Commissioner of Income Tax vs Kedia and Co.

R.S. Mongia, Actg. C.J.

The facts leading to the filing of the present Income Tax appeal may be noticed.

The respondent, Kedia and Co., Raha, District Nagaon, Assam, is a registered firm and an Income Tax assessee. The relevant assessment year in the present case is 1979-80. The respondent firm got an import licence to import 500.905 M. T. of palm oil from Malaysia. The Malaysia party duly despatched the goods and presented the bill of lading for collection of the value of goods to the United Asian Bank in Malaysia. That bank in Malaysia on its turn sent the bill of lading to the United Bank of India, Foreign Branch, Bombay, for realisation of the amount of U. S. dollars 3,64,658.84, equivalent to Rs. 32,38,133. The United Bank of India asked the respondent-firm to clear the bill of lading by making payment of the above amount and the date of maturity was mentioned by the bank as November 24, 1977. The respondent firm, however, paid Rs. 17,87,859 in instalments and could not pay the balance of Rs. 14,26,116. In the meantime, the respondent firm approached the shipping agent, J. N. Baxi and Co., Bombay, and managed to get a release of the goods by giving an indemnity bond, dated September 28, 1977, without releasing the bill of lading from the bank. Thereafter, the foreign branch of the United Bank of India having failed to realise the aforesaid balance amount of Rs. 14,26,116 from the respondent firm, returned the bill of lading to the Malaysian bank. The aforesaid Malaysian bank on receipt of the bill of lading from the United Bank of India, got an order of arrest from Admirality Suit on the ship S. S. Texotis, owned by Texotis Shipping Co., Necosia, Cyprus, which had chartered the vessel, S. S. Texotis, which carried the palm oil from Malaysia to Bombay Port. The aforesaid shipping company however, got release of the ship, by making the payment of the aforesaid sum to the Malaysian bank and took over the liability of realisation of the amount from the respondent firm. After taking over the liability for realisation and having failed to realise the amount from the respondent firm in the normal course, the shipping company filed a summary suit, No. 1994 of 1981 before the High Court of Bombay for realising the aforesaid amount of Rs. 14,26,116 from the respondent firm. The assessee in its return for the year 1979-80 did not include the aforesaid amount, as it was shown to be the liability which had neither been remitted, nor the respondent considered the liability to the tune of the aforesaid amount as having been remitted by the creditors. The original creditors, i.e., the Malaysian bank, or the firm which had supplied the material, stood substituted by the shipping agent, because, the shipping agent had paid the amount to the Malaysian bank by taking over the liability to realise that amount from the respondent firm. It was the case of the respondent that the very fact that the shipping company had filed a suit for realisation against the respondent firm, would go to show that the liability was kept alive and the same had not been remitted. According to the respondent, even if the suit is time barred, even then the liability would not stand remitted.

The Assessing Officer, however, did not agree with the respondent firm and ordered the addition of the aforesaid amount in the total income of the respondent u/s 41(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act").

The respondent firm filed an appeal against the order of the Assessing Officer, dated May 25, 1983, before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), vide his order dated October 22, 1983, allowed the appeal and held that the aforesaid amount could not be charged to tax u/s 41(1) of the Act as the liability had not been remitted. The Revenue, i.e., the present appellant, filed an appeal before the Income Tax Appellate Tribunal. The said appeal was registered as I. T. A. No. 539 (Gauhati) of 1990. However, the appeal was dismissed and the appellate order of the Commissioner of Income Tax (Appeals) was upheld, vide order dated October 27, 1997. Aggrieved by the Tribunal''s order, the Revenue filed an application u/s 256(1) of the Act with a prayer to draw up a statement of the case and refer the following question of law to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the summary suit pending before the Bombay High Court is sufficient ground to prove that the liability for payment still exists as the pending decision of the Bombay High Court has got no bearing in the present issue of cessation of liability within the meaning of Section 41(1) of the Income Tax Act because nothing was furnished before the Assessing Officer for verification ?"

However, the aforesaid application u/s 256(1) of the Act was dismissed by the Tribunal, vide order dated May 20, 1998. It was held that the proposed question was not a question of law and had not arisen from the decision of the Tribunal. Hence, the present appeal, by the Revenue u/s 256(2) of the Income Tax Act, 1961.

The Revenue has lost before three courts, as mentioned above. According to us, if there was a liability outstanding, the respondent firm was well within its right to exclude that amount This is a pure question of fact as to whether liability existed or not. The balance-sheet of the respondent-asses-see for the relevant year showed the liability of the aforesaid amount against the firm which had supplied the material. According to us, it will not make any difference if the creditor is substituted. In this case the shipping company had paid the money, which it had paid to the bank really on behalf of the respondent firm. In the trading account of the respondent firm for the accounting year in question, the purchase account of palm oil by the assessee was duly reflected and this was accepted by the Department. The transaction relating to the import of palm oil by the assessee was reflected in the account with the aforesaid Malaysian party. The fact that the shipping company had filed a suit for recovery against the respondent firm, further shows that the liability of the respondent firm was not remitted, but existed, and the liability remained alive.

Learned counsel for the respondent cited the decision in Commissioner of Income Tax Vs. Jaipur Oil Products P. Ltd., which is pari materia to the facts of the present case, in which it was held that the liability remains alive on similar facts and there was no cessation of liability.

During the course of argument, we had asked learned counsel for the respondent firm as to what is the status of the suit filed by the shipping company in the Bombay High Court. We had reserved the judgment. Learned counsel has placed on record a letter from his client in which it is mentioned that in fact the summary suit filed against the respondent firm had been disposed of by the Bombay High Court on October 15, 1982, and an ex parte decree had been passed against the respondent firm, which however had no information earlier regarding the passing of the ex parte decree and, therefore, no appeal was filed by the respondent firm. This would go to show that not only the firm was right in claiming the deduction of this amount in the return, but it has now become clear that in fact the respondent firm suffered a decree also of the aforesaid amount. In other words, the liability had not ceased or been remitted.

For the foregoing reasons, we do not find any case for interference in this appeal. The same is hereby dismissed.

P.G. Agarwal, J.

I agree.