Commissioner of Income-tax Vs. Ravindra C. Gajiwala - Court Judgment

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direct taxation - deemed income - sections 28, 41 and 41 (1) of income tax act, 1961 - as per section 41 (1) where allowance made in respect of loss or trading liability incurred by assessee and he recovers benefit then amount deemed as profit - when allowance made for loss which is reduced then can be taken for computation of income arising from business. head note: income tax business income--remission of a debt--kasar allowed by creditors of assessee--tribunal holding that same can be dealt with only under s. 41(1)--improper--it can be considered under the relevant provisions of the act including ss. 41(1) and s. 28. held : the tribunal has proceeded on the basis that the kasar was the income of the assessee taking a further view that the above said kasar amount can be dealt with only under the provisions contained under s. 41(1). the tribunal was not justified in taking such a broad view. the above said amount whether it may be called a kasar or a remission of a 'debt' may have to be taken into consideration, while computing the business income of the assessee under the relevant provisions of the act of 1961, including the provisions contained under s. 28 thereof. the tribunal was not justified in taking the view that the above said amount could have been taken into consideration only under the provisions of s. 41(1). application : also to current assessment years. income tax act 1961 s.41(1) income tax act 1961 s.28 - - it was also the view take by the income-tax officer that, even if the assessee had lost a certain amount from their creditors, then also the same amount can be taken as bad debts in the subsequent years and that the abovesaid transactions in which the kasar was allowed. in view of this position, according to the tribunal, the question of the adjustment of bad debts, etc. thus the provisions contained under section 41(1) of the act of 1961 appear to be clearly laying down a principle that, wen an allowance or deduction has been made in the assessment for any year in respect of some loss, expenditure or trading liability but, later on, when the extent of the same is reduced, it can be taken into consideration for the computation of the income arising from the business. 10 lakhs to enable the assessee to obtain a loan of a like amount from the indian bank. it is in the background of these facts that it was held that the responded had entered into a contract not only to purchase the shares but the arrears of the dividends also and that clearly showed that the price paid by him was not only for the shares but was also for the sum of rs. we would like to point out that the question referred to us does not call upon us to express any opinion regarding the relevant provisions under which the abovesaid kasar amount could have been considered for the purpose of tax or could have been taxed. none the less, it appears very clearly that the abovesaid amount of kasar or remission has been taken as income only and, therefore, the tribunal has taken the view that the relevant provision which would be attracted would be section 41(1) of the act of 1961 only.s.d. dave, j. 1. the income-tax appellate tribunal, ahmedabad, bench 'a', has referred the undermentioned question for our opinion, exercising the jurisdiction under section 256(1) of the income-tax act, 1961 : 'whether, on the facts and circumstances of the case, the appellate tribunal was right in law in holding that the remission of trading liability obtained by way of kasar by the assessee can be taxed only if it falls within the ambit of the provisions of section 41(1) of the income-tax act, 1961 ?' 2. the assessee happens to be a firm and a dealer. the assessment year is 1971-72, the samvat year being 2026, and the relevant period will be between november 10, 1969, and september 30, 1970. the assessee-firm was a dealer in cloth and used to sell and purchase the goods through certain brokers, including a broker known as messrs. jagdish hiralal. through the said broker, the assessee-firm has supplied goods to certain dealers, namely, vijay fabrics and mahesh textiles. they had purchased the goods from subhash and co., and the broker was entrusted with a certain amount. on or about may 13, 1970, the broker had absconded without leaving behind any trace in respect of his whereabouts, and, consequently, the assessee-firm could not realise the price of the goods supplied to the two dealers, namely, va fabrics and mahesh textiles. in the same way, the assessee-firm could not find any trace in respect of the amount of rs. 22,600 which was entrusted to the broker's firm. it appears that a large sum of the assessee's capital thus stood blocked up and the creditors of the assessee-firm has started pressing them for the payment of their dues. the assessee, thereon had made the position of their stringent financial set up clear to the creditors and, therefore, ultimately, the kasar was allowed by the creditors to the assessee-firm. the following table shows the name of the creditors and the kasar amounts allowed : -----------------------------------------------------------------name of the party kasar allowed-----------------------------------------------------------------rs.1. motiwala silk fabrics (rs. 4,600 rs. 1,533)2. hindustan silk industries 3,0673. jayantilal hiralal 1,4394. solapurwala textiles 8,8845. kinkabwala traders 2,2816. m. harikrishna textiles 25,2427. jagdish textiles industries 4,2098. pranjivandas gungaram and bros. 