Full Judgment Text
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.964/2009, 967/2009, 1003/2009, 1013/2009, 1014/2009 &
1015/2009
Reserved on : November 24, 2011.
% Date of Decision January 30, 2012.
COMMISIONER OF INCOME TAX (CENTRAL)-I ..Appellant
Through Mr.Sanjeev Sabharwal, Advocate.
VERSUS
MOHAN MEAKIN LIMITED …..Respondent
Through Mr. C.S.Aggarwal, Sr.Advocate with
Mr.Prakash Kumar, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
1. Whether Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporters or not ? Yes
3. Whether the judgment should be reported in the Digest? Yes
R.V. EASWAR, J.:
These are six appeals filed by the revenue under Section 260A of
the Income Tax Act (Act, for short). We have taken up ITA 964/2009 as
the lead matter. In this appeal, the following substantial question of law
nd
was admitted on 22 October, 2009:-
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 1 of 16
“Whether ITAT was correct in law in deleting the addition made
by the Assessing Officer on account of unclaimed credit
balances written off by the assessee in its books of accounts for
the year under consideration, invoking the provisions of Section
41(1) of the Income Tax Act.”
2. The facts giving rise to the present appeal may be briefly noticed.
The assessee is a public limited company engaged in the manufacture of
IMFL, beer, mineral water, juices, breakfast food, glass bottles etc. For
th
the assessment year 1995-96, a return was filed on 30 November, 1995
declaring income of Rs.3,00,33,390/-. In the course of the assessment
proceedings under Section 143(3) of the Act, the Assessing Officer made
several additions and disallowances to the returned income. Included in
them was an amount of Rs.17,39,263/-. This amount represented the
aggregate of several items written back by the assessee in the books of
accounts for the relevant previous year and as per para 15.2 of the
assessment order they are as follows:-
“15.2. As discussed above the amounts written back include the
following amounts:
(i) Miscellaneous Income
a. Salary & wages 59,088
b. Relating to parties 10,72,329
c. Security forfeited ---
d. Unencashed cheques 1,97,758
e. Excess dividend paid
In earlier year written back 14,916
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 2 of 16
i) Excess provision for doubtful debts
And advances written back 17,133
ii) Unclaimed bonus written back
Disallowed in the earlier assessment year 14,133
iii) Tax on immovable property for the
Year 1990-90 3,730
iv) Excess provision for excise duty payable
Relating to assessment years 1986-87
To 1989-90 written back 2,95,200
v) Excess provision of sales-tax in the
Assessment year 1990-91 written back 63,757
7,39,263/- ”
3. In the return of income the aforesaid amount was claimed to be not
taxable under the Act. The Assessing Officer called upon the assessee to
explain how the aforesaid items were not taxable. In response to the
th
query, the assessee submitted a written reply dated 18 December, 1998.
Briefly stated, the assessee took up the plea that the aforesaid items did
not represent any expenditure or loss or liability allowed in any of the
earlier years as a deduction, that the amount of Rs.10,72,329/- represented
small credit balances in the account of the customers and suppliers out of
advance received from them for supplies to be made subsequently which
they did not collect or which could not be fully adjusted against the
supplies made to them, that the essential requisites for invoking Section
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 3 of 16
41(1) of the Act were absent, that Section 28(iv) was also not applicable
and that in these circumstances the aggregate amount of Rs.17,39,263/-
cannot be brought to tax.
