DR. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the Income-tax Appellate Tribunal, Bombay Bench 'A', Bombay, has referred the following questions of law to this court for opinion :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 40A(8) of the Income-tax Act, 1961, were not applicable in respect of interest payments of Rs. 1,73,002, Rs. 2,87,000 and Rs. 1,49,127 on the ground that the interest payments were not interest payments on deposits received
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that an amount of Rs. 8,56,440 credited to the capital reserve account by the assessee-company in respect of the provisions for contractual liability taken over by the assessee-company was not chargeable to tax under section 41(1), 176(3A) or 28(iv) of the Income-tax Act, 1961 ?'
2. The assessee is a private limited company. It was incorporated in the year 1973. Its business is that of manufacture of pharmaceuticals. Its accounts are closed every year on 31st December. This reference pertains to the assessment year 1977-78, the corresponding previous year being calendar year 1976. The assessee became a partner in the firm of Messrs. Wockardt Pharmaceuticals on and from January 1, 1975. On December 31, 1975, by an agreement between the partners, all the other partners of the said firm retired and the assessee became the sole proprietor of the business carried on by it. Under the said agreement, the assessee-company took over the partnership business as a running concern on and from January 1, 1976. In terms of the agreement, all liabilities of the said firm including liability on account of all deposits received by the erstwhile firm as well as the amounts standing to the credit of the outgoing partners in their capital accounts (both fixed capital account and current account), were taken over by the assessee. In terms of the dissolution deed, some shares of the assessee-company were allotted to the outgoing partners and on the balance amounts standing to the credit of the partners, the assessee paid interest. Some of these partners, in the meantime had also become directors of the assessee-company and others were shareholders. In the course of its assessment for the assessment year 1976-77 (sic), the assessee-company claimed that out of the total interest paid by it, a sum of Rs. 1,73,002 was not on deposits received by it but represented interest on the liabilities of the old firm taken over with effect from January 1, 1976, on its becoming the sole proprietor of the business of the dissolved firm. The claim of the assessee was negatived by the authorities below. However, on appeal, the Income-tax Appellate Tribunal ('the Tribunal') accepted the contention of the assessee and held that payment of interest amounting to Rs. 1,73,002 on the liabilities of the business of the erstwhile firm which had been taken over by the assessee, could not be held to be 'expenditure by way of interest in respect of deposits received by it' and hence, section 40A(8) of the Act was not applicable. According to the Tribunal, this expenditure was on account of interest in respect of legal obligations to pay certain amounts to the partners concerned in terms of the agreement. From the above order of the Tribunal, the Revenue sought for reference under section 256(1) of the Act. The Tribunal has accordingly referred to us question No. 1.
3. The facts relating to the second question are as follows : The Income-tax Officer included in the income of the assessee a sum of Rs. 8,56,440 under section 41(1) of the Act. This amount is made of two sums : (i) Rs. 8,43,460, being the provision for excise duty in respect of which a demand had been raised by the excise authorities against the predecessor of the assessee. The above provision had been made by the said firm in its books of account and deduction was claimed and allowed in respect thereof in the computation of its income of the relevant assessment year. The liability in respect thereof appeared in the balance-sheet of the said firm as on December 31, 1975, under the head 'Current liabilities and provisions'. The above provision had been taken over by the assessee-company on January 1, 1976. This liability became unenforceable against the assessee-company during the calendar year 1976 relevant to the assessment year under consideration by virtue of a decision of the High Court rendered during the said year; and (ii) Rs. 23,980 representing the amount due by the erstwhile firm to Wockhardt Chemicals Works Pvt. Ltd. on account of unpaid rent, the liability in respect of which appeared in the balance-sheet of the said firm as on December 31, 1975. In terms of a consent decree, Worli Chemicals Works Pvt. Ltd. (Wockhardt) agreed not to enforce its demand for Rs. 23,980 against the assessee-company.
4. Both the above provisions and liability were included in the liabilities taken over by the assessee-company. The liabilities in respect of these two amounts thus having ceased, the assessee-company transferred the above amounts, in all amounting to Rs. 8,56,440, initially to the profit and loss account and thereafter to its capital reserve account. The Income-tax Officer applied the provisions of section 41(1) of the Act and included the said amounts in the income of the assessee. This order was confirmed on appeal. However, on further appeal, the Income-tax Appellate Tribunal ('the Tribunal') reversed the above finding of the authorities below and held that these amounts were not chargeable to tax in the hands of the assessee-company under section 41(1) of the Act. Aggrieved by the above decision, the Revenue sought for reference of the question of law arising therefrom to this court which the Tribunal did by referring to us question No. 2.
