TaxTMI 
TaxTMI 
2018 (3) TMI 1626
X X X X Extracts X X X X
X X X X Extracts X X X X
....exempt under the section 80P of the Income Tax Act, 1961 amounts to cessation of those liabilities and therefore, chargeable to tax in the current year being 2007-08 under Section 41(1) of Income Tax Act, 1961.? 3. The facts of the case are that the assessee is an apex Co-op. Bank of Rajasthan deriving income from Banking business. The income of assessee co-operative Bank was exempt u/s 80P(2) of I.T. Act, 61 in all the earlier year(s) and from this assessment year 2007-08, the entire income from Banking business of assessee Bank became taxable on withdrawal of exemption by insertion of section 80P(4) by Finance Act, 2006 w.e.f 1-4-07. The original assessment was completed u/s 143(3) at an income of Rs. 32,94,27,120/- making disallowance of Rs. 1,18,99,651/- on account of transfer to statutory Reserve out of carried forward account of provision for expenses treating the same as taxable u/s 41 of I.T.Act, 1961 and disallowance of Rs. 1,00,21,000/- out of contribution to PAC Managers salary. 4. The matter was argued time and again and on 16.1.2018 following order was passed:- Prima facie, the argument canvassed by the counsel for the appellant is required to be viewed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vey of the decision in Commissioner of Income Tax v. Lakshmamma, came to the conclusion that the general law even before Section 10 was amended by introducing Sub-section (2A) was such as to enable the benefit accruing from remissions or benefit accruing from payment made by a creditor being taxed. With very great respect we do not think this is a correct statement of the law. 7. Apart from the principle stated in the decision in Severne v. Dadswell, when a year's account has been finally settled with reference to the liabilities, there can be no question of reopening that year's assessment made on that factual and real basis. The only question then is whether what has been given up by a creditor in favour of an assessee or returned to him can be said to be income of the assessee. We find it difficult to accept the proposition that it would be income. What was returned to the assessee has nothing to do with the activities of the assessee; it does not arise from the business nor docs it arise from agricultural operations when the assessee is an agriculturist. The principle of the decision of the House of Lords case must apply to such a case. 8. We answer th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was set apart as provision during the assessment year 1972-73 in respect of liability which accrued in the previous years. In other words, the disputed amount has never been transferred back to the profit and loss account and, if so, there is no occasion for invoking Section 41(1)." Decision of Supreme Court in Commissioner of Agricultural Income Tax vs. Kerala Estate Mooriad Chalapuram reported in (1986) 161 ITR 155 wherein it has been held as under:- 5. In order to eliminate such a controversy in cases falling under the Indian Income-tax Act, 1922 Subsection (2A) was added in Section 10 of that Act, whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business, profession or vocation. Subsection (2A) was inserted in Section 10 in 1955. Before that Chagla, C.J., speaking for the Court in Mohsin Rehan Penkar v. Commissioner of Income-tax, Bombay City [1948] 16 ITR 183 (Bom) had observed: "It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation". This observation was noted by the Mysore High Court in C.I.T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the second limb of the sub-section to the fact situation. It may be noted that the assessee did neither pay the excise duty to the Government nor did it get refund of duty from the concerned authority. Notwithstanding the High Court's judgment in favour of the petitioner, the stage had not yet reached when it can be said that the liability for which allowance was given earlier ceased. The view taken by the High Court in substance is that the benefit in respect of the trading liability would accrue only when the liability definitely ceased after the termination of the proceedings in the Apex Court in favour of the petitioner. This very decision of the Allahabad High Court was relied upon by the Tribunal without appreciating the correct ratio of the decision."At this stage, counsel for the respondent seeks time, list on 30.1.2018. 5. Mr. Pathak appearing for the assessee has taken us to the order of the AO who while passing the order in the first round of litigation observed as under:- (iii). Contribution to PACS Managers salary: The assessee was asked to file the details of provisions for expenses of Rs. 3,48,54,592/- made in F.Y. 2006-07. On perusal of de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bution is statutory liability crystallizing at the end of every year and not in a nature of disputed/contingent liability. The contribution of assessee Bank to PAC Managers salary amounting to Rs. 10021000/- during the year is thus allowable deduction and AO is wrong and has erred in law in disallowing the same holding it as disputed/contingent liability. Allowability of contribution by the Apex Bank for PAC Managers salary is a statutory liability which is crystalized at the end of every year. The Contribution however, once made become at the disposal of Registrar of Co-operative Society which is payable as and when demanded by Registrar of Co-operative Society alongwith interest on it. Thus, it is not contingent liability but a statutory liability which is crystallized at the end of every year and hence the liability is allowable. The AO is, therefore, directed to delete the addition of Rs. 10021000/-. The 2nd ground of appeal is decided in favour of the appellant. 