1. The assessee a limited company has filed this appeal and has raised a few issues. From amongst the issues, the claim relating to the disallowance of 1/5th out of car expenses for personal use by the Director and disallowance made under Section 37(3A) was not pressed during the course of hearing and accordingly these two grounds are treated as dismissed.
2. The assessee has raised the issue of treating the amount of Rs. 13,48,215 representing provision that was made towards interest on deposits received from public in the earlier years and written back by credit to the Profit & Loss A/c in the year as income under Section 41(1) of the Act. The brief facts in regard to this issue arises as a consequence of the note that was appended to the balance sheet by the auditor which read "excess provision write back includes Rs. 13,48,215 being the interest provided in the earlier years on public deposits although company's liability to pay interest still exists. In the view of the management, quantum of liability is still to be decided by the High Court". The Assessing Officer based on the note so appended by the auditor to the balance-sheet considered it as similar in nature to the bonus provided and written back. He had further impressed by the fact that the assessee credited the amount to the Profit & Loss A/c of the year and had initially offered it as income but subsequently withdrawn by the assessee, which act of withdrawal was treated as an afterthought. He was, therefore, convinced that such write-back of interest has to be taxed as income.
3. The CIT(A) in his order had summarised the submissions of the appellant. He observed that the results of the assessee-company was very poor and to improve the image of that company, to show some profit in the accounts, the company had sought to write back the provision that was made in the earlier years on the interest on the public deposits received by the company. The CIT(A) considering the observation of the auditors that in the view of the management, the quantum of liability was still to be decided by the High Court, made reference to the order of the High Court.
4. The unsecured creditors and the shareholders of the company and the Company Law Department filed a writ petition to the Delhi High Court.
This was so mooted by unsecured creditors and the shareholders of the company in view of the company's consistently not paying the interest on public deposits and related matters. Accordingly, a meeting was convened between the unsecured creditors, shareholders and the directors of the company and a scheme of compromise or arrangement was drafted. This scheme of compromise or arrangement was placed before the Delhi High Court for its sanction, which would be binding on the unsecured creditors, depositors of the company as well as the assessee-company itself. As per the scheme of compromise or arrangement which was approved by the Delhi High Court vide order of 5th December, 1979, the secured creditors and preferential creditors were not to be effected by the scheme. Insofar as the depositors are concerned, the Delhi High Court in its order in paragraphs 4, 5, 6 & 7 delineated the scheme of arrangement. For the sake of facility, the said direction of the High Court is reproduced below All depositors shall be paid in full the amount of interest on the principal sum of their loans/deposits/advances at the rate of long term SBI interest per cent per annum for the period from the date it is due and outstanding up to the effective date of the scheme in two instalments (1) 50 per cent of interest within 90 days from the effective date, (2) balance 50 per cent of the interest within 180 days from the effective date.
All depositors shall also be paid interest on principal sum of their loans/advances/deposits for the time being remaining unpaid at the rate of 12 per cent per annum from the effective date.
If the Court considers that the company is not capable of paying the interest at the rate as set out in above proposed substituted clauses 4 & 5, it may refix the rate at such amount as it deems fit.
All depositors and unsecured creditors will be paid in full the principal sum outstanding as due to them is six instalments spread over a period of five years as detailed hereunder :- (i) 5 per cent of the principal sum within six months from the effective date.
(ii) 10 per cent of the principal sum within one year from the effective date.
(iii) 15 per cent of the principal sum within two years from the effective date.
(iv) 20 per cent of the principal sum within three years from the effective date.
(v) 20 per cent of the principal sum within four years from the effective date.
(vi) 30 per cent of the principal sum within five years of the effective date.
5. The outstanding interest for the earlier years which was written back in the year is also reproduced for the sake of facility :-Asst. year Accounting year Amount in 6. The CIT(A) after considering the above and also the direction of the High Court that 50 per cent of the interest shall be paid within 90 days from the effective date and the remaining 50 per cent of the interest within 180 days from the effective date and that the depositors shall be paid interest on the principal sum which remained unpaid @ 12 per cent per annum from the effective date, which not having been paid was of the view that the assessee-company had desired modification of the arrangement as such. The CIT(A) made reference to the above scheme especially para 5 which contained the direction of the High Court that in case the company is not capable of paying the interest at the rate set out by them in paras 4 & 5, the rate may be re-fixed at such amount as the High Court felt proper. The CIT(A), therefore, came to the conclusion that this indicated that the order of the High Court to pay the interest at 12 per cent and also the interest that remained outstanding on the effective date was a mere proposal and therefore the quantification was still to be done by them and as such was a contingent liability, He, accordingly, came to the conclusion that the liability did not subsist in the year and he accordingly was of the opinion that the decision in the case of Bhagwat Prasad & Co. v.CIT [1975] 99 ITR 111 (All.) was applicable to the facts of the case.
