act,
1922 in the year 1959-60, but subsequently received by the
assessee were sought to be brought to tax in the assessment
years 1964-65, 1965-66 and 1967-68 under s. 41(4) of the
Income Tax Act, 1961. The assessee’s business had discontin-
ued prior to the relevant years of recovery of the amounts.
The orders of assessment were confirmed by the Appellate
Assistant Commissioner. The Tribunal, however, held that the
amounts could not be taxed under s. 41(4) of the 1961 Act
for that section had no application to amounts written off
in 1959-60 in terms of s. 10(2)(xi) of the 1922 Act when it
was in force.
On a reference, the High Court held that the amounts in
question were includable in computing the taxable income of
the assessee in respect of the relevant years under s. 41(4)
of the 1961 Act. It took the view that there was no incon-
sistency between the relevant provisions of the two enact-
ments and that s. 24 of the General Clauses Act, 1897 was
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attracted as a result of which the order in terms of which
the amounts
207
had been written off was deemed to have been made under the
reenacted provisions, as contained in s. 36(1)(vii).
In these appeals by certificate, it was contended for
the appellant that the relevant provisions of the 1922 Act
and 1961 Act were not in pari materia, that s. 41(4) would
be attracted only where the bad debt had been written off in
terms of s. 36(1)(vii), and that what has been allowed as a
deduction in terms of s. 10(2)(xi) of the 1922 Act could not
on recovery be brought to tax under s. 41(4) of the 1961
Act, unless the business itself had continued to exist at
the time of recovery.
Dismissing the appeals, the Court,
HELD: 1. If the amounts had been received prior to the
repeal of the 1922 Act the entire transaction would have
been covered by the provisions of section 10(2)(xi) of the
Act, and the business having been discontinued prior to the
relevant years of receipt, these amounts would not have been
taxable. [209H; 210A]
Commissioner of Income Tax, Madras v. Express Newspapers
Ltd., 53 ITR 250 referred to.
2.1 The effect of section 24 of the General Clauses Act,
1897, in so far as it is material, is that where the re-
pealed and re-enacted provisions are not inconsistent with
each other, any order made under the repealed provisions
would be deemed to be an order made under the re-enacted
provisions. [212B]
2.2 Section 10(2)(xi) of the 1922 Act is equivalent to
sections 36(1)(vii), 36(2) and 41(4) of the 1961 Act. The
repealed section 10(2)(xi) is thus a composite section
containing the ingredients of the re-enacted sections
36(1)(vii), 36(2) and 41(4). Consequently, when a debt is
written off by an order in terms of section 10(2)(xi) of the
1922 Act, the Income Tax Officer exercises the same power as
he would have exercised on the enactment of section
36(1)(vii) of the 1961 Act. These two provisions are, there-
fore, consistent with each other. Section 36(1)(vii) is
subject to the provisions of sub-section (2) of that sec-
tion. Therefore, both sections 36(1)(vii) and 36(2) of the
1961 Act, being two of the ingredients of section 10(2)(xi)
of the 1922 Act, must be read together with reference to an
order under which debts had been written off. Accordingly,
in the light of section 24 of the General Clause Act, 1897,
the relevant order made under section 10(2)(xi) of the 1922
Act with reference to which the debt in question had been
written off, would be
208
deemed to be an order made under section 36(1)(vii) of the
1961 Act and such order is what is contemplated under sec-
tion 41(4) of that Act. Any amount which is recovered on any
such debt is attracted by the provisions of section 41(4) of
the 1961 Act and is, therefore, chargeable to tax in terms
of that sub-section to the extent of the ’excess’ specified
therein. [212C-G]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1431-
33(NT) of 1976.
Appeals by Certificate from the Judgment and Order dated
27.2. 1976 of the Ahmedabad High Court in Income Tax Refer-
ence
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Nos. 129 and 168 of 1974.
J.H. Parekh. P.H. Parekh and Ms. Shalini Soni, for the
Appellant.
S.C. Manchanda. K.P. Bhatnagar and Ms. A. Subhashini for
the Respondent.