4. The Assessing Officer first dealt with the amount of Rs. 10,72,329/.
He noted that the amounts have been written back in the assessee’s books
of account after the period of limitation for recovery of the same had
expired. According to him the amount represented a trading receipt which
was initially adjusted by the assessee in its books of accounts and thus fell
to be added as the assessee’s income. As regards the rest of the items
aggregating to Rs.6,36,693/- the assessee’s plea that the provisions of
Section 41(1) or Section 28(iv) were not applicable, was rejected by the
Assessing Officer by observing in paragraph 15.6 of the assessment order
as follows:-
“15.6 I have carefully considered the assessee’s reply and do
not agree with it. Details of these expenses clearly show that
these expenses are allowable expenses under the Income-tax
Act and the same have been claimed and allowed to the
assessee in earlier years. In my considered view these
expenses are fully covered with the provisions of section 41(1)
of the Income-tax Act, and writing back of these amounts in
the profit & Loss Account definitely establishes that there has
been a cessation of liability on the part of the assessee. The
assessee has written back the amount only after the expiry of
the period of limitation available under the limitation Act.
When the so called creditors have no legal remedy or
enforceable right on the assessee to make any recovery then it
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 4 of 16
is legitimate cessation of liability and writing back of these
amounts in the profit & Loss Account makes it taxable.”
Thus the aggregate amount of Rs.17,39,263/- was brought to assessment.
In support of the addition, the Assessing Officer referred to and relied
upon the judgment of the Supreme Court in CIT vs. T.V.Sundaram
Iyengar & Sons Ltd. (1996) 222 ITR 344 .
5. The assessee appealed to the CIT(A) against the aforesaid addition.
It would appear that before the CIT(A) the following breakup of the
addition was given:-
1. Salaries, wages and bonus 59088/-
2. Supplier’s credit balances 639005/-
3. Customer’s credit balances 433324/-
4. Uncashed cheques 197758/-
5. Cash advance 1219/-
1330394/-
6. Excess dividend paid in earlier
years written back 14916/-
Total 1345310/-
It may be noticed from the aforesaid breakup that there is no difference in
the figure of salaries, wages and bonus and the figure of uncashed
cheques between what was given before the Assessing Officer and what
was filed before the CIT(A). The figure of Rs.10,72,329/- given before
the Assessing Officer as amounts “relating to parties” has been divided
into two amounts of Rs.6,39,005/- representing suppliers’ credit balances
and Rs.4,33,324/- representing customers’ credit balances. The excess
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 5 of 16
dividend of Rs.14,916/- paid in the earlier year and written back in the
books of accounts in the year under appeal was deleted by the CIT(A)
since the amount had not been earlier allowed as a deduction by way of an
expenditure/liability.
6. The CIT(A) then considered the aggregate of item Nos.3 & 5
(Rs.4,33,324/- + 1,219/-). He applied the judgment of the Supreme Court
cited (supra) and held that since the assessee itself had written back the
amount as its income, the same was rightly added by the Assessing
Officer.
7. As regard item Nos.1, 2 & 4 aggregating to Rs.8,95,851/-, he held
that the same was also assessable as the assessee’s income under Section
41(1) of the Act on the basis of the aforesaid judgment of the Supreme
Court. He also observed that that the assessee has obviously written back
these liabilities as they have remained unclaimed for a long time and their
recovery had become barred by limitation. Since these were also
transferred to the profit and loss account, he held that they were rightly
taxed under Section 41(1).
8. The CIT(A) separately dealt with the excess provision of
Rs.17,133/- made for doubtful debts which was written back in the
accounts in the year under consideration. He noted that the provision had
not been allowed in any of the earlier assessment years as a deduction
and, therefore, held that Section 41(1) was not applicable in the year in
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 6 of 16
which the provision was written back. He accordingly deleted the
addition.