He, however, observed "though the liability of the appellant may not have ceased to full extent and in any case it was not certain as to what was going to the ultimate liability of the appellant in view of Clause 6 of the compromise order. What actually was the liability of the appellant will be known only when the claims of the interest are enforced by the depositor and when the amount of interest was actually paid by the appellant". He was further of the view that the decision of the Allahabad High Court in Indian Motor Transport Co. v. CIT [1978] 114 ITR 677 was applicable to the facts of the case. He, accordingly, confirmed the order of the Assessing Officer in treating write back as deemed income under Section 41(1) of the Act.
7. On the above-mentioned facts, the assessee has come up in appeal before us and submitted that initially the creditors, depositors as well as the Company Law Department had filed suit for winding up of the company. Subsequently at the instance of the company at a meeting with the creditors, depositors and the Company Law Department and the shareholders, the proposal of compromise or arrangement was placed and in accordance with the provision contained under the Companies Act, the various parties felt compromise or arrangement was a very reasonable proposition. Accordingly, the compromise proposal was placed before the High Court and the suit for winding up got converted into a compromise or arrangement scheme. It was, accordingly, the Delhi High Court after examining the scheme pronounced its order, copy of which has been placed in the paper book at pages 23 to 26. He submitted that the date of the compromise decree of the Delhi High Court is of 5th December, 1979. He submitted that the various public deposits that was received by the company, interest as were governed by the Companies Act were agreed to be paid by the company to the various depositors. The entire scheme of public deposits was governed by the Company's Acceptance of Deposits Rules, 1975. The company was running into losses and was unable to meet its liability towards the interest on the public deposits it received. The company had been providing interest as per the terms of agreement at the time of receiving of deposits, which was as per the Rules of the Company's Acceptance of Deposits Rules, 1975, with which fact, the revenue is not in dispute. He submitted that the interest that was outstanding aggregating to Rs. 13,48,215 contained two components. One interest as was payable as per the Company's Acceptance Deposits Rules, 1975 till the effective date and the interest on the outstanding principal at the rate of 12 per cent from the effective date. He submitted that the compromise decree para 7 provided the manner of repayment of the principal in instalments. The company though could adhere to the instalment of repayment of the principal but could not discharge its liability towards interest. To the extent of principal sum which remained unpaid, in accordance with para 5 of the compromise decree, the company had provided interest at 12 per cent per annum in the earlier year and in this year too.
8. He submitted that insofar as the observations of the Delhi High Court in para 6 is concerned, it is not the case of the revenue that either the Company on its own motion or the depositors had moved to the High Court for re-fixation of the rate of interest. He submitted that the Delhi High Court had very categorically observed that the company has to discharge its liability towards interest on the funds of the depositors used by the assessee in its business. The depositors had only agreed for modification of the rate of interest and did not waive or remit any part of the interest in favour of the assessee. He submitted that in the absence of any waiver by the depositors in favour of the assessee-company, the liability insofar as the assessee-company is concerned, would continue to subsist. He submitted that in regard to the possible modification of the rate of interest in the subsequent year is concerned, it might lead to reduction in the payment of interest, the remission to the extent of reduction of rate of interest would arise at that point of time of reduction in the rate of interest.
He submitted that the Company was able to discharge its liability of interest in the subsequent years. He submitted that the Company wrote back the interest amount only to show a better picture of its balance-sheet and Profit & Loss A/c. This was the reason that a note explaining the action of write back was appended to the balance-sheet.
