Commissioner Of Income-Tax v. General Industrial Society Ltd.

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question of law for our opinion:

“Whether, on the facts and in the circumstances of the case, the amount written back by the assessee during the year under consideration, viz., Rs. 17,595, could be assessed as income of the assessee?”

2. Shortly stated, the facts are as under:

The assessee is a limited company. It wrote back unclaimed liabilities and sundry amounts of Rs. 17,595 in its profit and loss account. The assessee pleaded before the Income-tax Officer that the amount written back in the profit and loss account was not taxable in view of the decision in the case of CIT v. Sugauli Sugar Works P. Ltd., [1985] 140 ITR 286 (Cal). The Income-tax Officer did not accept the contention of the assessee and he took the amount written back by the assessee as its income.

3. The assessee, being aggrieved, appealed to the Commissioner of Income-tax (Appeals) who confirmed the action of the Income-tax Officer. The assessee came in appeal before the Tribunal and relied on the decisions in the cases of Sugauli Sugar Works P. Ltd., [1983] 140 ITR 286 (Cal) and Commissioner Of Income-Tax v. B.N Elias & Co. (P.) Ltd., [1986] 160 ITR 45 (Cal). On behalf of the Department, reliance was placed on Commissioner Of Income-Tax v. Agarpara Co. Ltd., [1986] 158 ITR 78 (Cal).

4. The Tribunal, after considering the facts of the case and the case-law cited before it, allowed the assessee's claim by observing as under:

“4. The assessee during the year under appeal has written off the unclaimed and sundry amounts to the profit and loss account. The amount written off by the assessee cannot be taken as the income of the assessee in view of the decision of the Calcutta High Court in CIT v. Sugauli Sugar Works P. Ltd., [1983] 140 ITR 286 and Commissioner Of Income-Tax v. B.N Elias & Co. (P.) Ltd., [1986] 160 ITR 45. The Departmental representative has referred to the decision of the High Court in Commissioner Of Income-Tax v. Agarpara Co. Ltd., [1986] 158 ITR 78. The said case related to unclaimed wages and bonus. Therefore, the case of the assessee is covered by the earlier two decisions of the Calcutta High Court and consequently the amount taxed by the Income-tax Officer was not proper. The assessee is allowed a relief of Rs. 17,595.”

5. We have heard the rival contentions. The facts of the case show that the claim of the assessee with regard to unspent and unclaimed liabilities dates from January 27, 1972. The same became barred long before the end of the accounting year relevant to the assessment year under reference. In the instant year, the assessee credited the said unclaimed liability to the profit and loss account. The assessee claimed exclusion of this credit for determination of the taxable income on the following grounds:

1. That unilateral writing back of liability to the profit and loss account does not result in cessation of liability.

2. That the limitation only bars the remedy but does not extinguish the liability. Therefore, despite the liability being written back to profit there cannot be any profit in the eye of law.

6. Learned counsel appearing for the assessee relied upon the decisions of this court in CIT v. Sugauli Sugar Works P. Ltd., [1983] 140 ITR 286 and Commissioner Of Income-Tax v. B.N Elias & Co. (P.) Ltd., [1986] 160 ITR 45. It was pointed out that, in both the decisions, this court has drawn support from the decision of the Supreme Court in Bombay Dyeing and Mfg. Co. Ltd. v. State of Bombay, AIR 1958 SC 328.

7. It appears from the assessment order that there is one peculiar aspect in the present case. It. is the practice of the assessee to write back such unclaimed and unspent liabilities from year to year on grounds of bar of limitation of the liability and to get away without paying tax on such amount written back to profit on the same plea. This has been happening since the assessment year 1977–78. This fact, to our mind, is very significant. One more notable feature is that the assessee never divulged to the Assessing Officer the details and particulars of the claims despite specific enquiry. These two factors combine to lend to the case a colour different from the case relied upon on behalf of the assessee.

8. We have taken careful notice of the ratio in the decision of the Supreme Court, viz., Bombay Dyeing and Mfg. Co. Ltd.'s case, AIR 1958 SC 328. We have no hesitation to subscribe to the view that “when a debt becomes time-barred, it does not become extinguished but is only unenforceable in a court of law.” This view of the Supreme Court in fact devastated the assessee's plea. The Supreme Court no doubt says that the debt survives but at the same time leaves no room for doubt that such time-barred debt is an unforceable debt. That being so, the very unenforceability of the debt causes cessation. That is also how the assessee understood the law. It is the unenforceability that prompted the assessee to write back merrily the unspent and unclaimed items of liability. It is profit. Even if the debt does not get extinguished, that carries the only message that the cessation in the Context of section 41(1) of the Income-tax Act, 1961, will depend on the intention of the assessee. Where there is complete transparency as to the assessee's intention not to own up the liability, it cannot any more remain open to the assessee to turn around and say that the debt still subsists. The totality of the assessee's conduct shows that the assessee itself has brought about the termination of the liability. The following facts are clear pointers:

1. the writing back of the liability to profits.

