H.N Seth, J.:— At the instance of the assessee and under the directions of this court, the Income-tax Appellate Tribunal, Allahabad, has stated the case and referred the following question for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the sum of Rs. 5,408 and Rs. 1,071 as income of the assessee earned in the previous year relevant to the assessment year 1963,-64?”
2. The assessee, Messrs. Bhagwat Prasad and Co., is a registered firm carrying on business of dealing in cloth on wholesale basis at Kanpur. The Income-tax Officer found the following two amounts in the balance-sheet of the assessee for the relevant accounting year ending on Asarh Badi 2, Sambat 2019, i.e, some time in June/July, 1962:
Rs.
Reserve khata
5,408
Reserve byajkhata
1,071
Total
6,479
3. Investigation into the account books of the assessee revealed that a sum of Rs. 5,400 was received by it in the year 1951-52 from two of its customers as advance for supplying goods to them. The assessee neither supplied the goods nor returned the advance received by it to its customers. The Income-tax Officer held that as the limitation for claiming refund of the aforesaid amount had expired, it had to be treated as the assessee's income under section 41 of the Income-tax Act, 1961, earned in the accounting year relevant to the assessment year 1963-64. So far as the sum of Rs. 1,071 was concerned, it was an old balance brought forward in respect of interest charged from one Messrs. Bhagwan Prasad Kashi Prasad of Kanpur. The corresponding credit of the said amount was not given in the profit and loss account but was taken directly to the balance-sheet under the head “reserve byajkhata.” The Income-tax Officer treated this amount also as the assessee's taxable income on the ground that it was a fictitious liability. In the result, he treated both items as income of the assessee for the assessment year 1963-64.
4. Being aggrieved by the decision of the Income-tax Officer, the assessee went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the amount of Rs. 5,408 could not be taxed under section 41 of the Act as no allowance or deduction in respect of the same had been made in any earlier assessment year. As regards the second item of Rs. 1,071, the Appellate Assistant Commissioner observed that the Income-tax Officer had not stated the facts correctly. The correct facts were that the assessee had trade relations with Messrs. Bhagwan Das Kashi Prasad of Kanpur. In the books of the assessee an account of the above named party appeared in different accounting years, viz., 2014, 2015, 2016, 2016-2017 and 2017-2018. In the beginning of the accounting year there was already a debit balance of Rs. 4,215.48 in the account of Bhagwan Prasad Kashi Prasad. Before the end of the accounting year, which was relevant to the assessment year 1962-63, the account of the debtor had been debited with a sum of Rs. 1,071 on account of interest. This amount of interest had not been taken by the assessee to its profit and loss account, but, instead, in the balance-sheet the assessee showed it under the head “reserve interest account”. The Appellate Assistant Commissioner, therefore, opined that at the most what the Income-tax Officer could have done was to treat this amount as the assessee's income earned in the previous year relevant to the assessment year 1962-63 and to tax it accordingly. But then he was not justified in adding it in the assessee's income earned during the previous year relevant to the assessment year 1963-64. Accordingly, he modified the assessment made by the Income-tax Officer and directed deletion of the aforementioned two amounts.
5. Being aggrieved by the decision of the Appellate Assistant Commissioner, the Income-tax Officer filed an appeal before the Appellate Tribunal. The Tribunal found that as the assessee's liability to refund the advance of Rs. 5,408 received by it from its customers had ceased to exist, it was at liberty to appropriate that amount to its revenues. This amount was, therefore, to be treated as the assessee's income as provided in section 41 of the Income-tax Act, 1961. It was immaterial that, instead of appropriating the amount, the assessee continued to keep it in its reserve khata. Regarding Rs. 1,071 the Tribunal found that in the year subsequent to that relevant for the assessment year in question, the assessee entered into a compromise with Messrs. Bhagwan Das Kashi Prasad by virtue of which it received one-fourth of the amount outstanding on the date of the compromise in full and final satisfaction of its claim. Notwithstanding the aforesaid compromise, and the fact that the assessee did not realise this amount in the subsequent year it represented the assessee's income liable to be taxed. In the result, the Tribunal reversed the decision of the Appellate Assistant Commissioner and restored the assessment order made by the Income-tax Officer.
6. We will first deal with the question whether the Tribunal was justified in treating the sum of Rs. 5,408 as the assessee's income. As stated earlier, this sum represented the amount of advance received by the assessee for supplying goods to its customers. The assessee neither supplied these goods nor returned the advance received by him to its customers and by passage of time the right of the customers to claim it back from the assessee became barred by time. According to the revenue, when the assessee received this amount as advance, it became its trading liability which continued till such time as the goods covered by this amount were supplied to the customers or, in case they could not be supplied, the amount was returned to the customers. When the right of the customers to claim the aforesaid amount back from the assessee became barred by time the trading liability ceased and as provided in section 41 of the Income-tax Act, 1961, it would be deemed to be the assessee's profits or gains of the business.