He submitted that reading the note as was appended by the auditors to the balance-sheet also goes to indicate that the liability to pay the interest subsist as on the balance-sheet. He submitted that in the absence of any evidence indicating that the depositors had remitted the interest in favour of the assessee, the liability cannot be said to have ceased and the mere write back of liability which has been so done to present a better picture, being in the nature of unilateral action does not result in any income much less the deemed income. He placed reliance on Tractor & Equipment Corporation Ltd. v. ITO [1984] 9 ITD 132 (Delhi), India Coffee & Tea Distributing Co. Ltd. v. IAC [1987] 23 ITD 479 (Bom.), CIT v. Sugauli Sugar Works (P.) Ltd. [1983] 140 ITR 286 (Cal.) at page 292, CIT v. Batliboi & Co. (P.) Ltd. [1984] 149 ITR 604, CIT v. Pre-Stressed Concrete Co. (S.I.) (P.) Ltd. [1986] 162 ITR 314 and CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 128.
9. Mrs. Surbahi Sinha, Senior Departmental Representative, vehemently supported the orders of the authorities below and placed reliance on Batliboi & Co. (P.) Ltd.'s case (supra), CIT v. Batliboi & Co. (P.] Ltd. [1989] 177 ITR 289, CIT v. Haryana Co-operative Sugar Mills Ltd. [1985] 154 ITR 751 (Punj. & Har.) and ITO v. Foremost Dairies Ltd. [1986] 18ITD 157 (Bom.).
10. Shri Syali, the counsel for the assessee in his re-direct submitted that the Bombay High Court in Chase Bright Steel Ltd. (No. l)'s case (supra) considered its earlier decision in Batliboi & Co. (P.) Ltd. 's case (supra) and had observed that that decision was not applicable for Section 41(1) of the Act.
11. We have given our very careful consideration to the rival submissions. The facts as are on record on which there is no dispute is that the liability of Rs. 13,48,215 has two components namely interest till the date of compromise order at the rate prescribed in the Company's Acceptance of Deposits Rules, 1975 and second at 12 per cent from the date of compromise order on the outstanding principal sum. The other factor which is not in dispute is that neither the depositors nor the Company on its own motion had approached the High Court in accordance with para 6 of the compromise order for refixing of the rate of interest. The other factor which is also not in dispute is that the depositors of their own motion had not waived the interest in favour of the assessee-company. The note as was appended by the auditors which has been reproduced earlier clearly indicates that the liability to pay the interest insofar as the Company is concerned till exist or continues notwithstanding the fact that the interest so provided in the earlier years was credited to the Profit & Loss A/c. The observations of the auditors in the note which read in the view of the management, quantum of liability still to be decided by the High Court, is only an indication of Company's financial position and its inability to pay the interest as directed by the High Court and the possibility of the company seeking for reflxing of the rate of interest. The compromise decree as was mooted and agreed upon by the Company, the secured and preferential creditors, depositors and the shareholders as well as the Company Law Department would be binding on all the parties to the compromise decree, especially when it has the stamp of judicial body like the Delhi High Court. The assessee-company which falls within the jurisdiction of the Delhi High Court has to necessarily comply with the direction of the Delhi High Court and can at best seek redressal if it finds that it is too much on the company insofar as the rate of interest is concerned. Thus at best, the only possible way of reducing the liability, is with reference to the rate of interest and not with reference to the liability as such. The liability remains and would continue to remain fastened on the company so long as the company exist, unless the depositors forego their interest, which is an act of remission to be performed Since the depositors have not performed the act of remission in favour of the assessee-company in the light of the High Court compromise order, the liability continues to subsist.
12. The write back by the assessee to the credit of Profit & Loss A/c as stated by it is for showing a better picture to the public. The mere act of passing of entries in the books of accounts from liability to write back does not change the character of the liability as such unless there are extraneous circumstanced such as remission in favour of the assessee. By passage of time, the character of liability would not change at the instance of the assessee-company alone. The liability to pay the interest is a contractual liability which was initially so fastened on the company in view of the Company's Acceptance of Deposits Rules, 1975. Since the company was unable to pay the interest at the rates specified in those rules, the compromise decree was sought and the depositors had agreed for reduced rate of interest. The rate of interest so determined by the High Court of 1 2 pel cent: is payable on the outstanding principal sum on the effective date reduced by repayment of principal sum in various instalments The rate of interest till the compromise order is governed by the provision of Company's Acceptance of Deposits Rules, 1975.
13. Section 41(1) of the Act requires satisfaction of the two conditions namely the amounts must have been allowed as a deduction in some earlier years and that during the assessment year, the assessee must have received some benefits by way of remission or cessation of liability. Insofar as the first condition is concerned, the assessee was allowed deduction in the earlier years when it provided the interest as per the compromise decree order of the Delhi High Court.
