The Chief Commissioner of Income Tax, Cochin vs Kesaria Tea Co. Ltd.

P. Venkatarama Reddi, J.—The opinion recorded by the Kerala High Court in ITRNo. 16 of 1997 has given rise to this appeal filed by the ChiefCommissioner of income tax. The dispute relates to theassessment year 1985-86. At the instance of the Revenue thefollowing question was referred u/s 256(1) of theincome tax Act for the opinion of the High Court:

"Whether on the facts and in thecircumstances of the case, the Tribunalis right in law and fact in holding thatRs. 3,02,758/- cannot be brought to taxand in dole ting the addition ofRs. 3,02,758/- sustained by CIT(Appeals)?"

The High Court accepted the view of the Tribunal which partlyallowed the appeal of the assessee and answered the question infavour of the assessee.

The facts in brief are: The respondent-assessee isengaged in the business of tea, spices etc. During the assessmentyear 1985-86 (previous year ending on 31.3.1985) the assessee'wrote-back' in its accounts a sum of Rs. 14,65,997/- representingthe provision made during earlier years (1978-1981) towards itspurchase tax liability. It appears that the liability to pay purchasetax on certain goods was in dispute and, therefore, the provisionwas made. Further, it appears that the assessee, in support of itsclaim for purchase tax relief, inter ali, relied on the decision of theKerala High Court in Neroth Oil Mills' case. The SLP filed by theKerala State against the decision of the High Court in the said casewas rejected by this Court in November, 1984. Apparently, for thatreason, the assessee thought it fit to reverse the provision madeearlier towards purchase tax and therefore made the entries in thebooks of account during the year ending on 31.3.1985. Theassessing officer added the sum of Rs. 14,65,997/- whichrepresents the provision made towards purchase tax during theassessment years 1978-79, 1979-80 and 1980-81, treating thesame as the income of the previous year ending on 31.3.1985. Inthe first appeal, the CIT (Appeals) held that there was nojustification to include the sums which were already included in thecourse of reassessments made for the years 1979-80 and 1980-81.However, he upheld the addition of Rs. 3,02,758 pertaining to theassessment year 1978-79. The Appellate Commissioner held thatthe liability of the assessee finally ceased during the year 1985-86in view of the rejection of SLP in Neroth Oil Mills' case inNovember 1984. Certain observations were also made as regardsthe inflexibility of the sums pertaining to assessment years 1980-81and 1981-82 in respect of which reassessments were made.However, in this appeal, we need not go into the details thereof.

On further appeal by the assessee, the Tribunal setaside the addition of Rs. 3,02,758/- which was upheld by theAppellate Commissioner. The Tribunal did not agree with the viewtaken by the first Appellate Authority that there was no cessation ofliability within the meaning of Section 41(1) of the income tax Actduring the relevant year on account of dismissal of SLP in anothercase. The Tribunal observed that for claiming exemption frompurchase tax on the ground that transaction was in the course ofexport, two conditions were required to be fulfilled: (1) thingspurchased and exported are one and the same and (2) thepurchases were against firm orders for export. Neroth Oil Mills'case was concerned only with the first aspect and not the secondaspect. Therefore, the Tribunal observed that the judgment inNeroth Oil Mills' case, even if it had attained finality does not putan end to the disputed issue involved in the respondent-assessee'scase. The Tribunal further noticed that as late as 1993, the salestax department was pursuing the issue relating to purchase taxliability of the assessee from the assessment year 1974-75onwards and the cases were still pending decision before the SalesTax Authorities. The Tribunal pointed out that he unilateral actionon the part of the assessee in writing-back the amounts could nothave the effect of extinguishing the statutory liability. On reference,the High Court approved the view taken by the Tribunal and heldthat Section 41(1) cannot be invoked in the instant case. Hence, this appeal by revenue by Special leave.

It may be noted that the provision was made in the books ofaccount towards purchase tax which was under dispute and thebenefit of deduction from business income was availed of in thepast years in relation thereto. The same was sought to be reversedby the assessee during the year ending on 31.3.1985 for whateverreason it be. The question is whether the circumstancescontemplated by Section 41(1) exists so as to enable the Revenueto take back what has been allowed earlier as business expenditureand to include such amount in the income of the relevantassessment year i.e. 1985-86. In order to apply Section 41(1) inthe context of the facts obtaining in the present case, the followingpoints are to be kept in view : (1) In the course of assessment foran earlier year, allowance or deduction has been made in respectof trading liability incurred by the assessee; (2) Subsequently, abenefit is obtained in respect of such trading liability by way ofremission or cessation thereof during the year in which such eventoccurred; (3) in that situation the value of benefit accruing to theassessee is deemed to be the profit and gains of business whichotherwise would not be his income; and (4) such value of benefit ismade chargeable to income tax as the income of the previous yearwherein such benefit was obtained. The High Court, agreeing withthe Tribunal, rightly held that the resort to Section 41(1) could ariseonly if the liability of the assessee can be said to have ceasedfinally without the possibility of reviving it. On the facts found by theTribunal, the Tribunal as well as the High Court were well justifiedin coming to the conclusion that the purchase tax liability of theassessee had not ceased finally during the year in question.Despite the finality attained by the judgment in Neroth Oil Mills'case, the other issues having bearing on the exigibility of purchasetax still remained and the dispute between the assessee and thesales-tax department was still going on. There is no material onrecord to rebut these factual observations made by the Tribunal.Nor can it be said that the reasons given by the Tribunal areirrelevant.

The learned senior counsel appearing for the IncomeTax Department has contended that the assessee itself took stepsto write-off the liability on account of purchase tax by makingnecessary adjustments in the books, which itself is indicative of thefact that the liability ceased for all practical purposes and therefore,the addition of amount of Rs. 3,20,758/- deeming the same asincome of the year 1985-86 u/s 41(1) is well justified ofthe Act. But, what the assessee has done is not conclusive. Asobserved by the Tribunal, an unilateral action on the part of theassessee by way of writing-off the liability in its accounts does notnecessarily mean that the liability ceased in the eye of law. In fact,this is the view taken by this Court in Commissioner of Income Tax, Calcutta Vs. Sugauli Sugar Works P. Ltd., . We, therefore, find no substance in thecontention advanced on behalf of the appellant. Incidentally, wemay mention that the controversy relates to the period anterior tothe introduction of Explanation 1 to Section 41(1).

The decision of this Court in Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., has been cited by the learned counsel for the appellant.We find no relevance of this decision to the determination of thequestion involved in the present case. The factual matrix and theprovision of law considered therein is entirely different.

For the reasons aforesaid, we affirm the opinionexpressed by the High Court and dismiss the appeal filed by theRevenue. There shall be no order as to costs.