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TMI Blog2011 (12) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... hat a construction that reduces one of the two provisions in a statute to a useless lumber or a dead letter would not amount to a harmonious construction and that a familiar approach in such cases is to find out which one of the two provisions is a special provision made to govern a certain situation and to exclude that situation from the applicability of the general provision. If we apply this rule of interpretation to the case before us, we must necessarily hold that while Section 28(iv) would apply generally to all benefits or perquisites which arise to the assessee from the business carried on by him, the benefit which he obtains by way of remission or cessation of a trading liability in a later year, in respect of which he has obtained a deduction in an earlier year in computing the business income, should be governed by Section 41(1) which is the specific provision governing the factual situation and not by Section 28(iv). - Decided in favor of assessee. - HON'BLE MR. JUSTICE SANJIV KHANNA AND HON'BLE MR. JUSTICE R.V. EASWAR For the Appellant Through: Mr. Sanjeev Sabharwal, Advocate. For the Respondent Through: None. R.V. EASWAR, J.: By order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e creditors were not genuine and there was no genuine outstanding in their accounts. He accordingly added Rs. 1,25,46,534/- which represented the credit balances in the accounts of 9 parties, excluding Shri Vardhman Rice Industries Pvt. Ltd. who had filed confirmation letter. The Assessing Officer specifically noted that the amounts were being treated as unexplained credits in the books of accounts under Section 68 of the Act since the liabilities were not proved by the assessee. In the computation of the income also the addition was made with the narration addition on account of unconfirmed credits as discussed above . 4. The assessee filed an appeal against the aforesaid addition before the CIT (A) and in the grounds of appeal, took the point that the addition made under Section 68 of the Act was contrary to facts and law and that since the creditors were old balances the assessing officer was wrong in treating them as income of the assessee for the year under consideration. It was further pointed out that since the liability still existed in the books of accounts, the same cannot be treated as income. Before the CIT (A) the assessee also filed a letter dated 10.1.2006 in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhagwati Trading Co. (P.23-28) - 70531 - 50531 50531 40531 Confirmation enclosed Bharat Rice Mills (P.15-16) - - - 97061 100061 100061 Confirmation enclosed PAN: AABFB2620G(P 29) Giani Ram Anil Kumar (P.29-36) 4146006 4136006 4134716 4099716 4099716 4099716 Confirmation enclosed PAN : AABFG4121H Jaipal Ravinder Kumar (P.37-43) 586890 5608902 5208902 4705402 4665402 4665402 Confirmation enclosed Malwa Agro Industries (P.43-45) - - - 351670 351670 351670 Suleman security (P.46-48) - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther authorities were also cited before the Tribunal. 8. The Tribunal after taking note of the rival contentions, held that the applicability of Section 68 was ruled out since no fresh amounts were credited in the accounts of the creditors under consideration during the relevant accounting year. As regards the applicability of Section 41(1), the Tribunal held that the assessee was a limited company whose accounts were accessible to general public and that the balances in the accounts of the sundry creditors were only brought forward balances. It was held that the question whether the liabilities were genuine or not cannot be examined in the assessment proceedings for the year under consideration and such question could be examined only in the year in which the entries were first made in the accounts of the sundry creditors. As regards the assessee s plea that there was no cessation of any liability to the sundry creditors in the relevant accounting year and, therefore, the provisions of Section 41(1) of the Act were not attracted, it was held by the Tribunal that the plea has to be accepted in light of the judgment of the Supreme Court in the case of CIT v. Sugauli Sugar Works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rose on account of the fact that the debts had become more than three years old and were, therefore, not recoverable from the assessee in view of the law of limitation. With regard to the finding of the Tribunal that the assessee did not write back the liabilities in its profit and loss account for the year, the learned standing counsel clarified that this fact made no difference to the applicability of Section 41(1) since the Explanation 1 to Section 41(1) which was introduced by the Finance (2) Act, 1996 w.e.f. 1.4.1997 was not being relied upon by him. According to him, the writing back of the accounts of the sundry creditors in the profit and loss account can only be considered as one of the many unilateral acts done by the assessee and even in the absence of such write back it is open to him to contend, de hors the Explanation, that there was a remission or cessation of the trading liability which resulted in a benefit to the assessee. Strong reliance was placed by him on the judgment of the Supreme Court in CIT v. T.V. Sundaram (supra). Our attention was also drawn by him to a judgment of a Division Bench of this Court in Jay Engineering Works Ltd. v. CIT (2009) 311 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The argument of the learned standing counsel that the nonpayment or non-discharge of the liability in favour of the sundry creditors resulted in some benefit in respect of such trading liability in a practical sense or common sense and, therefore, the section was rightly invoked, with respect, overlooks the words following the above quoted words, namely, by way of remission or cessation thereof . As a matter of construction, it seems to us that it is not enough that the assessee derives some benefit in respect of such trading liability, but it is also essential that such benefit arises by way of remission or cessation of the liability. The words in clause (a) viz., some benefit in respect of such trading liability by way of remission or cessation thereof should be read as a whole and not in the manner suggested by the learned standing counsel. 12. That takes us to the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before he can be compelled to pay, that requirement is not satisfied if he is merely told that requirement is the normal course he is not likely to be exposed to action by the creditor. (underlining ours) This was also the view taken by the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra). 14. Since the Tribunal has relied on the judgment of the Supreme Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. (supra) we may usefully refer to the decision in order to appreciate the controversy therein and the ratio laid down. That was a case of a private limited company. In respect of the assessment year 1965-66, it transferred a sum of Rs. 3,45,000/- from the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The Income Tax Officer found that a sum of Rs. 1,29,000/- out of the above amount repaymented deposits and advances which were paid back by the assessee. He, therefore, deducted this amount from the amount of Rs. 3,45,000/- and the balance of Rs. 2,56,529/- was brought to assessment under Section 41(1) of the Act. The assessee appealed unsuccessfully to the Appellate Assistant Commissioner and thereafter carried th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in cash or otherwise, but it is necessary that the assessee should have received some benefit in respect of such trading liability. However, we have already seen that this benefit in respect of trading liability should be by way of remission or cessation of the liability , after the amendment made to the clause with effect from 1st April, 1993. The second part of the reasoning of the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra) is based on the interpretation of the words cessation or remission of the trading liability. The Supreme Court noticed a judgment of the Bombay High Court in J.K. Chemicals Ltd. v. CIT (19966) 62 ITR 34 in which it was explained as to what could bring out a cessation or remission of the assessee s liability. The observations of the Bombay High Court in the judgment cited above are as under:- The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. 