Insofar as the second condition of Section 41(1) of the Act is concerned, there is no evidence whatsoever that the depositors have remitted in favour of the assessee's interest indicating receipt of any benefit by the assessee, thus relinquishing the liability. The write back which is a unilateral action, though may give rise to a suspicion of a possible cessation of liability, could not be termed as equivalent to cessation of liability because it has to necessarily be preceded by the Act of remission by the depositors. There being no such action by the depositors waiving the interest, the amount of write back of Rs. 13,48,215 could not be treated as income under Section 41(1) of the Act. We, accordingly, delete the inclusion as income.
14. The various case laws cited by the Department are all with reference to a situation or circumstances where it indicated remission of cessation of liability. In the instant case as observed earlier the depositors and others had initially moved for winding up of the company, which was subsequently in a meeting of all those parties was modified to a compromise decree whereby the depositors had agreed for reduction in the rate of interest. Subsequent to the compromise decree order, the depositors had not taken up any action for winding up of the company or that the Company also did not on its own motion requested for modification in the compromise order. Therefore, the first step in treating any amount of liability as having ceased namely remission in favour of the assessee being absent the case laws relied upon is of no assistance to the revenue. The compromise decree which is binding on the assessee as well as the depositors both of them having jointly mooted it and agreed to be bound by it which was so ordered by the High Court having not been modified the liability continues to subsist insofar as the company is concerned and right to recover continues with the depositors.
15. Related to the above issue is the claim of provision of interest on the public deposits of Rs. 80,811 for the current year which was not so allowed on the basis that it was not so charged to the accounts. The facts are the same as discussed earlier and since it is a contractual liability and also bears the authorities of the High Court and the assessee having following the mercantile system of accounting despite the fact that the amount is not charged to the accounts in view of the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 the liability has arisen in the year and has to be necessarily allowed as a deduction to the assessee. We hold accordingly.
16. The assessee is aggrieved by the disallowance of Rs. 41,192 by applying the provisions of Section 40A(3) of the Act. He submitted that the expenses that have been sought to be disallowed is in regard to the various expenses on travelling incurred by the staff of the assessee-corapany. Shri Syali submitted that the staff when it had proceeded on the Company's work to various places is provided with advances. On return, the staff submit their travelling bills and also vouchers in regard to such other expenses incurred by them in connection with the company's work. These bills are reimbursed in cash.
He submitted that the authorities consolidated all the bills of various days as incurred by the employees and since they were paid by the company in one lump sum, treated it as in excess of Rs. 2,500 in cash.
He submitted that the expenses as incurred by the employees of the assessee as agents of the company are on day-to-day basis and the expenses as paid by them in cash on individual items, which being less than Rs. 2,500, has to be taken on that basis and the entire expenditure needs to be allowed. The D.R. placed reliance on the orders.
17. We have given our very careful consideration to the rival submissions. We are of view that there is considerable merit in the arguments advanced by the counsel for the assessee. The employees when sent on company's work to various places, are authorised to carry certain functions for and on behalf of the company, indicating that they are acting as agents of the company. While performing their duties at various places other than their normal place of work, the expenses as incurred by them on each of the individual items like postage, telephone, telegram, stationery and such other items are all independent and individual items which cannot be clubbed together. It is not the same thing as the supplier breaking-up his bills into separate invoices of Rs. 2,500 or less are the same for a bill exceeding Rs. 2,500 spliting into two separate payments. Section 40A(3) would get attracted at the point of time when the expenses are incurred with by the company or by its agents. The agents here in the instant case are the employees and since the individual items which are incurred on a day-to-day basis and when required especially when the employees do not have any bank account facility in those places would be squarely covered by the exemption of Rule 6DD(j) of the Act. The reimbursement is not the same as incurring of the expenses, as the reimbursement itself suggest that expenses have already been incurred.
We, accordingly, delete the addition of Rs. 41,192.
18. The assessee is aggrieved by non-allowing of deduction of sales tax which remained outstanding on 30th June, 1984 at Rs. 1,78,025 by applying the provision of Section 43B of the Act. In view of the jurisdictional High Court decision in Sanght Motors v. Union of India [1991] 187 ITR 703 and Escorts Ltd. v. Union of India [1991] 189 ITR 81, we have to uphold the disallowance. We only direct the Assessing Officer to allow deduction of the amount in the year of actual payment.