B.P. Saraf, C.J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961 (the 'Act'), made at the instance of the Revenue, the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (the 'Tribunal'), has referred the following question of law to this court for opinion :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that no part of the aggregate sum of Rs. 41,453 is chargeable to tax under Section 41(1) of the Income-tax Act ?'
2. This reference pertains to the assessment year 1964-65. The controversy is about the inclusion of a sum of Rs. 41,453 in the taxable income of the assessee as 'profits chargeable to tax' under Section 41(l)(a) of the Act. The material facts giving rise to this controversy, briefly stated, are as follows. In the course of the assessment of the assessee for the assessment year 1964-65, the Income-tax Officer observed that a sum of Rs. 41,453, representing certain balances in respect of which allowance or deduction had been made in the assessments of the assessee in the past, had been written off by the assessee during the relevant previous year and credit given to the partners in their profit sharing ratio. He was of the opinion that it was a case of remission of liability and hence that amount was chargeable to income-tax under Section 41(l)(a) of the Act. He, accordingly, included the sum of Rs. 41,453 in the taxable income of the assessee under the head 'Profits and gains of business'. The assessee appealed to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner observed that the ground of appeal challenging the inclusion of the above amount in the taxable income of the assessee was not pressed. He, however, rejected the claim of the assessee in this regard on the merits also. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal found that the Appellate Assistant Commissioner had not given any reason for holding that this amount was taxable under Section 41(1) of the Act. The matter was, therefore, remitted to the Appellate Assistant Commissioner for re-adjudicating this claim of the assessee after hearing' both the parties. The Appellate Assistant Commissioner, on hearing both the parties, observed that certain outstanding credit balances, in all amounting to R. 41,453, appearing in the accounts of the customers, employees, dealers and sub-contractors had been written off by the assessee in the previous year relevant to the assessment year 1964-65 and transferred to its profit and loss account and apportioned amongst its partners in their respective-pro fit ratio. The Appellate Assistant Commissioner also observedthat there was no dispute about the fact that the deduction had been made in the assessments for earlier assessment years in respect of the amounts represented by the credit balances written off by the assessee during the relevant previous year and transferred to its profit and loss account. The Appellate Assistant Commissioner was, therefore, of the opinion that it was a clear case where the assessee had obtained benefit in respect of trading liability to the extent of Rs. 41,453 by way of remission of trading liability. The assessee appealed to the Tribunal. The Tribunal held that despite the fact that trading liability to the tune of Rs. 41,453 had been written off by the assessee and the amount transferred to its profit and loss account and apportioned amongst its partners in their profit-sharing ratio, no material was brought on record by the Revenue to establish that there was remission or cessation of the liability. While doing so, the Tribunal relied on the decision of the Bombay High Court in J. K. Chemicals Ltd. v. CIT : [1966]62ITR34(Bom) .
3. We have heard Mr. Anil Bhan, learned counsel for the Revenue, who submitted that the amount of Rs. 41,453 representing the unclaimed balances standing to the credit of various parties having been transferred by the assessee itself to its profit and loss account, it was clearly liable to be included in the taxable-income of the assessee under Section 41(l)(a) of the Act. He submitted that the fact that the assessee himself has transferred the amounts to its profit and loss account itself was enough evidence of remission or cessation of liability to bring the case within the purview of Section 41(l)(a) of the Act. Reliance was placed in support of this contention on the decision of the Supreme Court in CIT v. T. V. Sundaram lyen-gar and Sons Ltd. : [1996]222ITR344(SC) . Learned counsel laid great emphasis on the following passage in the above decision (page 353) :
'If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus.'
4. He also relied on the following passage appearing in the said judgment (page 353) :
'In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assesseeitself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J. pointed out that what the asses-see did was the commonsense way of dealing with the amounts.'
5. Reliance was also placed on the decision of the Court of Appeal in England in Morley (H. M. Inspector of Taxes) v. Tattersall : [1939]7ITR316(Cal) which has also been referred to by the Supreme Court in CIT v. T. V. Sun-daram tyengar and Sons Ltd. : [1996]222ITR344(SC) . Great stress was laid on the following passage from the said judgment which is quoted in the above decision of the Supreme Court (page 352) :
'The true accountancy view would, I think, demand that these sums should be treated as paid into a suspense account, and should so appear in the balance-sheet. The surpluses should not be brought into the annual trading account as a receipt at the time they were received. Only time will show what their ultimate fate and character will be. After three years that fate is such, as to one class of surplus, that in so far as the suspense account has not been reduced by payments to clients, that part of it which is remaining becomes, by operation of law, a receipt of the company, and ought to be transferred from the suspense account and appear in the profit and loss account for that year as a receipt and profit. That is what it in fact is. In that year Jays become the richer by the amount which automatically becomes theirs, and that asset arises out of an ordinary trade transaction. It seems to me to be the commonsense way of dealing with these matters . . .'
6. Our attention was also drawn to the following observations of the Supreme Court based on the ratio of the above decision (page 353) :
'If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus.'
7. Learned counsel submitted that the ratio of the above decision squarely applied to the present case.
8. When the attention of learned counsel was drawn by the court to (lie later decision of the Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) , wherein the Supreme Court has categorically held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not entitle the Department to say that Section 41(1) of the Act would apply, he fairly stated that he was not aware of theabove decision and took time to peruse the same and make further submissions in this regard. The matter was adjourned accordingly.