The Judgment of the Court was delivered by
THOMMEN, J. These appeals under certificate arise from
the common judgment of the High Court of Gujarat in the
Commissioner of Income Tax, Gujarat 111 v. Poonjabhai Vanma-
lidas. 105 ITR 388 Guj. The assessee is the same in all the
cases. The assessment years in question are 1964-65. 1965-66
and 1967-68. In the relevant previous years. the assessee
received certain amounts and they were assessed under sec-
tion 41(4) of the Income Tax Act, 1961 (hereinafter referred
to as the "1961 Act"). The contention of the assessee was
that he was not assessable under section 41(4) of the 1961
Act because these amounts had been written off as bad debts
in the year 1959-60 and his claim tot deduction, though
initially disallowed by the Income Tax Officer. was subse-
quently allowed by the Income Tax Appellate Tribunal in
I.T.A. Nos. 673-676 (AHD) dated 12.7. 1963. The business of
the assessee had discontinued prior to the previous year in
which any part of the amount was received, and consequently,
it was contended. these amounts when received were not
assessable to income-tax under section 41(4) of the 1961 Act
as that section was not in pari materia with section
10(2)(xi) of the Income Tax Act, 1922 (’1922 Act’) in terms
of which the amounts had been written off as bad debts. This
contention was rejected by the Income Tax Officer and the
amounts were brought to tax. The orders of assessment were
confirmed by the
209
Appellate Assistant Commissioner. On further appeal by the
assessee, the Tribunal held, accepting the assessee’s con-
tention, that the amounts could not be taxed under section
41(4) of the 1961 Act, for that section had no application
to amounts written off in 1959-60 in terms of section
10(2)(xi) of the 1922 Act when it was in force. On a refer-
ence, the High Court held that the amounts in question were
includable in computing the taxable income of the assessee
in respect of the relevant years under section 41(4) of the
1961 Act. The questions referred were accordingly answered
by the High Court against the assessee and in favour of the
Revenue. Hence the present appeals.
Section 10(2)(xi) of the 1922 Act reads:
"10. Business:-(1) ..................................
(2) Such profits or gains shall be computed after
making the following allowances, namely:
(xi) when the assessees’s accounts in respect of
any part of his business, profession or vocation are not
kept on the cash basis, such sum. in respect of bad and
doubtful debts, due to the assessee in respect of the part
of his business, profession or vocation, and in the case of
an assessee carrying on a banking or money-lending business.
such sum in respect of loans made in the ordinary course of
such business as the Income-tax Officer may estimate to be
irrecoverable but not exceeding the amount actually written
off as irrecoverable in the books of assessee:
Provided that if the amount ultimately recovered on
any such debt or loan is greater than the difference between
the whole debt or loan and the amount so allowed, the excess
shall be deemed to be a profit of the year in which it is
recovered and if less, the deficiency shall be deemed to be
a business expense of that year;
There is no dispute that the assessee’s accounts were
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not kept on cash basis. There is also no dispute that the
assessee’s business had discontinued prior to the year of
recovery of the amounts in question, If the amounts had been
received prior to the repeal of the 1922 Act the entire
transaction would have been covered by the provisions of
210
section 10(2)(xi) of that Act, and the business having been
discontinued prior to the relevant years of receipt, these
amounts would not have been taxable. See Commissioner of
Income Tax, Madras v. Express Newspapers Ltd., 53 ITR 250.
But the amounts in question here were recovered after the
coming into force of the 1961 Act which repealed the 1922
Act. The question, therefore, is whether the amounts which
had been written off in terms of section 10(2)(xi) of the
1922 Act, but subsequently received after the repeal of that
provision. could be brought to tax in terms of the relevant
re-enacted provisions. Tax is sought to be levied under the
1961 Act in terms of section 41(4) which reads:
"41. Profits chargeable to tax .--
4. Where a deduction has been allowed in respect of
a bad debt or part of debt under the provisions of clause
(vii) of sub-section (1) of section 36, then, if the amount
subsequently recovered on any such debt or part is greater
than the difference between the debt or part of debt and the
amount so allowed, the excess shall be deemed to be profits
and gains of business or profession, and accordingly charge-
able to income-tax as the income of the previous year in
which it is recovered, whether the business or profession in
respect of which the deduction has been allowed is in exist-
ence in that year or not.
This sub-section. refers to the deduction allowed in respect
of a bad debt under the provisions of section 36(1)(vii) of
the 1961 Act which reads as follows:
"36. Other deductions--(1). The deductions provided for in
the following clauses shall be allowed in respect of the
matters dealt with therein, in computing the income referred
to in section 28--
(vii) subject to the provisions of sub-section (2),
the amount of any debt, or part thereof, which is estab-
lished to have become a bad debt in the previous year:
211
Significantly sub-section (4) of section 41 of the 1961 Act
specifically states that tax is attracted whether or not the
business or profession in respect of which the deductions
had been allowed continued to be in existence in the year of
receipt. This is a fundamental deviation from the earlier
provision contained in section 10(2)(xi) of the 1922 Act.
