Commissioner of Income Tax vs S.K.G. Sugar Ltd.

Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') the following question has been referred by the Tribunal for our opinion at the instance of the revenue:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 7,77,175 being the amount of commission treated by the assessee as payable to the Zonal Development Council for the assessment years 1971-72 and 1972-73 in spite of no demand notice for the assessment having been received by the assessee either in the relevant years or subsequently and having been allowed by way of deductions in the assessments for these assessment years is not assessable u/s 41 of the income tax Act, in the assessment year 1973-74 in spite of the fact that no demand notice was received the said amount was written back to the profit & loss account on the ground the Zonal Development Council was not consulted in the relevant years thereby showing the assessee itself had treated the sum of Rs. 7,77,175 as no longer a debt or liability payable by it ?

The facts as found by the Tribunal are briefly stated as under:

The Government of Bihar promulgated an Ordinance known as Bihar Sugar Cane (Regulation of Supply and Purchase) (Second) Ordinance, 1969 which was made effective from 8-7-1969. u/s 48 of the said Ordinance, the State Government by a notification required the occupiers of sugar factories to pay commission and/or a fee not exceeding Rs. 0.05 per quintal on the purchase of sugarcane made by it or on its behalf. The commission thus collected was to be paid to the co-operative society and to the Zonal Council in such proportion and in such manner as may be prescribed in the notification by the said Government from time to time. The Ordinance provided that the arrears of commission payable shall bear interest as specified u/s 51 of the Ordinance and shall be recoverable together with interest as a public demand as an arrear of land revenue.

Pursuant to the aforesaid Ordinance, the assessee-company computed its liability for payment of commission for the assessment years 1971-72 and 1972-73 and deduction was allowed in the assessments for the aforesaid liabilities. The company, however, did not pay this amount as the Council had not been constituted and transferred the said amount to the profit and loss account for the relevant year. The company also claimed a sum of Rs. 2,36,540 paid as commission for the current year. The ITO allowed the current year''s commission but treated the sum of Rs. 7,77,175 as profit u/s 41(1) of the Act.

The AAC found that there was nothing to show that there was a cessation of the liability for a sum of Rs. 7,77,175.

The AAC particularly relied upon the letter dated 16-1-1975 written by the State Government by which it was pointed out that steps should be taken against the sugar factories to get the amount deposited in National Savings Account. On the basis of the aforesaid letter, the AAC pointed out that it cannot be said that there was a cessation of the liability and deleted the said amount which was taken by the ITO as the deemed income. The Tribunal followed the said order of the AAC.

On further appeal to the Tribunal, the Tribunal held that the liability of the assessee did not cease to exist and as such, this could not be assessed as income u/s 41(1). It was held by the Supreme Court in Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., that only the real income could be assessed to tax. The Supreme Court in Commissioner of Income Tax, West Bengal I Vs. India Discount Co. Ltd., , held that the receipt being one which in law could not be regarded as income, it could not become income merely because the assessee erroneously credited it to the profit and loss account. Since, this liability did not cease to exist, the same could not be treated as income u/s 41(1) merely on the ground that it was written back.

At the hearing, the learned counsel appearing for the revenue submitted that u/s 48 of the Ordinance, the State Government by the notification in question required the occupiers of sugar factories to pay commission at the rate not exceeding Rs. 0.05 per quintal on the purchase of sugarcane made by it on its behalf. The commission was to be paid to the co-operative society and to the zonal council in such proportion and in such manner as may be prescribed in the notification from time to time. The arrears of such commission shall bear interest as specified u/s 51 of the Ordinance and shall be recovered together with interest as a public demand being the arrears of land revenue. Assessee-company debited the liability for the commission computed in terms of the said notification for the assessment years 1971-72 and 1972-73 and the debit was also allowed as outgoing from profit, though the same was not paid. As the Zonal Council by then had not been constituted, the said commission debited has been written back to the profit and loss account in the accounts for the instant previous year relevant to the assessment year 1973-74. The amount so written back was the aggregate sum of Rs. 7,77,175. It is urged on behalf of the revenue that the facts clearly show that there was a cessation of liability which alone could lead the assessee to credit the provision for the earlier year to the profit of the instant year.

