2011 (5) TMI 127 - HC - Income Tax

Court overturns Tribunal order, directing deletion of disputed income. Appeal allowed, questions answered.

The Court set aside the Tribunal's order, directing the Assessing Officer to delete the disputed amount from the assessee's income for the relevant year. ... Deemed income on account of extinguished or remitted liability - Cheques were not presented by the creditors during the validity period - ITAT treated the amount due to creditors as extinguished liability and hence deemed income u/s 41(1) - In view of decision of Apex Court in Commissioner of Income-tax v. T. V. Sundaram Iyengar and Sons Ltd. (1996 -TMI - 5532 - SUPREME Court) held that: - In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. - the views taken by the Tribunal are totally opposite the ones taken by the Supreme Court mentioned above and consequently, are not tenable. The order of the Tribunal below is, thus, set aside and the Assessing Officer is directed to delete the aforesaid amount involved from the income of the assessee for the relevant year. - Decided in favor of assessee Issues Involved:1. Whether the transit flat for employees was a guest house under Section 37(4) and Section 37(5) of the Income Tax Act, 1961.2. Whether the liability of Rs.5,02,646/- representing cheques not encashed by the appellant's suppliers stood extinguished or remitted, making it liable for tax under Section 41(1) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:Issue 1: Transit Flat as a Guest HouseThe appellant did not press this issue, acknowledging the binding precedent set by the Division Bench decision in the case of Keshoram Industries and Cotton Mills Limited Vs. C.I.T reported in (1991) 191 ITR 518. Consequently, this issue was not argued further.Issue 2: Taxability under Section 41(1)The appellant contended that the cheques amounting to Rs.5,02,646/- were issued to creditors who did not encash them, and thus, the debts were neither extinguished nor barred by limitation. The appellant maintained that the debt remained valid despite non-encashment of the cheques, referencing several Supreme Court decisions, including:1. Commissioner of Income-tax Vs. Agarpara Co. Ltd.2. Commissioner of Income-tax Vs. General Industrial Society Ltd.3. Commissioner of Income-tax Vs. Sugauli Sugar Works (P) Ltd.4. Chief Commissioner of Income-tax Vs. Kesaria Tea Co. Ltd.The Tribunal had ruled that the liability was extinguished or remitted as the creditors did not present the cheques within the validity period and did not claim the amount within the limitation period. The Tribunal concluded that the liability ceased within the meaning of Section 41(1) of the Act.Court's Analysis and Judgment:The Court referred to Section 41(1) of the Income Tax Act, which states that if an allowance or deduction has been made in respect of any loss, expenditure, or trading liability incurred by the assessee, and subsequently, the assessee obtains any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained or the value of the benefit shall be deemed to be profits and gains of business and chargeable to income tax.The Court cited the Supreme Court's judgment in Commissioner of Income-tax Vs. Sugauli Sugar Works (P) Ltd., which held that a unilateral entry by the assessee in its accounts does not invoke Section 41(1). The liability does not cease merely because the creditor did not take steps to recover the amount within the limitation period. The Court emphasized that the debt is not extinguished by the expiration of the limitation period; it only prevents the creditor from enforcing the debt.Further, the Court referred to the Supreme Court's decision in Chief Commissioner of Income-tax Vs. Kesaria Tea Co. Ltd., which reiterated that the liability must cease finally without the possibility of revival for Section 41(1) to apply. The Court noted that the Tribunal's decision was contrary to these principles.The Court also addressed the Revenue's reliance on Commissioner of Income-tax Vs. T. V. Sundaram Iyengar and Sons Ltd., distinguishing the factual matrix and legal provisions considered in that case from the present one. The Court concluded that the Tribunal erred in applying Section 41(1) to the facts of this case.Conclusion:The Court set aside the Tribunal's order, directing the Assessing Officer to delete the disputed amount from the assessee's income for the relevant year. The appeal was allowed, with the first formulated question answered in the affirmative and against the assessee, and the second question answered in the negative and against the Revenue. No order as to costs was made.