TMI Blog2018 (3) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... - - Dated:- 6-3-2018 - Mr. K. S. Jhaveri And Mr. Vijay Kumar Vyas JJ. For the Appellant(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat For the Respondent(s) : Mr. R.B. Mathur with Mr. Prateek Kedawat JUDGMENT 1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal preferred by the assessee and confirmed the order of CIT(A) and AO. 2. This court while admitting the appeal on 9.10.2017 framed following substantial question of law:- Whether under the facts and circumstances of the case and in law, the ld. ITAT was justified in confirming the addition of ₹ 1,18,99,651/- made to the income of the appellant based on the finding that in the years of transfer to the Reserve Fund of the excess provisions made for establishment and other expenses in earlier years when the business income of the Appellant Bank was totally exempt under the section 80P of the Income Tax Act, 1961 amounts to cessation of those liabilities and therefore, chargeable to tax in the current year being 2007-08 under Section 41(1) of Income Tax Act, 1961.? 3. The facts of the case are that the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es rendered has to be helped in continuing his business and, therefore, either gives up his right to receive the amounts that had accrued due or returns the amounts which he had actually received. The money that had either been given up or had been refunded is money that belonged to the creditor which could no longer be the income of the assessee and it comes to the assessee in the form of a windfall. This aspect had been noticed very clearly in the judgment of Rowlatt J., his judgment which gave rise to the decision of the House of Lords in British Mexican Petroleum Co. v. Jackson. In such cases the money received is not the income of the assessee; we think that it is to cover cases of this nature that Sub-section (2A) of Section 10 was introduced in the Indian Income Tax Act of 1922 and reintroduced in the form of Section 41 of the Income Tax Act, 1961. The learned judges of the Mysore High Court, on a very exhaustive survey of the decision in Commissioner of Income Tax v. Lakshmamma, came to the conclusion that the general law even before Section 10 was amended by introducing Sub-section (2A) was such as to enable the benefit accruing from remissions or benefit accruing from pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1972-73, the petitioner was following the practice of debiting the profit and loss account, with amounts actually paid or payable to the retiring workers in each year and had shifted to the actuarial valuation system from that assessment year onwards and has, in later years, shifted back to the old system, it does not follow therefrom that either the liability for which the said amount was provided has ceased or that there are any other facts or grounds attracting the provisions contained in Section 41(1) of the Act. Learned counsel also explains that the petitioner has transferred back the amount of ₹ 81,20,209 representing the amount which was set apart as a provision for meeting the retirement gratuity liability, on actuarial valuation, during the assessment years 1973-74 and 1974-75, but the company has not transferred back the said amount of ₹ 51,61,166, the amount which was set apart as provision during the assessment year 1972-73 in respect of liability which accrued in the previous years. In other words, the disputed amount has never been transferred back to the profit and loss account and, if so, there is no occasion for invoking Section 41(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of the Act comes into play and it is not necessary that the Revenue should await the verdict of higher Court or Tribunal. If the Court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief. 8. True, expenditure and trading liability may be over-lapping concepts; but the law-makers apparently intended to deal with allied concepts separately and specifically so as to make the provision as comprehensive as possible in order to effectuate the objective underlying the provision. The anatomy of the Section and the collocation of the words employed therein would suggest that the test of cessation or remission of liability has to be applied vis-a-vis trading liability and it cannot be projected into the previous clause. 11. The High Court correctly appreciated the scope of Section 41(1) and applied the second limb of the sub-section to the fact situation. It may be noted that the assessee did neither pay the excise duty to the Government nor did it get refund of duty from the concerned authority. Notwithstanding the High Court's judgment in favour of the petitioner, the stage had not yet reached when it can be said that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d will be held by Apex Bank for and on behalf of Registrar of Co-Op. Societies. The Registrar of Co- Op. Societies is to use the fund for payments of PAC Managers salary in case of sufficint funds are not available for their salary. The PAC Managers are appointed by authority for safeguarding the recovery fo loans advanced by other co-operative Banks and Apex Bank. Thus the measure is for commercial benefit of assessee Bank who advances loans to such PACs. Thus the liability of contribution for PAC Managers salary is a statutory liability being crystalized at clos of every year and, the contribution after it is made becomes at the disposal of Registrar Co-operative Society which is payable as and when demanded by Registrar Co-operative Society. It will be clear and evident from copy of rules submitted that liability of contribution is statutory liability crystallizing at the end of every year and not in a nature of disputed/contingent liability. The contribution of assessee Bank to PAC Managers salary amounting to ₹ 10021000/- during the year is thus allowable deduction and AO is wrong and has erred in law in disallowing the same holding it as disputed/contingent liability. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration of the balance sheet , it would obviously be a provision. Provisions made against the anticipated loss and contingencies are charges against profits and to be taken into account in course of receipt and P L A/c in the balance sheet while reserves are appropriation of profits. We are not aware as to how the assessees is crediting amount under reserve and provisions by the assessee. Since the accounts are being audited and are being prepared as per Reserve Bank of India guidelines therefore, we feel that the reserve and surplus are made by the assessee as understood in commercial parlance. Thus the issue is not to be decided simply on the basis that the entrires have been made in the balance sheet and not in the P L A/c. We are not having sufficient details to decide the issue before us as to whether the amount could have been added or not and therefore, we restore back the issue on the file of the AO. The AO will ascertain the nature of the provisions which has been written back during the year and will also ascertain as to whether such provision was added back in the year in which such provision was credited in the balance sheet. Thus this issue is restored back on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve of ₹ 80,99,16,594.12/- and brought forward provisions under the head provisions for establishment of ₹ 1,18,99,651/- On finding by the assessee bank that the said brought forward provision under the head provision for establishment is no longer required and accordingly the said amount was transferred to Statutory Reserve in this year i.e. F.Y. 2006-07. Copy of statutory and provision for establishment account are enclosed. From the said copy of accounts it is evident and verifiable that the said provision was made out of/from earlier years exempted profits of the assessee bank and not from the income or profits of the A.Y. 2007-08. 8.1 In respect of observation of the Hon ble ITAT that in case the amounts which have now been transferred from provisions to reserve has been added bank in the year in which such provisions was credited them the same cannot be taxed now in the A.Y. when the same is being transferred from the provision to reserve . The answer is that the provision transferred to reserve has not been added back in computation of income in respective assessment years, therefore, the written back of provisions for expenses in the year under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the firstmentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to thesuccessor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income tax as the income of that previous year. 5.6 He contended that the said provision will not apply to the facts of the case as there is no entry in the books of account for transferring the amount in reserve fund. Merely, it has been done in view of the decision of the Supreme Court in State Bank of Patiala vs. CIT reported in (1996) 219 ITR 706 for which matter was remitted back. 5.7 He has also taken us to the order of the CIT(A) wherein it has been observed as under:- 7. It is not disputed by the appellant that the Provisions totaling to ₹ 1,18,99,651/- were not added back in the Computations of Income of the returns filed for earlier assessment years. It is also not disputed that the Provisions were debited in the P L account, therefore, the conclusion in the assessment order of taxing the Prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitially in the profit/loss account were deemed to have been disallowed either in the computation of income by the assessee or subsequently by the AO in the assessment order. Further, the note to the computation of income is totally silent about nature and quantum of provisions for administrative expenses which has been made subject matter of section 41(1) of the Act. Unless and until there is one to one correlation between the expenses disallowed earlier and benefit obtained now by way of reversal of such provision for expenses, it cannot be held that the provisions of section 41(1) are not applicable. Therefore, the above said contention of the ld AR in respect of deemed disallowance of the provisions of expenses by way of a note in the computation of income and hence, not applicability of section 41(1) cannot be accepted. 5.5 We have given a careful consideration to the said contention raised by the ld. AR but we are unable to accept the same. Section 41(1) talks about allowances/deductions which has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The said allowance/deduction u/s 41(1) has not been made s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the respondent stating that the impugned notice does not contain any reasons or grounds for which the assessment is sought to be reopened and asserting further that none of the grounds relevant for reopening of the assessment mentioned in either of the two clauses in Section 147 are attracted in this case. The representative of the petitioner also personally met the respondents. The respondents informed the petitioner's representative that he proposes to include the aforesaid amount of ₹ 51,61,166 in the income of the petitioner-company in the assessment year 1976-77 under Section 41(1) of the Act. The petitioner's representative was also apprised of the fact that action is sought to be taken under Clause (b) of Section 147. Subsequently, the petitioner received a letter dated April 8, 1980, from the respondents stating merely that he has initiated the proceedings under Clause (b) of Section 147 but without giving or setting out the reasons on the basis of which he assumed the jurisdiction in the matter. Under the said letter, the respondents called upon the petitioner to submit his return before he could consider the petitioner's request for supplying the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hind it is that money embezzled from an