TMI Blog1984 (11) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... ctively ? 2. Whether, on the facts and the circumstances of the case, the amounts of provision made by the STC for bad and doubtful debts and sales tax liabilities which were transferred to the assessee are assessable in the hands of the assessee for these assessment years ?" For the assessment year 1967-68, the following two questions have been referred : " 1. Whether, on the facts and in the circumstances of the case, the surplus of Rs. 5,74,848 is liable to be assessed in the hands of the assessee as income under section 41(1) of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the provisions made by the State Trading Corporation for bad and doubtful debts and sales tax liabilities which were transferred to the assessee are assessable in the hands of the assessee for this assessment year ? " In substance, these questions are similar to the ones for the earlier two years. For the assessment year 1968-69, the following question has been referred: " Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire surplus of Rs. 5,37,178 representing credits in the 'Bifurcation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essable unit from the predecessor. It was held by the Tribunal that it was not necessary that the entire business should be transferred and this case was a case of succession to an independent and separate business. The Tribunal followed the judgment of the Supreme Court in CIT v. Hukamchand Mohanlal [1971] 82 ITR 624, where it was held that successor in business could not be held chargeable under section 41 (1) of the Act. The question of bad and doubtful debts was also considered by the Tribunal and came to the conclusion that no case was made out for inclusion of this amount as the assessee's income. There was a sales tax liability of Rs. 1,52,297.29 and some other bad and doubtful debts which had been transferred towards which some payment has been received. In the assessment year 1967-68, a sum of Rs. 5,74,848 was adjusted in the " Bifurcation Suspense Account". As regards the bad and doubtful debts, there is no specification of the amount, but the earlier order of the Tribunal was followed. In the assessment year 1968-69, the reference is confined only to the adjustment in the "Bifurcation Suspense Account " amounting to Rs. 5,37,178. The Tribunal had again recorded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustments were in the nature of capital receipts or revenue gains. As the question is somewhat intricate, it will be useful to see why the Income-tax Officer held that these were revenue gains. The Income-tax Officer was faced with two contentions: (a) that the amounts in question were not a result of the assessee's (trading) activities, but only a result of the adjustment of the previous liability and hence a capital receipt. Secondly, the amount could not be taxed under section 41, as there was no deduction claimed by the assessee on this account at any stage. According to the Income-tax Officer, the position of the assessee was that of successor and the assessee had to be treated as if it was in existence since the inception of the activities. According to him, all liabilities which had already been allowed had to be taxed now provided there is a saving. On this footing, the entire amount was held to be taxable. We do not find that the reasoning is at all satisfactory, but reproduce it as that of the Income-tax Officer. In the assessment year 1966-67, it was reasoned that the assessee took over the assets and liabilities as well as trade contracts, and, therefore, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofession in respect of which the allowance or deduction has been made is in existence in that year or not." It is not easy to see how this question has been put into operation on the facts of the present case by the Income-tax Officer. The section provides that if an allowance or deduction has been made in respect of loss, expenditure or trading liability, then, if a remission or cessation of the liability is received as a benefit by the assessee in some other year, it shall be deemed to be profits and gains of business or profession and hence chargeable to income-tax. It has first to be determined what is the deduction that was permitted earlier which is written back for the purpose of this case. The scheme of the section is a simple one. If certain expenditure is allowed as a deduction in any assessment, that deduction can be written back and treated as income in some other year when it is written back in the accounts. For instance, when accounts are written on the mercantile system of accounting, the assessee is likely to treat some anticipated liabilities as a deduction in the accounts. When the quantum of such expenditure is decreased due to subsequent events, the differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the properties, assets and liabilities pertaining to the transferred business shall be the value as given in the schedule attached to the scheme, being the value as shown in the books of the transferor-company. This value is taken as binding on both the companies. In short, the arrangement between the two companies was that all the entries shown in the business of the transferor-company (STC) shall be shown as entries in the books of MMTC and then the " Bifurcation Suspense Account " would operate to see the actual valuation for the purpose of adjusting the sum of rupees two crores paid to the STC. It is this revenue amount, i.e., the gain over and above the book entries, which is the subject-matter of the first question which we are to decide. If this amount had been received by the STC, that would be taxable under the provisions of section 41(1). The problem we are faced with is : are they chargeable in the hands of the assessee-company ? On this aspect, the judgment of the Supreme Court CIT v. Hukam chand Mohanlal [1971] 82 ITR 624, seems to be conclusive. The court specifically held that there was no provision in the Act which made successor in business or the legal re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity carried on by the assessee, but the result of business activity carried on prior to the purchase by the STC and, therefore, the receipts are capital appreciations. Similarly, if there is a shortfall, it would be a capital loss and not a revenue loss. To revert to the example previously set out, if " A " has to recover a sum of Rs. 20,000 from " B " and he sells this right to recover to " C " who files a suit and recovers only Rs. 10,000, it cannot be said that he has suffered a revenue loss of Rs. 10,000. He will suffer capital loss of Rs. 10,000 because the thing he bought for Rs. 20,000 has turned out to be worth only Rs. 10,000. We would accordingly answer the first question for the assessment years 1965-66 and 1966-67, in the negative, in favour of the assessee and against the Department. We would answer the first question for the assessment year 1967-68, in the negative, though this question is restricted only to section 41(1). In the assessment year 1968-69, the question is differently worded, because it requires us to determine whether the Tribunal was right in holding that the amount was not taxable. We would answer this question in the affirmative, in favour of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the reason why the provision was allowed. As it is a question of accountancy and we do not have the advantage of knowing what the provisions actually are, we would merely follow the order of the Appellate Assistant Commissioner on the footing that these provisions were in respect of the amounts which had already been taxed in the hands of STC and were thus not taxable in the hands of the assessee. We may also note for convenience that if these amounts were not taxed in the hands of STC, these amounts could be allowed in the hands of the assessee as amounts anticipated to be payable and, therefore, they bid to be allowed on the mercantile system of accountancy as anticipated liabilities and in the event of the sales tax being remitted or the bad debts being realised, the provisions of section 41(1) would apply against the assessee. The section would only apply if the amounts had not already been taxed in the hands of STC. This point of view has been added in case there is factual difference between the amount involved in the assessment years 1965-66 to 1967-68. Otherwise, if there was no factual difference, then the position would be the same as decided by the Appellate Assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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