The counsel for the assessee placed reliance on the judgment of the Supreme Court in India Discount Co. Ltd.''s case (supra). There, the Supreme Court held that when the assessee enters into a contract not only to purchase the shares but also the arrears of the dividends arising from the shares, the implication is that the price paid by him represented not only the value of the shares but also the amount of such arrear dividend to be realised. In such situation, the price accounted for as the arrear dividends due could not be assessable income in the hands of the purchaser. The receipt being one which in law could not be regarded as income could not become income merely by reason of the assessee having erroneously credited it to the profit and loss account. The purpose of citing this case was to bring home the principle that treatment of the assessee of any particular transaction in his books of account is not decisive of the character of the transaction. Thus, if a receipt is in law not an income receipt, the assessee''s erroneous treatment of such receipt as income will not lend to it the character of income which the receipt essentially lacks. It is true that the assessee has written the liability for the commission back to the profit and loss account of the year but that has no materiality.

The crucial question is whether the commission collected remained a liability as far as the assessee is concerned and whether in law there was a cessation of the liability so as to attract the provisions of section 41(1).

In our view there was no cessation of the liability in respect of the amount which is payable under the Bihar Sugarcane (Regulation of Supply and Purchase) (Second) Ordinance, 1959. In order that an amount is deemed to be the income u/s 41(1) of the 1961 Act, there must be a remission or a cessation of the liability in respect of the said amount. The benefit contemplated by the section must be by way of remission or cessation of the liability and no other benefit is contemplated under the section. The transfer of an entry in the accounts is a unilateral act and does not bring about the cessation of the liability of the debtor. Therefore, by mere appropriation of an amount by reversal of the entry in the Profit and Loss Account for the relevant year, there is no cessation of the liability. The cessation of a liability can arise only when the liability ceases to exist in the eye of law to all intents and purposes.

Our attention was also drawn to the letter dated 16-1-1975 addressed by the Cane Commissioner, Bihar, to the District Collector wherein the direction was given to take steps for getting the collections of commission by the sugar factories deposited in National Savings Account pledged to the Chairman of the respective Council or in the name of the Collector of the District, as the case may be, for the season 1969-70 to the season 1974-75. Therefore, this letter clearly shows that the obligation of the sugar factories under the Bihar Ordinance was in full force and effect without any diminution. Therefore, irrespective of the fact that the assessee wrote back the liabilities debited in the past years to the profit and loss account, the liabilities still subsisted. By virtue of the direction of the Cane Commissioner, the assessee''s liability to pay the collection to the Cane Council stood slightly modified in that the assessee was to get the collection deposited in favour of such Council or in favour of the District Collector.

It appears to us that under the Ordinance as also under the Act there is a statutory liability to deposit the amount and such liability has accrued by reason of the statute itself. Accordingly, the liability cannot be said to have ceased merely because the Council was not constituted during the relevant year but it was constituted in the later year.

On the facts of this case there is no room for inducting the concept for cessation of liability within its meaning u/s 41(1). It is not the case that the State Government remitted the liability or terminated the liability so as to result in its cessation or remission.

The only thing which the revenue seeks to rely upon so heavily, is the assessee''s act in writing back the collection to the profit and loss account. Obviously, the assessee had acted wrongly and the collection is not open to be appropriated as profit by the assessee under the statute. The requirement of statute never ceased. It is still in operation as is evident from the direction issued by the Cane Commissioner. The facts of the case are so straight forward that it can be said that the conclusion is quite easy. It is not the case of the revenue that the Ordinance had lapsed and ceased to be in operation nor is it controverted that there was no direction from the statutory authorities to earmark the collection by way of commission for the Cane Council in the shape of Savings Certificates in its favour. That being so, we find hardly any room for controversy as to non-assessability of the collection of the commission, notwithstanding the assessee''s act in writing it back to the profit.

For the reasons aforesaid, we answer the question in the affirmative and in favour of the assessee and against the revenue. There will be no order as to costs.

Banerjee, J.

I agree.