Furthermore, sub-section (4) of section 41 specifically says
that the deductions should have been allowed in respect of a
bad debt under the provisions of section 36(1)(vii) in order
to attract section 41(4).
The assessee, therefore, contends that the relevant
provisions of the two enactments are not in pari materia,
and what has been allowed as a deduction in terms of section
10(2)(xi) of the 1922 Act cannot be brought to tax under
section 41(4) of the 1961 Act. Any order made under section
10(2)(xi) of the 1922 Act under which a debt-was written off
would not attract tax on recovery of the whole or part of
such amount unless the business itself continued to exist at
the time of the recovery. Furthermore, the assessee contends
that sub-section (4) of section 41 of the 1961 Act is at-
tracted only where the bad debt was written off in terms of
section 36(1)(vii) of that Act, and not in terms of section
10(2)(xi) of the 1922 Act, the provisions of which are not
in pari materia with either section 36(1)(vii) or section
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41(4).
Rejecting the contentions of the assessee, the High
Court held that there was no inconsistency between the
relevant provisions of the two enactments and that section
24 of the General Clauses Act, 1897 was attracted as a
result of which the order in terms of which the amounts had
been written off was deemed to have been made under the re-
enacted provisions, as contained in section 36(1)(vii), and
consequently the amounts recovered on any such debt were
chargeable under section 41(4).
Section 25 of the General Clauses Act, 1897, in so far
as it is material. reads:
"24. Continuation of orders, etc., issued under enactments
repealed and re-enacted--Where any Central Act or Regulation
is, after the commencement of this Act, repealed and re-
enacted with or without modification, then, unless it is
otherwise expressly provided, any appointment, notification,
order, scheme, rule, form or bye?law, made or issued under
the repealed Act or Regulation, shall, so far as it is not
inconsistent with the provisions re-enacted, continue in
force, and be deemed to have been made or issued under
212
the provisions so re-enacted, unless and until it is super-
seded by any appointment, notification, order, scheme, rule,
form or bye-law made or issued under the provisions so re-
enacted ...... "
The effect of section 24 of the General Clauses Act,
1897, in so far as it is material, is that where the re-
pealed and re-enacted provisions are not inconsistent with
each other, any order made under the repealed provisions is
deemed to be an order made under the reenacted provisions.
The question, therefore, is whether the provisions of the
repealed section 10(2)(xi), under which the bad debts were
written off as irrecoverable in the books of the assessee,
are in terms re-enacted by the repealing Act. A comparative
table furnished i. The Law and Practice of Income Tax, Kanga
and Palkiwala (Seventh Edition-Volume II) shows that section
10(2)(xi) of the 1922 Act is equivalent to sections
36(1)(vii), 36(2) and 41(4) of the 196 1 Act. The repealed
section 10(2)(xi) is thus a composite section containing the
ingredients of the re-enancted sections 36(1)(vii), 36(2)
and 41(4). Consequently when a debt is written off by an
order in terms of section 10(2)(xi) of the 1922 Act, the
Income Tax Officer exercises the same power as he would have
exercised on the enactment of section 36(1)(vii) of the 1961
Act. These two provisions are, therefore, consistent with
each other. Section 36(1)(vii) is subject to the provisions
of sub-section (2) of that section. Therefore, both sections
36(I)(vii) and 36(2) of the 1961 Act, being two of the
ingredients of section 10(2)(xi) of the 1922 Act, must be
read together with reference to an order under which debts
had been written off. Accordingly, in the light of section
24 of the General Clauses Act, 1897, the relevant order made
under section 10(2)(xi) of the 1922 Act with reference to
which the debt in question had been written off, is deemed
to be an order made under section 36(1)(vii) of the 1961 Act
and such order is what is contemplated under section 41(4)
of that Act. Any amount which is recovered on any such debt
is attracted by the provisions of section 41(4) of the 1961
Act and is, therefore, chargeable to tax in terms of that
sub-section to the extent of the ’excess’ specified therein.
The contentions of the assessee thus fail, and the
appeals are accordingly dismissed. No order as to costs.
P.S.S. Appeals
dismissed.
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