assessee retains the character of income of the assessee in the hands of the person who embezzled the money and when he either returns it to the assessee, or when it is recovered by the assessee, it comes back to the assessee as his income, the amount not having changed its character. In the meanwhile that income had not been taken into account in any assessment year as, under the Income-tax Act, it was deductible as a loss arising from the carrying on of the business. It is only in such peculiar cases, we think that the rule in that decision can be applied. We think the same principle has been applied by Finlay J. in Gray v. Lord Penrhyn, [1937] 21 T.C. 252 (K.B.) in a case of misappropriation committed by the officials of a slate quarry, but not detected by the auditors who later on made good the amount. The principle behind these decisions cannot be pressed into service in cases where the creditor due to generous considerations or to be more realistic when he finds that it is necessary for the very purpose of his business that the assessee from whom he had claimed large amounts by way of interest or price of goods or as remuneration pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and for these reasons we direct the parties to bear their costs. 6.3 In Commissioner of Agricultural Income Tax vs. Kerala Estate Mooriad Chalapuram (1986) 161 ITR 155, it has been held as under:- 5. In order to eliminate such a controversy in cases falling under the Indian Income-tax Act, 1922 Sub-section (2A) was added in Section 10 of that Act, whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business, profession or vocation. Sub-section (2A) was inserted in Section 10 in 1955. Before that Chagla, C.J., speaking for the Court in Mohsin Rehan Penkar v. Commissioner of Income-tax, Bombay City MANU/MH/0182/1948 : [1948]16ITR183(Bom) had observed: It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation . This observation was noted by the Mysore High Court in C.I.T. v. Lakshmamma (supra), and appears from what was said by them to have received that tacit approval of the learned Judges. It was made the basis of distinguishing the case before them from that decided by the Bombay High Court. 6.4 In State Bank of Patia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s totally unjustified and proceeds on mere surmises and conjectures. This is not a case, when at the time fund is earmarked, there is a known liability - one which has either arisen or anticipated legitimately, by the assessee - and the fund to meet such eventuality cannot be treated as reserves . The observations of this Court that the liability should be one which has actually arisen or is anticipated legitimately by the assessee , cannot be extended to hold, that in the case of an assessee carrying on banking business, it is bound or can reasonably anticipate on the date of the preparation of balance sheet bad and doubtful debts , for which it ought , in anticipation, make a provision and such provision for anticipated liability should be equated with known and existing liability and should be construed as a provision. The question in such cases, is whether the liability was known or anticipated on the date when the balance sheet was prepared. The question is not whether the assessee can anticipate or reasonably anticipate on the date when the balance sheet was prepared about the bad and doubtful debts . The High Court was in error in surmising that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee suffered any loss on the remittance of ₹ 25 lakhs and ₹ 12,50,000/- in Pakistani currency from West Pakistan. These two amounts admittedly came out of Pakistan profit for the assessment year 1954-55 and the equivalent of these two amounts in Indian currency, namely, ₹ 36 lakhs and ₹ 18 lakhs respectively, was included in the assessment of the assessee as part of Pakistan profit. But by the time these two amounts came to be repatriated to India, the rate of exchange had undergone change on account of devaluation of Pakistani rupee and, therefore, on repatriation, the assessee received only ₹ 25 lakhs and ₹ 12,50,000/- in Indian currency instead of ₹ 36 lakhs and ₹ 18 lakhs. The assessee thus suffered a loss ₹ 11 lakhs in one case and ₹ 5,50,000/- in other in the process of conversion of Pakistani currency into Indian currency. It is no doubt true-and this was strongly relied upon by the High Court for taking the view that no loss was suffered by the assessee-that the books of account of the assessee did not disclose any loss nor was any loss reflected in the balance-sheet or profit and loss account of the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Section 10(2), but if it was a trading loss, it would be liable to be deducted in computing the taxable profit of the assessee under Section 10(1). This indeed was not disputed on behalf of the Revenue but the serious controversy raised by the Revenue was whether the loss could at all be regarded as a trading loss. The argument which found favour with the High Court was that the loss was caused on account of devaluation of the Pakistani rupee which was an act of the sovereign power and it could not, therefore, be regarded as a loss arising in the course of the business of the assessee or incidental to such business. This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Iyer, J., speaking on behalf, of this Court in Badri Das Dage v. C.I.T. MANU/SC/0081/1958 : [1958]34ITR10(SC) but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while 'fixed capital means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (new) Ltd. v. Thurgood 18 T.C. 280., If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. This is clearly borne out by the decided cases which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.000/- were held in West Pakistan as capital asset or as trading asset or in other words, as part of fixed capital or part of circulating capital in the business. The Tribunal will, on