7. Section 41(1) of the Income-tax Act, 1961, runs thus:
“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.”
8. Under this section the fiction that any benefit accruing to an assessee by remission or cessation of its trading liability is deemed to be its profits and gains of the assessee's business comes into play only if while computing its income for some assessment year an allowance or deduction in respect of the trading liability is made and subsequently the assessee acquires in respect of that trading liability some benefit whether in cash or any other manner accrues to the assessee because of its ceasing to exist. In other words, the revenue merely takes as income what it had earlier allowed as deduction. In this case the Appellate Assistant Commissioner clearly pointed out that a sum of Rs. 5,408 had not been claimed by the assessee as an allowance or deduction in any earlier assessment year, nor had the same been so allowed. The Appellate Tribunal did not disagree with this finding of the Appellate Assistant Commissioner. It applied the fiction created by section 41(1) of the Act only because, in its opinion, as the right of the customers to recover the amount had become barred by time, the assessee's liability in respect of Rs. 5,408 had ceased to exist. As stated earlier, in order to rely upon the fiction created by section 41(1) of the Act, it was incumbent upon the revenue to further show that an allowance or deduction in respect of, that amount had been made while computing assessee's income in some earlier year. The allowance and deduction which are to be made while computing the assessee's income in an assessment year are laid down in the various provisions of the Income-tax Act. It is only if while making an assessment such allowance or deduction is made and the amount is subsequently recouped in the circumstances mentioned in section 41(1), it is to be deemed to be the assessee's income. Merely because the amount of advance received by the assessee was not treated, and, considering the method of accounting adopted by it, could not be treated as its income for the assessment year in which the money was received, it cannot be said that an allowance or deduction in respect thereof had been made in its assessment for that year. We are accordingly not satisfied that the very first condition for the applicability of section 41(1), viz., that the amount of Rs. 5,408 received by the assessee as advance had been allowed or deducted in its assessment for some earlier year exists and as such the revenue cannot take advantage of the fiction created by section 41 of the Act.
9. Moreover, in this case even the second condition for the applicability of section 41(1), viz., that the assessee should in the assessment year in question receive some benefit by way of cessation of its trading liability, also is not made out. According to the department the liability has ceased to exist because the claim of the customers to get the money back from the assessee has become barred by time. In the case of Kohinoor Mills Co. Ltd. v. Commissioner of Income-tax [1963] 49 ITR 578 Bom., it has been held that when a liability becomes barred by the law of limitation, there is neither remission nor cessation of liability; the liability is not extinguished, only the creditor's remedy becomes barred. Therefore, even if it be taken that if while computing the assessee's income for the assessment year in which the amount of Rs. 5,408 was received by the assessee as advance, it was not treated as its income, it resulted into an allowance being made, it still cannot be taxed under this sub-section as income for the year in which the debt due to the assessee (sic) became time barred as there was neither remission nor cessation of its liability in that year. We are, therefore, of opinion that on the facts and in the circumstances of the case the Tribunal was not justified in treating the sum of Rs. 5,408 as income of the assessee in the previous year relevant to the assessment year 1963-64.
10. Coming now to the dispute regarding the sum of Rs. 1,071 we find that the Appellate Assistant Commissioner held that this amount was credited as interest in the assessee's account books in the accounting year relevant to the assessment year 1962-63. In the relevant assessment year this amount of interest had not been taken by the assessee to its profit and loss account and had been shown in the balance-sheet under the reserve interest account. From the order passed by the Tribunal, it appears that in the subsequent year the assessee entered into a compromise with its debtor in respect of this amount. Even if the sum of Rs. 1,071 could be treated to be the assessee's income, it could not be considered to be the assessee's income earned in the accounting year in which the assessee merely transferred it to reserve byajkhata account. This income accrued to the assessee when it debited its debtor's account, i.e, in the previous year relevant to the assessment year 1962-63. Merely because the assessee transferred the amount to its reserve byajkhata in the relevant accounting year, it cannot be said that it was an income which accrued in that year. As the assessee neither received this income nor did it accrue to it in the previous year relevant to the assessment year 1963-64, it could not be treated as income earned by it in that year. We find that the Tribunal has interfered with the order passed by the Appellate Assistant Commissioner in this regard without, in any way, pointing out any circumstance from which it could be inferred that this was the assessee's income earned during the relevant previous year. In our opinion the Tribunal was not justified in treating this amount as the assessee's income earned in the previous year relevant to the assessment year 1963-64.
11. The question referred to us, therefore, is answered in the negative and against the department. The assessee will be entitled to receive his costs which we assess at Rs. 200.
12. Question answered in the negative.