TMI Blog1992 (11) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... koo Udyog Pvt. Ltd. (DTU) and the second element represented, the liability that was provided by the appellant firm, in its books over the years. The appellant firm, had claimed that, the liability that was provided by DTU in its books, was never claimed as a deduction by the assessee, in computing its income in any of the earlier years and therefore, it could not be treated as its income under section 41(1) of the Act. The appellant had raised the issue that, Rs. 65,71,630, representing PF contributions provided and deduction allowed to it in the earlier years, did not cease to be its liability, and therefore, could not be treated as income under section 41(1) of the Act. Shri Agarwal, the learned counsel for the appellant, however, fairly conceded that, the claim of the appellant, to the extent of Rs. 65,71,630, has no merit. He submitted that, assessee was allowed deduction to that extent, and consequent to the determination of the actual liability of Provident Fund, the said provision no longer represented any actual liability, because, it stood remitted and there is cessation of liability. He contended that, he would press the claim of the appellant regarding the amount of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court, DTU and other bidi manufacturers, the contractors (Sattedars) did not permit any deduction from the payments made to them, for labour charges of ' home workers '. Since, DTU did not deduct the PF contribution from the payments made to these ' home workers ' through the Sattedars, as per the provisions of the PF Act Scheme, the employer became liable to make good the contributions of the employees, as well as that of the employer, though, it had not made any deduction. Further, the Act Scheme, prevented recovery of the contributions so made, on behalf of the employees, from them. The High Courts stayed the recovery of the dues, pending the decision of the Supreme Court. DTU had made provisions in its towards the share of these ' home workers ' and covering the employers equal share, for the assessment years 1978-79 to 1982-83, aggregating to Rs. 2,26,41,195. In the assessment year 1978-79 the provision was not allowed to be deducted by the assessing officer, but, the first appellate authority had allowed the deduction. The Revenue carried the matter in appeal to tile Tribunal and the Tribunal, considering the above facts, vide its order dated November 29, 1980, uphel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ' home workers. 'A. O. had observed that, consequent to the decision of the Supreme Court in 1985, the appellant had no option, but, to maintain the record of the ' home workers ', fixing their precise identity and eligibility. A. O. had considered the fact that, DTU was a concern in which, the partners of the appellant firm were directors. He observed that, because of the agreement with DTU in 1971, DTU was to manufacture bidis according to the specification of the assessee-firm, and to bear the trade mark of the firm. He also noted that, according to the agreement, the firm could also supply to DTU, the tendu leaves, labels and the tissue papers. A. O. had also noted the fact, that the reading of clause 4 of the agreement entered into on December 1981, indicated that, the assessee-firm, had not only taken over the firm, but, also agreed to satisfy discharge, all the debts liabilities of DTU and shall indemnify DTU against all accounts, proceedings, claims demands relating to the liabilities claims, as well as shall be exclusively entitled to benefit, if any, as a result of remission or cessation thereof. A. O. had made reference to the order of the Tribunal in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Motilal Ambaidas v. CIT [1977] 108 ITR 136, observed that, section 41(1) cannot be construed narrowly and tax liability cannot be avoided. He then referred to the Supreme Court ruling in McDowell Co. Ltd. v. CTO [1985] 154 ITR 148, wherein, it was observed that, assessee could not evade tax liability by the use of colourable devices. He had accordingly concluded that the predecessor and the successor are from the same family group and that, the final amount having been quantified, so intimated to him, and therefore, treated the amount of Rs. 2,92,82,189 as income under section 41(1) of the Act. On appeal, the assessee sought to file additional evidence, in support of its claim that, the PF Commissioner, was still in the process of determination of the final liability, and that, even in 1991 assessee has been pursuing the same. CIT(A), made reference to the Supreme Court decision in Mr. Ramanujam, Secretary, Dist. Bidi Workers Union v. State ofTamil Nadu, for the proposition that, the beneficial legislation in the interest of the workers had not been implemented in its true spirit. CIT(A) was of the opinion that the claim of PF is at best an abstract liability and at worst o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the lower authorities, that, the appellant firm, has carefully planned everything, knowing fully well, as far back as 1981, when it took over the business of bidi manufacturing, that the liability of PF would get substantially get reduced, has no basis. He contended that, in assessment year 1983-84, the consideration of Rs. 5 lakhs, paid to DTU was found to be adequate and the revenue had no quarrel on that account. He submitted that, according to clause 4 of the agreement of take over, the appellant firm was to indemnify DTU of any further liability and therefore, any reduction in any of the liability, was also to be retained and not to be passed over to DTU. Since, the appellant firm, had taken over the business of manufacturing of bidis enblock, the assets as well as the liabilities, attached to the business had to be taken over, and there was no other alternative. He contended that, the liability towards PF of ' home workers ' had continued and it was merely as a result of recalculation that, the amount of Rs. 2,26,41,195 was determined as not payable any longer. He contended that, the lower authorities, had repeatedly used the words of collusion, preplanned affair of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the person, in whose hands, its income was assessed. He pleaded that, the appellant firm had taken over the business in 1981, along with the assets and liabilities, as also any future liabilities and future reduction in them. He contended that, in view of such take over, the ' home workers ' and their liability, also was the subject-matter of such an agreement. He contended that, if the take over was