9. The following items of addition were separately dealt with by the
CIT(A) in paragraph 13 of his order under the head “provisions for tax,
duty etc. written back”:-
1.Tax on immovable property for the year 1990-91
Written back: Rs. 3,730/-
2.Unclaimed bonus for earlier years written back: Rs. 14,133/-
3.Excess provision for excise duty for
Assessment years 1986-87 to 1989-90 written back: Rs.2,95,200/-
4.Excess provision for sales tax
For assessment year 1990-91 written back: Rs. 63,757/-
TOTAL Rs.3,76,820/-
10. It was submitted before the CIT(A) that none of the aforesaid items
of expenditure had been claimed as a deduction in the earlier years in
which the provision for the payments had been created because of Section
43B of the Act and, therefore, the writing back of the provisions in the
books of account for the year under appeal on the ground that those
provisions were no longer required, does not attract Section 41(1). This
contention of the assessee was accepted by the CIT(A) with regard to the
first, third and fourth items aggregating to Rs.3,62,687/- and the addition
to this extent was deleted. However, in respect of the unclaimed bonus of
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 7 of 16
Rs.14,133/-, the CIT(A) held that it must have been claimed and allowed
as a deduction in the earlier year, presumably because Section 43B did not
apply to provision created for bonus. He accordingly upheld the addition
under Section 41(1).
11. Thus the CIT(A) decided the correctness of the various additions in
the following manner:-
Addition Amount Deleted Confirmed
Salaries, wages and bonus
written back
Rs.59,088/- -- yes
Suppliers credit balances Rs.6,39,005/- -- yes
Customers credit balances Rs.4,33,324/- -- yes
Uncashed cheques Rs.1,97,758/- -- yes
Excess dividend Rs.14,916/- yes --
Excess provision for
doubtful debts
Rs.17,133/- yes --
Unclaimed bonus written
back
Rs.14,133/- -- yes
Tax on immovable
property
Rs.3,730/- yes --
Excess provision for
excise duty
Rs.2,95,200/- yes --
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 8 of 16
Excess provision for sales
tax
Rs.63,757/- yes --
12. Both the assessee as well as the revenue preferred appeals before
the Tribunal for the assessment years 1990-91 to 2003-04 (7 years).
There were thus 14 cross appeals before the Tribunal which were all
th
disposed of by a common order dated 27 March, 2009. In the appeal
before us, we are concerned only with the assessment years 1990-91,
1991-92, 1993-94, 1994-95, 1995-96 and 1996-97. So far as the additions
that are disputed in the present appeals are concerned, the decision of the
Tribunal for these years is contained in paragraph 12 of the aforesaid
order, which is the impugned order. The Tribunal disposed of the issues
in the following brief paragraph:-
“12.The next dispute relates to unclaimed credit balances
written back in the account of the customers and suppliers
(A.Y. 1990-91 to 1996-97); salaries, wages & bonus
(A.Y. 1990-91 to 93-94); unencashed cheques (A.Y.
1990-91 to 93-94); and securities forfeited (A.Y. 1990-91
& 92-93). All these issues arose in earlier years also
wherein the Tribunal has restored the matter back to the
file of AO and the AO in set aside proceedings has
deleted the disallowances made in this regard. In the light
of this, such unilateral right of the unclaimed credit
balances in the account of customers and suppliers; in the
account of salaries, wages and uncashed cheques and
securities forfeited, cannot be brought to tax u/s 41(1) of
the Act. In fact in relation to the last two items, there has
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 9 of 16
been no claim for deduction for invoking the provisions of
sec. 41(1) of the Act.”
13. It would have facilitated the disposal of the present appeals if the
Tribunal had discussed the facts relating to the additions in some detail
and had given separate findings in respect of each of them with
appropriate reasons. It is, however, seen that the Tribunal disposed of the
dispute relating to unclaimed credit balances etc. in a summary manner by
observing that in the proceedings remanded by the Tribunal to the
Assessing Officer, in respect of the earlier years, the Assessing Officer
has himself deleted the additions/disallowances and in the light of this
development, the unilateral write back of the unclaimed credit balances
etc. cannot be brought to tax under Section 41(1) of the Act. It has also
been observed that in respect of the addition relating to uncashed cheques
and securities forfeited, there had been no claim for deduction for the
provisions of Section 41(1) to be invoked. The Tribunal having been
constituted by the Income Tax Act as the ultimate fact-finding authority,
we would have expected it to pass reasoned orders, setting out the
relevant facts, figures and contentions in a manner in which parties to the
dispute can readily appreciate the reasoning and the conclusions. There
should be clarity and the factual matrix lucidly stated. It has not been
made explicit in the order of the Tribunal as to what were the directions in
the order stated to have been passed by the Tribunal in respect of the
earlier years and what was the basis or facts upon which the Assessing
Officer for those years deleted the disallowance/additions made. Despite
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 10 of 16
this handicap, we have proceeded to dispose of the present appeals since
the orders of the Assessing Officer and the CIT(A) in respect of the
disputed issues are fairly elaborate.
