Commissioner of Income-tax v. Chaudhary Cotton Ginning & Pressing Factory

JUDGMENT

N.K. Sud, J. - This order will dispose of Income-tax Reference Nos. 120 and 121 of 1982, arising out of the order of the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh ('the Tribunal'), dated March 23, 1982, relating to the assessment year 1977-78.

2. In Income-tax Reference No. 120 of 1982, the following question of law has been referred for the opinion of this court, at the instance of the Revenue :

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal erred in law in allowing the assessee's claim that the unabsorbed depreciation of Rs. 20,392 brought forward from the assessment year 1976-77 should revert back in the case of the firm and it should be set off against the income of the firm in view of the provisions of section 32(2) of the Income-tax Act, 1961 ?"

3. In Income-tax Reference No. 121 of 1982, at the instance of the assessee, the following question of law has been formulated :

"Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the amount of Rs. 5,29,332 was liable to tax as deemed income under sub-section (1) of section 41 of the Income-tax Act, 1961 ?"

4. The assessee is having a factory for cotton ginning and pressing. During the accounting period relevant to the assessment year 1977-78, it owed Rs. 11,61,768.06 to 52 creditors. These amounts represented the price of goods purchased by the assessee in the accounting period relevant to the assessment year 1976-77. The purchase price of the goods had entered into the determination of net commercial results as per profit and loss account and was taken into consideration by the Income-tax Officer, B-Ward, Sirsa, who had framed the assessment for the assessment year 1976-77 vide order dated January 23, 1979, determining the net loss of Rs. 5,29,332 before allowance of depreciation.

5. During the course of assessment proceedings for the assessment year 1977-78, which is the year under consideration, the Income-tax Officer found that the said 52 creditors were paid off by the assessee only to the extent of 50 per cent due to each of them. The balance 50 per cent amount of Rs. 5,80,884 was remitted by the creditors in favour of the assessee. After giving an opportunity to the assessee of being heard, the Income-tax Officer treated the amount of Rs. 5,80,884 as income representing remission or cessation of liability within the meaning of section 41(1) of the Income-tax Act, 1961 ('the Act').

6. For the assessment year 1976-77, there was an unabsorbed depreciation of Rs. 20,392 determined by the Income-tax Officer. During the course of assessment proceedings for the year under consideration, the assessee made a claim before the Income-tax Officer that the said amount of Rs. 20,392 be allowed in the computation of the total income for the assessment year 1977-78. This contention was rejected by the Income-tax Officer.

7. The assessee took the matter in appeal before the Commissioner of Income-tax (Appeals), who upheld the findings of the Income-tax Officer on both the issues.

8. The assessee preferred a second appeal before the Tribunal. The Tribunal allowed the assessee's claim for set off of unabsorbed depreciation of Rs. 20,392 pertaining to the assessment year 1976-77. It was held that the assessee being a registered firm, the amount of depreciation for the assessment year 1976-77 not wholly set off in the respective assessments of the partners, has to be brought back for computation of total income of the firm for the succeeding years under section 32(2) of the Act. The Tribunal, however, upheld the findings of the authorities below in treating the amount of Rs. 5,29,332 as income under section 41(1) of the Act.

9. The assessee as well as the Revenue filed reference applications under section 256(1) of the Act, requiring the Tribunal to refer the questions decided against them for the opinion of this court.

In the above factual background, we now proceed to answer the questions referred for our opinion.

10. As far as the question about allowance of unabsorbed depreciation in Income-tax Reference No. 120 of 1982 is concerned, learned counsel for the Revenue fairly points out that the issue stands settled against the Revenue in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 5121 (SC) .

11. Accordingly, the question is answered in the negative, i.e., in favour of the assessee and against the Revenue.

12. As far as the question in Income-tax Reference No. 121 of 1982 is concerned, the facts are not in dispute. The assessment for the year 1976-77 had been made vide order dated January 23, 1979, at a net loss of Rs. 5,29,332 before allowance of depreciation. This was based upon the profit and loss account in which deduction on account of purchases included the purchases of Rs. 11,61,768.06 made from the 52 creditors. The loss was duly allocated to the partners to be considered in their personal assessments. Since the payments of Rs. 11,61,768.06 had not been made to the 52 creditors during the accounting period relevant to the assessment year 1976-77, the same was shown as trading liability in the balance-sheet for that year. It is not in dispute that in the succeeding year, i.e., the assessment year 1977-78, the said 52 creditors accepted 50 per cent of the amount due to them and remitted the balance amount of Rs. 5,80,884 in favour of the assessee. The assessee does not dispute that the remission of trading liability is deemed to be income under section 41(1) of the Act. However, the case of the assessee is that the remitted amount can only be treated as income under section 41(1) of the Act if the allowance or deduction has been made in the assessment for earlier years in respect of such expenditure or trading liability incurred by the assessee. According to the assessee, in the assessment year 1976-77, when the benefit of trading liability of Rs. 11,61,768.06 had been claimed, the assessment had resulted in a net loss of Rs. 5,29,332. Thus, it is claimed that out of the total liability of Rs. 11,61,768.06, deduction to the extent of Rs. 5,29,332 could not be said to have been allowed in the assessment year 1976-77. In other words, it is claimed that the allowance from deduction with regard to the expenditure, loss or trading liability has to be against a positive income in the process of assessment. It is only then that any remission such as expenditure, loss or trading liability or part thereof in any subsequent year can be treated as income under section 41(1) of the Act.

13. In order to appreciate the contention of the assessee, reference may be made to the provisions of section 41(1) of the Act, which reads as under:

"Profits chargeable to tax.—(1) 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."

14. A bare perusal of the aforesaid provision shows that the interpretation sought to be placed by the assessee is misconceived. As per this section, a benefit obtained by an assessee in respect of any loss, expenditure or trading liability by way of remission or cessation thereof, is deemed to be profits and gains of business or profession, if it is shown that such loss, expenditure or trading liability was allowed as a deduction in the assessment for any year. Thus, all that this provision requires is that such an expenditure had been allowed as a deduction while making assessment for any earlier year. There is no further requirement that the assessment must result in a positive income. It is not in dispute that the deduction on account of trading liability of Rs. 11,61,768.06 had duly been allowed while framing the assessment for the assessment year 1976-77. Thus, the requirement of section 41(1) stands fulfilled and remission of any part of the said trading liability in any subsequent year has to be treated as profits and gains of business or profession as done by the Assessing Officer. We are, therefore, satisfied that the Tribunal was right in holding that the remission of Rs. 5,80,884 during the assessment year 1977-78 out of the total amount of Rs. 11,61,768.06 allowed as a deduction in the assessment year 1976-77 was squarely hit by the provisions of section 41(1) of the Act and had rightly been brought to tax.

Accordingly, we answer the question referred by the Tribunal in the negative, i.e., in favour of the Revenue and against the assessee.