Commissioner of Income Tax vs Uttaranchal Transport

This appeal arises out of an order passed by the income tax authorities for the assessment year (AY) 1986-87 in respect of M/s. Uttaranchal Transport, Kanpur (the assessee) under the income tax Act, 1961 (the Act). The facts

The assessee was formed in the assessment year 1986-87 and succeeded to the transport business from another firm.

The accounting period for the assessee was from July to the end of June next year. It was closed on March 8, 1986 and as such the accounting period for the assessment year 1986-87 was treated to be from July 1, 1984, to March 8, 1986.

In the beginning of the assessment year 1986-87, there was a liability of Rs. 23,85,609. Out of this amount, the liability of Rs. 6,18,894 was of the assessment year 1985-86 and the rest was of different assessment years prior to the formation of the assessee.

In the assessment year 1986-87 a sum of Rs. 64,840 was paid. Thus, a sum of Rs. 23,20,769 remained to be paid at the end of the assessment year 1986-87.

The Assessing Officer (the AO) passed the assessment order after remand on March 27, 1992. He held that:

� The assessee had played a careful device to defraud the Revenue. It was not acceptable.

� The assessee had obtained a benefit in respect of such liability by way of remission/cessation.

In view of the aforesaid finding the Assessing Officer added the entire remaining liability at the end of the assessment year 1986-87 of Rs. 23,20,769 as income u/s 41(1) of the Act.

The assessee filed an appeal before the Commissioner of income tax (Appeals). It was partly allowed on November 6, 1992. The Commissioner of income tax (Appeals) held that:

� Out of the total liabilities added by the Assessing Officer the liability of Rs. 17,01,875 was the liability from the assessment year 1980-81 uptill the assessment year 1985-86, when the relevant assessment for the decision is the assessment year 1985-86 only; and

� The issues are to be decided for the assessment year 1986-87.

The Commissioner of income tax (Appeals) granted relief for Rs. 17,01,875 and remanded the case to the Assessing Officer to decide afresh regarding the addition of the liabilities of Rs. 6,18,894 for the assessment year 1985-86.

The income tax Department (the Department) filed an appeal. It was dismissed by the income tax Appellate Tribunal, Lucknow Bench, Lucknow (the Tribunal) on July 31, 2001. Hence, the present appeal.

Substantial question of law

This appeal was admitted on the following substantial question No. 2 of law:

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was correct in law in dismissing the Department''s appeal even after holding that in the year under consideration the liability ceased to exist?

The decision

All the income tax authorities have recorded the findings that the assessee-firm was formed in the assessment year 1985-86 and the liability of the earlier assessment years was not incurred by the assessee but by its predecessor-in-interest.

The Supreme Court in Commissioner of Income Tax, Madhya Pradesh Vs. Hukumchand Mohanlal, , has held that:

The Act does not contain any provision making a successor-in-business or the legal representative of an assessee to whom an allowance has already been granted, liable to tax u/s 41(1) in respect of the amount remitted and received by the successor or the legal representative.

The aforesaid decision was approved by the Supreme Court (sic) in COMMISSIONER OF INCOME TAX Vs. B.R. CHAWLA, . The court observed that (head note):

The amount in respect of which remission or cessation takes place has to be assessed in the hands of the assessee who was earlier granted an allowance or deduction and none else.

It is relevant to point out that section 41(1) of the Act has been amended since then. It is enforced with effect from April 1, 1993, by the Finance Act, 1992. Now, the word "assessee" there, includes the successor-in-interest. However, this case is governed by the law as it stood then.

In view of the above, after cessation of the liabilities of the years till the assessment year 1984-85 (i.e. prior to formation of the assessee), they could be added in the hands of the predecessor-in-interest of the assessee, who were earlier granted the allowances or deductions and not in the hands of the assessee. In view of the above, there is no illegality in the order. The appeal has no merit. It is dismissed.