9. The matter is on board today for further hearing. Mr. Anil Bhan, learned counsel for the Revenue, fairly conceded that in CIT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) , the Supreme Court has held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not entitle the Department to say that Section 41(1) of the Act would apply and the amount would be taxable income of the assessee. He, however, contended that the earlier decision of the Supreme Court in CIT v. T. V. Sundaram lyengar and Sons Ltd. : [1996]222ITR344(SC) should be followed in view of the fact that it was a decision of a larger Bench comprising three-judges whereas the later decision is a decision of a Bench comprising two judges. He submitted that, in any view of the matter, the later decision of the Supreme Court is per incuriam inasmuch as the earlier decision of the larger Bench of the Supreme Court was not placed before the court and this decision has been rendered without taking note of the law laid down in that case.
10. We have carefully considered the submissions of learned counsel and perused both the decisions of the Supreme Court. On a careful reading of the same, we do not find that there is any inconsistency between the two decisions of the Supreme Court. We also do not find any merit in the submission of learned counsel that the decision in CIT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) is per incuriam. The facts of the two cases are completely different.
11. The facts of the present case are identical to those of CIT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) . In that case also in the previous year relevant to the assessment year 1965-66, the assessee transferred a sum of Rs. 3,45,000 out of the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The Income-tax Officer found that an amount of Rs. 1,29,000 was with reference to deposits and advances which had been paid back and he included a sum of Rs. 2,56,529 under Section 41 of the Act in the total income of the assessee. The appeal of the assessee was dismissed by the Appellate Assistant Commissioner. However, the Income-tax Appellate Tribunal accepted the contention of the assessee and held that its unilateral entry in the accounts transferring the amount to the capital reserve account could not have brought the matter within the scope of Section 41(1) of the Income-tax Act and consequently held in favour of the assessee. The decision of the Tribunal was challenged by the Revenue before the High Court. The High Court approved the decision of the Tribunal and said that a unilateral act on the part of the debtor would not bring about the cessation of his liability. Against the decision of the High Court, the Revenue went on appeal to the Supreme Court. The Supreme Court approved the decision of the High Court and held that a mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. The Supreme Court also said that such an entry by itself would not confer any benefit on the debtor as contemplated by Section 41(1) of the Act. The Supreme Court categorically held (at page 522) :
'Just because an assessee makes an entry in his books of account unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone, but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after the expiry of the normal period of limitation as provided in the Limitation Act.' .
12. The Supreme Court also quoted with approval the following passage from the decision of the Bombay High Court in J. K. Chemicals Ltd. v. CIT : [1966]62ITR34(Bom) :
'The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt--the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability.'
13. The above decision of the Supreme Court is a clear authority for the proposition that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. The Supreme Court has held that even the expiry of the period of limitation prescribed by the Limitation Act would not extinguish the debt ; but it would only prevent the creditor from enforcing the debt. The Supreme Court has held in categorical terms that the mere fact that the assessee has made an entry of transfer in his accounts will not enable the Department to say that Section 41(1) of the Act would apply and the amount should be included in the total income of the assessee. The above decision applies proprio vigore tothe present case and learned counsel for the Revenue also does not dispute this fact.
14. We have also considered the submission of learned counsel for the Revenue that the above decision is per incuriam, the same being in conflict with the earlier decision of a larger Bench of three judges of the Supreme Court in CITv. T. V. Sundaram lyengar and Sons Ltd. : [1996]222ITR344(SC) . We find that the controversy in that case was totally different. In that case though the money was received by the assessee in the course of the carrying on of his business, it was treated as deposit and was of capital nature at the point of time it was received. It is by efflux of time that the money became the assessee's own money. It is in these circumstances that the Supreme Court observed (at page 353) :
'Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus.'
15. It is in the peculiar facts and circumstances of the above case that the Supreme Court held (page 353) :
'Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts.'
16. We do not find any conflict between the decisions of the Supreme Court in CIT v. T. V. Sundaram lyengar and Sons Ltd. : [1996]222ITR344(SC) and CAT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) . The contention of learned counsel for the Revenue that the decision in CIT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) is per incuriam is thus wholly devoid of any merit and the same is, therefore, rejected.
17. It may, however, be pertinent at this stage to mention that the legal position in regard to remission or cessation of liability emerging from the decision of the Supreme Court set out above has undergone a change by the insertion of the following Explanation to Section 41(1) of the Act by the Finance (No. 2) Act, 1996, with effect from April 1, 1997 :
'Explanation--For the purposes of this sub-section, the expression 'loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission orcessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that subsection by way of writing off such liability in his accounts.'
(emphasis1 supplied)
18. The effect of the insertion of the above Explanation is that for the assessment year 1997-98 and subsequent years, the expression 'loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof' in Section 41(1) of the Act would include the remission or cessation of any liability by any unilateral act of the asses-see. In view of the above amendment, the decision of the Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. : [1999]236ITR518(SC) would not be applicable to assessment for the assessment year 1997-98 and subsequent years.
19. In view of the foregoing discussion, we are of the clear opinion that, on the facts and in the circumstances of the case, the Tribunal was right in holding that no part of the sum of Rs. 41,453 was chargeable to tax under Section 41(l)(a) of the Income-tax Act, 1961.
20. The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
21. The reference is disposed of accordingly with no order as to costs.