the basis of this additional evidence and in the light of the law laid down by us in this judgment determine whether the loss suffered by the assessee on remittance of the two sums of ₹ 25 lakhs and ₹ 12,50,000/- was a trading loss or a capital loss. 6.7 In Tuticorin Alkali Chemicals Fertilizers Ltd. vs. Commissioner of Income Tax (1997) 227 ITR 172, it has been held as under:- 10. There is another aspect of this matter. The company, in this case, is at liberty to use the interest income as it likes. It is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hypothetical income, which it might have earned if the old agreement had continued to subsist. The facts of the present case are almost identical, and the principle applied by the Bombay High Court governs this case. The reason is plain. Income tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income, if income does not result at all, there cannot be a tax, even tough in bookkeeping, an entry is made about a hypothetical income which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there s obviously neither accrual nor receipt of. Income, even though an entry to that, effect might,, incineration circumstances, have been made in the books of, account. This is exactly what has happened in this case, as it happened in the Bombay case, which was approved by this court. Here too, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit was part of the existing business and there was no dispute that there was unity of control and interlacing of the units, the expenses incurred by the assessee for the setting up of a new unit, would be of a revenue nature. We find that, in the present case, the tribunal has correctly applied the decision of this court in Relaxo Footwears Limited (supra). The administrative expenses would be of a revenue nature as there was continuity of business. The tribunal, in our view, has correctly concluded that the authorities below had erred in holding the said expenditure to be of a capital nature. We agree with the conclusion of the tribunal that the whole of the expenditure is to be allowed as revenue expenditure and consequently there would be no question of grant of depreciation on such expenditure. 6. In these circumstances, we feel that no interference with the impugned order of the tribunal is called for. The tribunal has correctly appreciated the law on the point and has applied the same to the undisputed facts. 7. No substantial question of law arises for our consideration. The appeals are dismissed. 7. He contended that issue is required to be answered in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urity deposits held by the assessee for performance of contract by its constituents, As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The Commissioner of Income Tax (Appeal) found that the assessee wrote back the amounts to its profit and loss account because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its profit and loss account. The Commissioner of Income Tax (Appeal) held that these amounts were not revenue receipts but were of capital nature. Provisions of Section 41(1) were not attracted in the facts of this case because the assessee's liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view. 19. We fail to see how these deposits were in any way different from the deposits which came for consideration in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income Tax, Simla MANU/SC/0066/1958 : [1959]35ITR519(SC) . The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account even if it was somebody else's money. In fact, as Atkinson, J. pointed out that what the assessee did was the common-sense way of dealing with the amounts. 8.3 He also relied upon the decision of Supreme Court in Polyflex (India) Pvt. Ltd. vs. Commissioner of Income Tax, Karnataka reported in (2002) 257 ITR 343 (SC), it has been held as under:- 7. We are inclined to think that in a case where a statutory levy in respect of goods dealt in by the assessee is discharged and subsequently the amount paid is refunded, it is the first clause that more appropriately applies. It will not be a case of benefit accruing to him on account of cessation or remission of trading liability. It will be a case which squarely falls under the earlier clause, namely, obtained any amount in respect of such expenditure . In other words, where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance had been given in the assessment for earlier period, the assessee is liable to disgorge that benefit as and when the obtains refund of the amount so paid. The consideration whether there is a possibility of the refund being set at naught on a fut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.4.2006 has increase to ₹ 82,41,83,630.49/-. The increase in the amount of statutory reserve is contributed by transferred of ₹ 1,18,99,651/- from carried forward provisions written back in the relevant financial year by transferring the said amount to the statutory reserve account. 11. His further contention that for different assessment years 2003-04, 2004-05, 2005-06 2006-07, the entries could not have been made as on 31.3.2006 and the same has been made for the A.Y. 2007-08. In that view of the matter, we are of the opinion that case is covered by provisions of Section 41(1) of the Act as reproduced hereinabove. 12. The further contention which has been raised by counsel for the appellant that this exemption of income and entries already made are only to rectify the book entry, in our considered opinion, at the relevant time, the said contention would have been valid because the total income was exempted but when the entries were made in the books of account, the said income was not totally exempted. In that view of the matter, the view taken by all the authorities is required to be upheld. 13. In that view of the matter, the issue is answered in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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