5,250--------53,803--------------------------------------------------------------- 3. it would thus be clear that the total amount in a sum of rs. 53,803 was allowed as kasar in favour of the assessee-firm. the assessee had closed the accounts of the abovesaid eight parties, after making part payment in terms of a settlement and had credited the kasar amount of the balance of rs. 53,803 and the same was carried forward for samvat years 2026 to 2027. this aspect was later on noticed by the income-tax authorities and, therefore, the income-tax officer concerned had asked for the explanation of the assessee-firm as to why the relief so obtained by the firm, as stated above, should not be taken as amounts surrendered against goods purchased and added to the business income. the assessee had represented before the income-tax officer the circumstances under which the settlement came into existence, along with the fact that there was on their part indeed a promise to make the payment of the abovesaid amount wen the financial condition would permit them to do so. it was also pointed out before the income-tax officer that, wen the assessee-firm had subsequently realised some amount by way of purchase price of a piece of land sold by them, certain amount was paid to one of the creditors, though the amount was included in the kasar amount. now, the income-tax officer had not accepted the abovesaid explanation tendered by the assessee and had taken the view that the goods were purchased during the course of business and as such the amount surrendered by the creditors was during the course of the business. it was also the view take by the income-tax officer that, even if the assessee had lost a certain amount from their creditors, then also the same amount can be taken as bad debts in the subsequent years and that the abovesaid transactions in which the kasar was allowed. thus, the income-tax officer was of the opinion that the abovesaid amount of rs. 53,803 so surrendered by the creditors would form a part of the business income of the assessee during the relevant year liable to be taxed. the abovesaid view is explicit from the assessment orders dated march 30, 1974, available at annexure 'a'. 4. the assessee had carried the matter in appeal before the appellate assistant commissioner who in his turn confirmed the decision of the income-tax officer by the appellate orders dated august 11, 1976, by taking the view that the assessee had paid certain amounts for the purchase of the goods but later on the kasar was allowed to him and, therefore, there was a reduction in the price of the creditors' goods and, that, therefore, the abovesaid amount in the form of the kasar had become the income of the appellant and was thus taxable in the year under question. it is in view of these findings that the appellate assistant commissioner had preferred to dismiss the appeal of the assessee by the said orders. 5. the assessee thereafter had approached the tribunal by filing appeals against the abovesaid appellate orders. as a fact, it was found by the tribunal that the assessee, during the accounting period relevant to the assessment year under appeal, had the benefit of kasar allowed to the by eight of the creditors to the tune of rs. 53,803 and that the abovesaid aspect of the case could not be and was not in dispute. moreover, on an appreciation and consideration of the various contentions urged on behalf of the assessee, the tribunal had taken the view that there was no evidence to come to the conclusion that there was an integrated arrangement in respect of the liability of the assessee towards their creditors who has allowed them the kasar and the claims against their own debtors from whom they were claiming certain dues. in view of this position, according to the tribunal, the question of the adjustment of bad debts, etc., would not arise. the tribunal had also taken the vies that it was not possible to accept the contention raised by the revenue that the kasar allowed was a reduction in the assessee's cost price which went to increase pro tanto the profit of the assessee-firm. yet, according to the tribunal, in the facts and circumstances of the case, the real question which survived for consideration was as to whether when the creditors had allowed the assessee the kasar, it would amount to reduction in the cost of the goods supplied by them or it was in fact grace given for delayed payment to be made by the assessee when they recoup the necessary financial stability the third question which the tribunal had taken up for consideration was as to whether the abovesaid kasar can be said to be an outright remission. upon a close examination of the abovesaid three alternative positions, the tribunal had taken the view that it was difficult to believe that the assessee's creditors had only granted breathing time to the assessee for the assessee to repay the same as and when they would be all to recover the amounts from their own debtors. the tribunal found that the kasar allowed represented the remissions given by the eight creditors and had the effect of extinguishing the assessee's liability pro tanto. according to the tribunal, apart from section 41(1) of the act of 1961, there was no other provision under which any benefit of such a nature could have been brought under the taxing net as profit from business. after a careful consideration of the provisions contained under section 41(1) of the act of 1961, the tribunal has opined that even if the remission was given in the same year in which the liability was incurred, the provisions contained under section 41(1) of the act of 1961 could have no application because the said provisions of the act of 1961 presuppose a loss or trading liability for which the deduction or allowance has been granted in the earlier assessment. the accounts of all the three traders out of the eight traders were examined and it was found that the case of the five creditors would stand on a different footing than the case of the remaining three creditors. the kasar allowed by the three creditors totalling rs. 17,565 was held to attract the provisions contained under section 41(1) of the act of 1961. this amount, therefore, was ordered to be retained, while the remaining amount was ordered to be deleted. these orders were pronounced by the tribunal on june 26, 1978, which are available at annexure 'c'. 