14. We first take up for consideration the salaries, wages and bonus of
Rs.59,088/- written back in the assessee’s account. In paragraph 11 of the
order of the CIT(A), a finding has been recorded that the amount was
admittedly earlier claimed and allowed as deduction. The contention,
however, was that there was no cessation or remission of the liability and,
therefore, by merely writing back the credit balances in the books of
accounts, which is an unilateral action of the assessee, the liability cannot
be said to have ceased. We are concerned with the assessment year 1995-
96. Explanation 1 to Section 41(1) was added by the Finance (No.2) Act,
st
1996 with effect from 1 April, 1997. After the insertion of this
Explanation, it is not open to the assessee to claim non-taxability on the
ground that the writing off of the liability in his accounts cannot be treated
as cessation of liability. The Explanation provides that the unilateral act
of the assessee by way of writing off such liability in its accounts would
be considered as remission or cessation of the liability. In circular No.762
th
dated 18 February, 1998 which is reported in (1998) 230 ITR (St.)12, the
CBDT has explained the reason behind insertion the above Explanation.
In paragraph 28.3 of the circular it has further been stated that the
st
amendment will take effect from 1 April, 1997 and will, accordingly,
apply in relation to assessment year 1997-98 and subsequent years. The
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 11 of 16
Explanation, therefore, does not have any retrospective effect. It does not,
therefore, apply to the assessment year 1995-96. For this reason, we hold
that the mere writing back of the loan in relation to unclaimed salaries,
wages and bonus cannot amount to cessation of the liability. This aspect
of the matter has been considered by us elaborately in the case of
Commissioner of Income Tax-III v. Shri Bardhman Overseas Ltd., ITA
rd
No.774/2009 decided on 23 December, 2011. For the reasons stated in
that judgment, we hold that the addition is not in accordance with law.
15. So far as the suppliers’ credit balances of Rs.6,39,005/- and the
customers’ credit balances of Rs, 4,33,324/- are concerned, the same
reasoning is applicable for the year under consideration. Accordingly,
those two additions made by the Assessing Officer are also not in
accordance with law.
16. In the case of the uncashed cheques amount to Rs.1,97,758/-, the
finding of the Tribunal is that that there was no claim for deduction in any
of the earlier years and, therefore, the amount cannot be added under
Section 41(1) of the Act. It is not in dispute, as it cannot be, that the
amount of uncashed cheques was not allowed as deduction in any of the
earlier assessment years. As per the assessee this represents the cheques
received and remaining on hand on the last day of the accounting period.
Tribunal has accepted this stand. The Assessing Officer and the CIT(A)
have not stated why the stand of the assessee was not acceptable.
Revenue has also not stated and averred that the assessment order now
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 12 of 16
passed, this aspect was not considered and examined. In these
circumstances, Section 41(1) can hardly have any application. We
accordingly, uphold the decision of the Tribunal deleting the addition.