limited to business and not of the employees liabilities, then, it would have indicated that, the transaction was not intended to evade the tax. He pleaded that, if only if, DTU had culminated the agreement with ' home workers ', which would have brought to close, the employer-employee relationship, it would have been for DTU to ensure compliance of the PF Laws. Since, this was not so done, the firm and DTU, had prior knowledge that, the liabilities that were provided in the books of DTU, were entirely imaginary and not real, and it was a case of clever planning, by getting all of such imaginary liabilities as deduction, thus, reducing the tax liability in those years in the hands of DTU and at the same time, by showing as if the business was retransferred to the firm, and getting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the bidi manufacturers. In 1981, when, the appellant firm, took over the manufacturing business, the applicability of the PF Act to all the bidi manufacturers, was still in liquid state, because, the Supreme Court was seized of the matter. It was in 1985, that the matter got resolved, which was after about four years from the date of take-over of the business, by the appellant firm. It was only in 1985, that, Supreme Court had held that, employees would cover even ' home workers '. The various bidi manufacturers association, as well as the various bidi workers union, had both carried the issue to the Supreme Court the former denying the applicability to ' home workers ' and the latter strongly supporting its claim that, the PF Act extended to and covered all workers, including ' home workers '. The manufacturers, had claimed that, ' home workers ' were not their regular employees, but, contract labourers, who keep on either changing or who move from place to place. This was based on the fact, that, they had contacts with contractors of labour, called ' Sattedars ', and that, the individual labourers, was the responsibility of the ' Sattedars ' and not of the assessee. The work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be marketed under the trade name of the appellant firm only. The assessments had been framed on DTU on the manufacturing activity and on the appellant firm for the period during which, the manufacturing was carried on by DTU. It has never been the case of the revenue that, for the period 1971 to 1981, it was held that, the agreement for handing over of the business of manufacture of bidis, by DTU, was a sham transaction and appeared only on paper. It was also in the knowledge of the revenue, that in 1981, when the appellant firm, had taken over the business of manufacture of bidis, along with all assets and liabilities, the two concerns were related concerns. It is not denied that, the appellant firm and DTU had been carrying on with the manufacture of bidis, under the same circumstances, as existed before 1971 and between 1971 to 1981. The assessments, as have been framed on the appellant firm, for the assessment years from 1983-84 to 1988-89, contained no remark that, the agreement of take-over was a sham transaction, because the manufacturing unit, had all along remained with the assessee-firm. We are therefore, of the opinion that, when the initial handing over in 1971, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the claim as was advanced by the appellant firm presently. It is claimed that, the transaction of giving over in 1971 and take over in 1981, was so depicted, solely with the view to evade the tax on accrual of benefit, consequent upon the reduction in the actual amount payable to P. F. Authorities. We may observe that the claim as put forth, by the revenue, does bring out some interesting argument, but, it remains merely an argument, without any substance in it. The clause 4 of the agreement, which has used the words of entitlement of any benefit that might accrue from the liabilities, upon its remission and cessation, are a normal precaution taken by the buyer, who takes over all of his predecessors' assets and liabilities, agreeing to indemnify him from all the liabilities, demands, claims etc. We are therefore, of the opinion that, nothing comes out from these words, to suggest that, the agreement was a sham. As had been observed in the earlier paragraphs, it is too much to claim that, the two parties, had effected a perfect plan of claiming deduction of huge amounts as liability, give over the business enblock to another, with clear foresight of the benefit of reduction in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 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 ". The reading of the above clearly indicates that, the assessee, who had been allowed deduction in any asst. year, of any loss, expenditure or trading liability, and in any subsequent previous year, the assessee has obtained ally benefit in cash or otherwise, some benefit in respect of any trading liability by way of remission or cessation, then such benefit so accruing to the assessee, would be chargeable as profits and gains from business. This section is based on the principle of accrual, i.e.. mercantile system of accounting. This enactment had considered the possibility of disputes arising in business, regarding the quantum, due to quality etc., and the purchaser demanding compensation or reduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved the benefit, not being the same, the wife could not be made liable for the refund of sales tax, as deemed income from profits and gains from the business. The revenue had considered the ruling of Supreme Court in Saraswati Industrial Syndicate's case but, insisted that, the terms of the agreement between the parties are relevant. Since, clause 4 of the agreement to take over indicated that, it is the assessee-firm, who would be entitled to any benefit, as a result of remission or cessation of trading liability, the revenue contended, this clause, gave it, the right to treat the income as deemed profits under section 41 (1) of the Act. The reading of the order of Supreme Court in Saraswati Industrial Syndicate Ltd.'s case does not even suggest that, section 41(1) could be invoked, at tile instance of the successor assessee, if he agrees to be assessed in respect of the benefit received by him, though, deduction was not allowed to him. A representative acts for and on behalf of the person, whom he represents, indicating the assessee, remains the same. A successor in business follows his predecessor, and therefore, they can never have identical identity. As regards the terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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