TMI Blog1995 (4) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... y further claim towards the amount in question. And as pointed out earlier, during the previous year relevant to the assessment year 1983-84, which is now before us, the assessee wrote back the sum to the credit of the P L A/c. 11. The assessee's case before the Assessing Officer was that the write-back in question was unilateral and that, consequently, there is no question of invoking the provisions of section 41(1) of the Act on the ground that there was cessation of liability. Reliance in this regard was placed on the Bombay case of CIT v. Sadabhakti Prakashan Printing Press P. Ltd. [1980] 125 ITR 326 and Rex Commercial Corpn. Ltd. (45 CTR Bom. 17). The Assessing Officer rejected the assessee's claim on the ground that " the above decision has not been accepted by the Department ". 12. The CIT(A) declined to interfere in the matter for the following reasons : (i) The Bombay case of Sadabhakti Prakashan Printing Press (P.) Ltd. was concerned with provision for gratuity. (ii) In the assessee's case, however, the write-back related to a trading liability proper. (iii) The assessee refused to pay the purchase consideration because the goods supplied by the Bombay concern w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee wrote back the said sum to the credit of the P L A/c. Its case before the Assessing Officer was that the said write-back was unilateral and that consequently there was no question of invoking the provisions of section 41(1) of the Act on the ground that there was cessation of liability. This claim was rejected both by the Assessing Officer and by the CIT(A). 19. As before the lower authorities so before us, the following attractive aphorisms are pressed into service in support of the assessee's claim that the amount written back to the credit of the P L A/c. cannot be brought to charge : (a) " a debt subsists notwithstanding that its recovery is barred by limitation ", and (b) " assessee's unilateral act cannot bring about a cessation or remission of his liability ". 20. The short question that arises for consideration is whether the said act of the assessee is valid on the facts and in the circumstances of the case. To resolve the issue it is first necessary to notice a couple of decided cases having a direct bearing on the issue in question. 21. In the Bombay case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578, invoking the provisions of section 10(2A) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or cessation of the trading liability in question. The Bombay High Court rejected the said contentions for two reasons : The first reason, to quote the High Court was : 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, but 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. . ." The second reason given by the High Court which, as we see it, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the characteristics of unpaid wages ; the circumstances which impelled the assessee to reverse the entry and the like. Perhaps the learned Judges were having in their mind the fact that payment of gratuity was also regulated by special statutes. As we see it, therefore, much assistance cannot be drawn from the said case. 26. We then have the Calcutta case of CIT v. Sugauli Sugar Works P. Ltd. [1983] 140 ITR 286. That case was concerned with " liabilities for expenses in a sum of Rs. 2,56,529, which had been allowed as revenue deduction in the earlier years ". The said sum was part of the sum of Rs. 3,45,000 which the assessee had transferred from suspense account to its capital reserve account. Relying on the said transfer and applying the provisions of section 41(1) of the Act the Assessing Officer brought to charge the said sum of Rs. 2,56,529. The assessee was unsuccessful before the first appellate authority. Before the I.T.A.T. the assessee contended that it had paid back the liabilities with regard to (a) unsecured loan of Rs. 36,000, (b) commission on sugar sales amounting to Rs. 37,897, and (c) interest on unsecured loan to the extent of Rs. 4,142, and that conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first appellate authority on this issue. On its part, the Tribunal allowed the assessee's claim relying on : (a) Kohinoor Mills Co. Ltd., (b) Ambika Mills Ltd., and (c) J.K. Chemicals Ltd. The said issue was one of the subject-matters of reference made to the Bombay High Court at the instance of the revenue. On an examination of the reported cases the Bombay High Court observed: " To sum up, so far as this court is concerned, the settled legal position appears to be what was stated by this court in its judgment in J.K. Chemicals Ltd.'s case [1966] 62 ITR 34. The liability of an assessee does not cease merely because the liability has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded. Essentially, therefore, it will always be a question of fact whether or not the assessee has expressed unequivocally his intention not to honour the liability after it has become barred by limitation. In a given set of facts, a finding either way may be possible. In the instant case, the departmental authorities have assumed that the assessee had no inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the Allahabad High Court at the instance of the assessee. The assessee's case was that the sums in question did not represent its income. It was suggested that they might be receipts on capital account or receipts in the nature of a windfall. It was also contended that even if the receipts were on revenue account, they arose only in an earlier assessment year. The High Court rejected all the aforesaid alternative contentions. As for the assessee's main contention to the effect that the sums written back to the credit of the P L A/c would constitute its income, the High Court rejected this contention too. In that regard the High Court observed : ".....It is possible the claims of the constituents against the company for certian sums were barred by time before the financial year 1961-62. But the material on the record does not disclose the exact time, when those claims became barred by time. It further appears that the company chose to indicate the various amounts in its books as deposits outstanding in favour of the constituents. So long as these sums represented deposits in favour of the constituents, the sums could not be treated as income of the assessee. It was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er non-action on the part of the Swiss suppliers and their omission to take any legal steps against the assessee-company for the recovery of the amount of Rs. 30,572 for a period of nearly five years would lead to the inference that there was a cessation of liability with effect from the date when the entry was made.... what we have to ascertain is not merely entries in the books of account but actual cessation of liability. In our opinion, looking to the fact that for a period of 5 years and even till today no action has been taken by the Swiss supplier to recover the amount of Rs. 30,572 from the assessee-company and no legal steps have been taken, it is not unreasonable to infer that the Swiss supplier at least has treated this liability of the assessee-company towards itself to have come to an end and to have ceased and, under these circumstances, in substance, and in fact there has been a cessation of this liability of the assessee to the Swiss suppliers. " [Emphasis supplied]. 36. The significance of the said decision, as we see it, lies in the fact that while reversal of entries would not per se be conclusive of the matter, the attendant circumstances would have to be take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, a bilateral act of the parties will be necessary. However, in cases where the recovery has become barred by limitation by operation of law, unilateral expression of intention of the debtor not to treat the amount any more as a liability might be sufficient to bring about a 'cessation of liability'. Diversion of the amount of liability to the profit and loss account is one of the most unequivocal modes of such declaration. The question is whether an assessee who has himself written off his time-barred liability from his accounts and transferred the amount to his profit and loss account thereby treating it as his income can be permitted to turn round, when the question of inclusion of such amount in his income under section 41(1) of the Income-tax Act, 1961, arises, and say that despite his own action of writing off the liability and transferring the amount to the profit and loss account, the liability has not ceased. In the absence of extraordinary circumstances, the answer to this question has to be in the negative. In extraordinary cases where the assessee wants to contend that despite his own action of the nature indicated above the liability still survives, the onus will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debtor and the creditor. (vii) Where, however, a debt has become time barred by operation of law, the fact that the debtor has diverted the liability to his P L A/c must be regarded as one of the most unequivocal modes of the declaration of the debtor's intention not to pay the debt. In such cases the factum of the debtor's transferring the sums in question to the credit of his capital account/profit and loss account will amount to cessation of liability. (viii) Even after writing the sum in question back to the credit of the capital account/profit and loss account, it is open to the debtor to show the existence of extra-ordinary circumstances in support of his contention that his own action of crediting the sum to his capital account/profit and loss account notwithstanding, the liability still survives. Clearly, in such cases a heavy onus is cast on the debtor to bring sufficient material on record in support of his contention. 41. In the case before us the assessee purchased as far back as in 1977 certain goods from G.K. Modi, Bombay for a sum of Rs. 2,33,357. It also debited the said sum in its books of account and on that basis obtained revenue deduction in respect the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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