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, by his own unilateral act, can bring about the cessation or remission of his liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of the contention of the revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of any steps taken by the creditors to recover the amount, it must be held that there was a cessation of the debts bringing the case within the scope of Section 41(1). In the case before us, the identical contention has been taken on behalf of the revenue, though the period for which the amount remained unpaid to the creditors is much less. It was held by the Supreme Court that a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt. 17. In the case before us, as rightly pointed out by the Tribunal, the assessee has not transferred the said amount from the creditors account to its profit and loss account. The liability was shown in the balance sheet as on 31st March, 2002. The assessee bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a balance sheet of a company amounts to an acknowledgement for the purpose of Section 19 of the Limitation Act and in order to be so, the balance sheet in which such acknowledgement is made need not be addressed to the creditors. In light of these authorities, it must be held that in the present case, the disclosure by the assessee company in its balance sheet as on 31st March, 2002 of the accounts of the sundry creditors amounts to an acknowledgement of the debts in their favour for the purposes of Section 18 of the Limitation Act. The assessee s liability to the creditors, thus, subsisted and did not cease nor was it remitted by the creditors. The liability was enforceable in a court of law. 18. The judgment of the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra) was followed and applied by a three Judges Bench of the Supreme Court in Chief Commissioner of Income Tax v. Kesaria Tea Co.Ltd.(supra). The assessee in this case was engaged in the business of tea, spices etc and made provision in its account for the years from 1978 to 1981 for the purchase tax liability. The tax liability was in dispute with the sales tax department. In the previous year rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 41(1) nor section 28 applied, as the amounts represented excess trading advances given by the customers to the assessee and that since at the time they were received they were capital receipts they could not change character and become assessable as revenue receipts. At the instance of the revenue, the following question of law was referred to the High Court of Madras: Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting the addition made by the Income-tax Officer representing unclaimed sundry credit balances written back to the profit and loss account by the assessee during the previous year relevant for the assessment year under consideration? The question for decision which arose before the Supreme Court, in the words of the court itself (page 347 of 222 ITR) was that even though the deposits were of capital nature at the point of time of receipt by the assessee, could their character change by efflux of time? The Supreme Court thereafter referred to several authorities including the celebrated decision of the Court of Appeal in England in the case of Morley v Tattersall (1939) 7 ITR 316, and the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and in the accounts for the accounting periods relevant to the assessment years 198283 and 1983-84, the balance remaining in the accounts was taken to the credit of the profit and loss account. The assessee could not explain why the balance was taken to its profit and loss account even though the money belonged to somebody else. It was in these circumstances that the Supreme Court applied a common sense view of the matter and held that the assessee had become richer by the amount transferred to the profit and loss account. The matter was thus decided on general principles and on the footing that the assessee committed and overt act indicating that it had appropriated the balances in the deposit amounts belonging to its customers as its own monies and was not able to explain why it took the step. The general principles and the common sense point of view were applied to decide the case. Section 41(1) specifically deals with amounts that were allowed as deduction in the past assessments as trading liabilities, which in a later year cease or are remitted by the creditors. If and when there is evidence in a particular later year to show that the liability has ceased or has been remit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 256(1) of the Act shows that there is a specific reference to Section 41(1) of the Act. However, this judgment cannot be invoked to the present case for the simple reason that in the present case, the assessee did not write back the sundry creditors to its profit and loss account, a finding which is not disputed by the Revenue. The judgment of this Court in Jay Engineering Works Ltd. v. CIT (supra) is therefore distinguishable. 23. In the course of his arguments, the learned standing counsel referred to Section 28(iv) of the Act, according to which the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable to income tax under the head profits and gains of business or profession . He submitted that since the amounts remained unpaid to the sundry creditors for a period of 4 years or more, the monies were available to the assessee in its business which amounted to a benefit arising from the business carried on by the assessee. The contention seems attractive at first blush but cannot bear scrutiny. The provisions of Section 41(1) have been specifically incorporated in the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue, it would also introduce an element of uncertainty or subjectiveness in ascertaining as to what would be the lapse of time that would be necessary to render a liability to pay the creditors ineffective, which would result in an alleged benefit to the assessee. Moreover, if after the taxing of the amount u/s 28(iv) on the ground that considerable time has elapsed from the date of the debt during which the assessee had the benefit of the monies in his business, it is found that in another later year the creditor has recovered the money from the assessee, there is no provision in the Act to allow deduction for such payment. The section cannot be made subject to such vagaries or subjectiveness in its applicability. It is also necessary to bear in mind that in the case of CIT v. Sugauli Sugar Works (P) Ltd. (supra) a contention was in fact advanced before the Supreme Court on behalf of the revenue that the liability to the creditors remained unpaid by the assessee for more than 20 years and there was practically a cessation of the debt which resulted in a benefit to the assessee which should be brought to tax under Section 41(1). This argument was not given effect to by the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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