6. later on, by filing the necessary application, the revenue had requested the tribunal to refer certain questions to this court for opinion, answer and reply. thus, along with the statement of the case, the tribunal has preferred to refer to us the aforementioned question. 7. it is in these facts and circumstances of the case that we have been called upon to deal with the said question. the question as framed by the tribunal would go to show as to whether it was a correct view in the facts and circumstances of the case that the remission of trading liability usually known as kasar obtained by the assessee can be taxed only if it falls within the ambit of the provisions of section 41(1) of the income-tax act, 1961. the question would, in other words, mean as to whether the abovesaid amount could have been considered for any other purpose - say for the purpose of computing the business income under any other relevant provisions of the act of 1961, include section 28 thereof. it is in this context that we have to proceed ahead for the consideration of the question referred to us. 8. section 41(1) of the act of 1961 is in respect of certain profits chargeable to tax, and it says that where the allowance or deduction has made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and, thereafter, subsequently, during any previous year, the assessee obtains any amount in respect of such loss or expenditure or some benefit in respect of that trading liability, the abovesaid amount shall be deemed to be profits. thus the provisions contained under section 41(1) of the act of 1961 appear to be clearly laying down a principle that, wen an allowance or deduction has been made in the assessment for any year in respect of some loss, expenditure or trading liability but, later on, when the extent of the same is reduced, it can be taken into consideration for the computation of the income arising from the business. 9. the table indicated by us hereinabove shows that, in fact, various creditors who have been termed as trading parties had allowed the kasar in a sum of rs. 53,803. this amount has been taken into consideration by the tribunal and the authorities below while examining the question as to whether the provisions contained under section 41(1) of the act of 1961 should be applied to the same. the tribunal has taken the view that the entire amount would not be covered by the abovesaid provisions of law but a smaller amount, namely, an amount of rs. 17,565 only would attract the abovesaid provisions of the act of 1961. this position has been accepted by the tribunal on the basis that the remaining five dealers or creditors had started the accounting period only during the assessment year in appeal and the kasar allowed by those five creditors was not open to be added under the provisions of section 41(1) of the act of 1961. the abovesaid view taken by the tribunal would go to show that so far as the amount rs. 17,565 is concerned, the same has been taken as the income of the assessee. 10. reliance has been placed upon the decision of the house of lords in british mexican petroleum co. ltd. v. cir [1932] 16 tc 570. this decision, which has been relied upon by various high courts of this country, points out that a debt forgone by the creditor does not become the income of the debtor - the assessee. in cit v. p. ganesa chettiar : [1982]133itr103(mad) , the question was as to whether, on the dissolution of a fir, when the assessee had paid a lump sum in complete settlement of all his claim as a partner, as a result of which the debit balance in the capital account had show the necessary entry and the amount was not recovered but was taken into account in making lump sum payment, would it be a debt forgone or waived as settled law, it has been recognised by the madras high court that a debt forgone or waived cannot constitute an income and the sum of rs. 53,130.56 could not have been taxed as income. in cit v. bharat development p. ltd. : [1982]135itr456(delhi) , the facts were entirely different. because of the amalgamation of certain companies with the assessee-company (as per the majority view) a trader cannot be said to make a profit merely because he has been able to obtain an item of stock-in-trade for less than its market price. in cit v. bhavnagar bone and fertiliser co. ltd. : [1987]166itr316(guj) , the facts were altogether different inasmuch as, in that case before this court, the partners of a firm, who were also the directors of the assessee-company had sold the entire plant and machinery and the firm had discontinued its business and the only activity which was carried on was in respect of realising the debts. the credit balance in the firm's account in the books of the company was transferred to the profit and loss appropriation account and later on to the capital revenue account and the question was as