5. We have heard at length Mr. G. S. Jetley, learned counsel for the Revenue. So far as the controversy in the first question is concerned, it is clear from the facts of the case that after the business of the erstwhile partnership firm was taken over by the assessee-company as a running concern with all its assets and liabilities including the amounts standing to the credit of the outgoing partners of the said firm, the amounts belonging to the partners no more retained the character of 'capital' but assumed the character of debt due. The former partners became the creditors of the assessee-company in respect of the amounts in question. The assessee-company also paid interest on the said amounts.
6. Section 40A(8) of the Act refers to 'expenditure by way of interest in respect of any deposit received by a company' and provides for disallowance of 15 per cent. of such interest. 'Deposit' has been defined in Explanation (b) to mean any deposit of money with the company, including any money borrowed by it. The only exclusion is on account of amounts received by the company which fall under any of the clauses thereof. The admitted position in the present case is that these amounts do not fall in any of the exclusionary clauses. In such a situation, the amounts in question, lying in deposit with the assessee-company on which interest had been paid by it, evidently fall within the meaning of section 40A(8) and hence interest paid thereon would fall within the purview of section 40A(8) of the Act. The method or manner in which the amounts came to be received by the assessee, in our opinion, has no relevance for the purpose of deciding whether the particular amounts belonging to others and lying with the assessee on which interest was also paid by the assessee, would fall within the expression 'deposit'. We have dealt with this aspect in Income-tax Reference No. 57 of 1984 decided on November 30, 1994 CIT v. Jhaveri Bros. and Co. P. Ltd. : [1995]214ITR374(Bom) , wherein also we have taken an identical view in the matter.
7. For the reasons set out above, the Tribunal was not justified in holding that the interest payments in question were not in respect of any deposit received by the assessee but were in respect of obligations which the assessee had taken over from the firm as a going concern while taking over its business. The obligation to pay the money to the partners to whom it belonged is always there in all such cases. We fail to understand why such obligations would not qualify as 'deposits' when they have all the ingredients of a deposit. In the premises, we answer question No. 1 in the negative and in favour of the Revenue.
8. So far as the second question is concerned, the admitted position is that the partnership-firm, the business of which had been taken over by the assessee, had claimed deduction in respect of the two amounts in question in the computation of its income as a trading liability which was allowed by the Income-tax Officer. The amounts appeared in its books of account as a trading liability. All liabilities, including the liability in respect of the amounts in question, had been taken over by the assessee-company. There is no controversy about the fact that during the previous year relevant to the assessment year under consideration, by virtue of the decision of the High Court, the liability of the assessee-company to pay excise duty ceased to exist and so far as the liability to pay the sum of Rs. 23,980 to Wockardt Chemicals Works Pvt. Ltd. is concerned, again the admitted factual position is that this liability came to an end during the relevant previous year as a result of the consent decree passed by the court. That being so, in our opinion, section 41(1) at the Act is clearly attracted. Section 41(1) provides :
'41. 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.'
9. In the instant case, from the facts set out above, it is obvious that all the conditions of section 41(1) of the Act were fulfilled in respect of the trading liabilities in question and the assessee-company obtained a benefit in respect thereof by way of cessation/remission of the same. The value of such benefit so accruing to him, therefore, has to be deemed to be profits and gains of the assessee and chargeable to income-tax as his income of the assessment year under consideration.
10. The only question that, possibly, could have arisen in this case is whether the deduction in respect of such expenditure or trading liability having been made in the assessment of the erstwhile partnership firm, provisions of section 41(1) would be applicable to the assessee-company which took over the business of the said firm as a going concern. That question, however, has become academic in view of the specific provision contained in sub-section (3A) of section 176 of the Act, which was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. It reads :
'(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.'
11. This sub-section thus provides that any sum received after discontinuance of a business is to be treated as income of the recipient in the year of receipt, as if it would have been included in the total income of the person who carried on the business, had it been received before such discontinuance.
12. In the premises, we are of the clear opinion that the Tribunal was not right in holding that section 41(1) was not applicable to the amounts in question. Hence, the second question is also answered in the negative in favour of the Revenue.
13. In the result, both the question are answered in the negative and in favour of the Revenue.
14. In the facts and circumstances of the case, there shall be no order as to costs.