17. As regard the excess dividend of Rs.14,916/-, the same reasoning
holds good because dividend paid by a company to its share holders is not
an allowable deduction under the Income Tax Act as it represents an
appropriation of the profits after they have been earned. If the dividend is
not allowable as a deduction, the excess written back cannot also be
assessed as income under Section 41(1). While holding that the dividend
cannot be assessed under Section 41(1), we must also observe that there is
no mention in paragraph 12 of the order of the Tribunal about excess
dividend being written back and assessed on that basis. As already
mentioned by us, the specific figures and the facts have not been stated by
the Tribunal. Be that as it may, we proceed on the basis that the amount
of excess dividend written back is included in the aggregate figure of
unclaimed credit balances written back and have proceeded to render our
decision on that basis. We are referring to this aspect only to highlight the
kind of difficulties the High Court can face while hearing an appeal under
Section 260A of the Act from the order of the Tribunal, if the order of the
Tribunal does not contain the relevant facts, figures and the precise
controversy arising in different assessment years.
18. As regards the excess provision for doubtful debts amounting to
Rs.17,133/- which has been written back, the finding of the CIT(A) that
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 13 of 16
the provision was never allowed as a deduction in the earlier years. Since
the finding that the provision was not allowed in the earlier year as a
deduction is not under challenge, the amount cannot be added under
Section 41(1) when it is written back in the accounts. The decision of the
Tribunal is upheld.
19. Subject to the above observation, we answer the substantial
question of law in the affirmative, against the revenue and in favour of the
assessee.
20. The other appeals relate to the assessment years 1990-91, 1991-92,
1993-94, 1994-95 and 1996-97. The following table sets out the
additions/disallowances in dispute in the appeals:-
ITA NO. RELEVANT
ITEMS IN ISSUE UNDER THE
AMOUNT(s)
HEAD
in Rs.
A.Y
1014/2009 1990-91 1. Salary, wages and
Unclaimed
Balances Written
70,976
Bonus
2. Customer’s credit
3,93,958
Back
balances
3. Supplier’s credit
5,68,768
balances
4. Un-cashed cheques
20,849
10,54,551
967/2009 1991-92 1. Salary, wages and
Unclaimed
Balances Written
98,189
Bonus
2. Customer’s credit
6,50,550
Back
balances
3. Supplier’s credit
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 14 of 16
balances
1,50,997
4. Un-cashed cheques
28,395
9,28,131
1015/2009 1993-94 1. Salary, wages and
Bonus
Unclaimed
Balances Written
72,636
2. Customer’s &
3,54,508
Back
Supplier’s credit
balances
3. Un-cashed cheques
21,712
4,48,856
1003/2009 1994-95 1. Salary, wages and
Unclaimed
Balances Written
47,931
Bonus
2. Customer’s &
3,83,306
Back
Supplier’s credit
balances
3. Un-cashed cheques
46,514
4,77,751
1013/2009 1996-97 1. Customer’s &
Unclaimed
Balances Written
__
Supplier’s credit
balances
2. Un-cashed cheques
95,418
Back
72,677
1,68,095
21. Since the substantial question of law framed by this Court is a
common question for all the appeals and since it refers only to “unclaimed
credit balances written off by the assessee in its books of accounts”, we
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 15 of 16
are confining our decision in all the appeals to the additions made under
the following heads, namely; (a) unclaimed salaries, wages and bonus; (b)
credit balances unclaimed by the suppliers; (c) credit balances unclaimed
by the customers and (d) uncashed cheques. As decided by us in the
appeal for the assessment year 1995-96 in ITA No.964/2009, these
additions are held to be rightly deleted by the Tribunal. It may be added
that for all these assessment years also, the Explanation-1 to Section 41(1)
is not applicable as they are all prior to the assessment year 1997-98 from
which year only the said Explanation is applicable. Accordingly, the
substantial question of law framed for these assessment years, which is
the same as for the assessment year 1995-96, is answered in the
affirmative, against the revenue and in favour of the assessee. There shall
be no order as to costs.
(R.V. EASWAR)
JUDGE
(SANJIV KHANNA)
JUDGE
January 30, 2012
Bisht
ITA Nos.964, 967, 1003, 1013, 1014 & 1015/2009 Page 16 of 16