to whether the abovesaid amount would represent the value of any benefit or perquisite arising from the business of the assessee-company. it was held that the abovesaid amount was not received by the assessee-company as a result of any business transaction with the firm, and that the said amount had no connection or nexus with the business of the assessee-company. it appears that the abovesaid finding that the said amount would not represent the value of any benefit or perquisite arising from the business of the assessee-company is based upon the peculiar facts and circumstances of the case. in cit v. general electrodes and equipments ltd. : [1985]155itr78(bom) , the facts showed that there was a collaboration agreement between the assessee-company and the foreign company and the foreign company had arranged through a foreign bank for a bank guarantee for rs. 10 lakhs to enable the assessee to obtain a loan of a like amount from the indian bank. subsequently, the foreign company had paid an amount of rs. 5 lakhs to the foreign bank in part extinction of their liability. the income-tax officer had held that the payment was in the course of carrying on the assessee's business and it was assessable as the income of the assessee. in the background of the aforesaid facts, it was held by the bombay high court, confirming the decision of the tribunal, that the benefit obtained by the assessee was not in the course of carrying on its business and was not an income assessable under section 28(iv) of the act of 1961. but it should not be overlooked that the emphasis was on the facts and circumstances of the case which showed that the benefit obtained by the assessee was not in the course of the carrying on of its business activity which was of manufacturing electrodes. the other decision which requires consideration is the supreme court decision in cit v. india discount co. ltd. : [1970]75itr191(sc) . it was a case of the purchase of certain shares along with the arrears of dividends. later on, the assessee-company who were dealers in shares had received an amount of rs. 43,925 being the dividends which had been declared between 1936 and 1945 but was not claimed at collected by the previous owners. the question was as to whether the abovesaid amount of dividend obtained by the assessee can be said to be income liable to be taxed in the hands of the assessee-company. it is in the background of these facts that it was held that the responded had entered into a contract not only to purchase the shares but the arrears of the dividends also and that clearly showed that the price paid by him was not only for the shares but was also for the sum of rs. 43,925 which was going to be realised in the form of arrear dividends and, therefore, the abovesaid sum cannot be said to be an income which could have been assessed in the hands of the assessee-company. 11. the principles laid down in the decisions referred to above would indeed go to sow that a forgone debt would not be the income of the debtor which could be assessed as business income under the relevant provisions of the income-tax statute. but, here, in the reference on ad, as noticed above, the tribunal has proceeded on the basis that the kasar was the income of the assessee taking a further view that the abovesaid kasar amount can be dealt with only under the provisions contained under section 41(1) of the income-tax act, 1961. 12. it appears to us that, by doing so, the tribunal has gone to the extent of saying that the abovesaid amount could not have been considered under any other relevant provisions of the act of 1961 for the purpose of computation of the business income of the assessee. we would like to point out that the question referred to us does not call upon us to express any opinion regarding the relevant provisions under which the abovesaid kasar amount could have been considered for the purpose of tax or could have been taxed. it is, therefore, not necessary on our part to express any opinion in respect of the exact relevant provisions of he income-tax act, 1961, under which the abovesaid amount could have been taxed. none the less, it appears very clearly that the abovesaid amount of kasar or remission has been taken as income only and, therefore, the tribunal has taken the view that the relevant provision which would be attracted would be section 41(1) of the act of 1961 only. but looking to the facts and circumstances of the case, it appears that the tribunal was no justified in taking such a broad view. in out considered opinion, the abovesaid amount, whether it may be called a kasar or a remission of a 'debt', may have to be taken into consideration while computing the business income of the assessee under the relevant provisions of the act of 1961 including the provisions contained under section 28 thereof. looking to the frame of the question and out view that it is not necessary for us to decide and indicate the relevant provisions of the taxing statute under which the abovesaid amount could have been considered for the purpose of tax, we would only say that the tribunal was not justified in taking the view that the abovesaid amount could have been taken into consideration only under the provisions of section 41(1) of the income-tax act, 1961. in our opinion, the abovesaid amount can be considered for the purpose of taxing the income of the assessee under the relevant provisions of the act of 1961 including section 28 thereof. we, therefore, answer the abovesaid question referred to us in the negative, in favour of the revenue and against the assessee, with no order as to costs.