2. treating such amount written back as part of profit available for appropriation to the reserve forming part of the capital whereby the assessee acquired the vestitive right in the amount.

3. there has not been a single instance where such unclaimed amounts though written back year after year were eventually disbursed either on demand or on its own motion.

9. The recurrence of the event of writing back over years has to be looked at not from a doctrinaire or dogmatic view when the question is whether such contingency results in augmentation of profit due to be taxed. The decision of the Supreme Court in Bombay Dyeing and Mfg. Co. Ltd.'s case, AIR 1958 SC 328, was altogether in a different context. There the issue was whether, even after limitation and consequential unenforceability of the debt, the debtor is to transfer the amount to a fund or funds as required by a statute, precisely the Bombay Labour Welfare Fund. Therefore, in that case, the debt was alive by the obligation of law enjoined by special statute for the purpose of that statute.

10. The observation of the Supreme Court that the debt is unenforceable rather advances the Revenue's case. When the debt is unenforceable and ceases to be owned up by the debtor, nothing remains of the debt and its writing back to the profit and loss account gives finality to its extinction. The decisions of this court as relied upon were not on the same facts to be matched with the present one. Moreover, this court has also earlier held that bilateralness of the act of extinguishing the claim may be inferred from the conduct of the debtor and the creditor. It need not be a positive act or positive conduct. It can be inferred from the surrounding circumstances that there has been cessation or remission of the liability of the assessee. That was the case of Commissioner Of Income-Tax v. Agarpara Co. Ltd., [1986] 158 ITR 78 (Cal). It was a case where bonus remained unclaimed and unpaid and was eventually written back. This court observed as follows (at page 94):

“The assessee has provided for bonus for its employees but a part of the bonus so provided for three several years remained unclaimed. Once bonus has been offered by the employer, but remains undrawn, it cannot be said that the liability subsists even after the expiry of the time prescribed by the statute, particularly when there is no dispute pending regarding the payment of bonus. In the context of such facts and circumstances, it may be inferred that unclaimed or unpaid bonus is an excess of the requirements of the assessee and, therefore, to that extent, in any event, the liability has ceased. Assuming that there can be a cessation only on bilateral act by both the creditor and debtor, such acts may be inferred from the conduct of the debtor and the creditor. It need not be a positive act or a positive conduct. It can be inferred from the surrounding circumstances that there has been a cessation or remission of the liability of the assessee. In this case, a portion of the bonus for several years remained undrawn by the employees for about 5-7 years. Bonus is payable in each year. In the absence of any dispute, it cannot be said that a liability to pay bonus not claimed by the employees subsists. The assessee has written back in the accounts the amount representing the unclaimed bonus. The assessee by its aforesaid act and conduct has declared that there is no liability in respect of that portion of the bonus not claimed by the employees. The persons who are entitled to claim such bonus, by not claiming it for years together, should be deemed to have abandoned their claims, if any. It is difficult to appreciate that when the bonus is paid annually, why such bonus, unless there is a dispute, should remain unclaimed by the concerned employees. The principle that a statute of limitation bars only the remedy but does not extinguish the debt may not strictly apply in income-tax proceedings in deciding whether there has been cessation or remission of a statutory liability.”

11. In our view, there cannot be a strait-jacket formula, irrespective of the facts and circumstances of each case, that unclaimed liabilities should not attract the provision of section 41(1) of the Act simply on the ground that the bar of limitation does not extinguish the debt and as such the assessee can write back such unclaimed debts as money available for use in any manner he may choose with immunity from taxation. As indicated earlier, if the legal remedy for recovery by the creditor is barred, the existence of the debt is merely theoretical where the creditor has not turned up for a good length of time and the conduct of the assessee also demonstrates that the creditor would not turn up with any claim. A barred debt cannot be any more treated as a debt where the assessee has unmistakably and unequivocally demonstrated his disinclination to liquidate such debt. The act of writing back is a clear indication as to the assessee's intention to disown obligation to pay. Following the decisions of this court in Commissioner Of Income-Tax v. Agarpara Co. Ltd., [1986] 158 ITR. 78, we hold that the unclaimed amounts written back and credited to the profit and loss account are properly taxable under section 41(1) of the Act as income arising from cessation or remission of liabilities.

12. For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of Revenue and against the assessee. There will be no order as to costs.

Shyamal Kumar Sen, J.:— I agree.