5.2 He has taken us to the order of the Tribunal passed in first round of litigation observing as under:- The intention of the assessee is that the amounts which have now been transferred from prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er the amount could have been added or not and therefore, we restore back the issue on the file of the AO. The AO will ascertain the nature of the provisions which has been written back during the year and will also ascertain as to whether such provision was added back in the year in which such provision was credited in the balance sheet. Thus this issue is restored back on the file of the AO and AO will decide as to whether provision written back was included in expenses claimed in the year in which such provision created. If it was claimed then amount written back will be income. 3.1 The second ground of appeal of the revenue is that the ld. CIT(A) has erred in deleting the addition of Rs. 1,00,21,000/- holding that PACS Manager salary is not contingent liability but a statutory liability. Whereas as per the provisions it is in the nature of contingent/ disputed liability as no disbursement out of the said liabilities was made. 3.3 Before the ld. CIT(A),it was submitted that the assessee cooperative bank was statutorily required by the Registrar of Cooperative Societies under Primary Agricultural Cooperative Society Managers, selection, appointment and service c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to reserve has been added bank in the year in which such provisions was credited them the same cannot be taxed now in the A.Y. when the same is being transferred from the provision to reserve'. The answer is that the provision transferred to reserve has not been added back in computation of income in respective assessment years, therefore, the written back of provisions for expenses in the year under consideration amounts to cessation of liability and become income in view of provision of section 41(1) of the I.T. Act, 1961. 8.2 The contention of the assessee that addition of amount of provisions to the income as per profit and loss account and then claim of deduction u/s 80P(2) would result in NIL taxable income. This exercise was omitted by note appended to the computation of income. 9. In view of the above facts observed and discussed as per the direction of the Hon'ble ITAT it is concluded that provisions for establishment expenses and other expesnes to the extent of Rs. 1,18,99,651/- has been claimed and allowed as expenditure in the profit and loss account in preceding assessment years. The provisions for expenses have not been added back in computa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....7 He has also taken us to the order of the CIT(A) wherein it has been observed as under:- 7. It is not disputed by the appellant that the Provisions totaling to Rs. 1,18,99,651/- were not added back in the Computations of Income of the returns filed for earlier assessment years. It is also not disputed that the Provisions were debited in the P & L account, therefore, the conclusion in the assessment order of taxing the Provisions totaling to Rs. 1,18,99,651/- because they have been transferred to Reserve in the year under consideration is upheld, as Hon'ble ITAT direction was only to confirm whether the Provisions were added back to income in earlier years or not. The answer is No they had not been added back. The addition of Rs. 1,18,99,651/- is thus upheld. 5.8 The aforesaid order is subject matter of appeal before the tribunal wherein while considering the case, the tribunal observed as under:- 5. We have heard the rival submissions and pursued the material available on record. The principle contention raised by the ld. AR is that the assessee's income from its banking business was wholly exempt u/s 80P(2) of the Act in the earlier years (prior A.Y 2007-08)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utation of income and hence, not applicability of section 41(1) cannot be accepted. 5.5 We have given a careful consideration to the said contention raised by the ld. AR but we are unable to accept the same. Section 41(1) talks about allowances/deductions which has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The said allowance/deduction u/s 41(1) has not been made subject to deduction under Chapter-VIA of the Act as claimed ld. AR. If the contention raised by the ld. AR is accepted, then it leads to the situation where no allowance or deduction will have be claimed by the assessee and further, in such circumstances, provisions of section 41(1) cannot be invoked where an assessee is eligible for deduction under Chapter-VI-A of the Act. In our view, the said contention of the ld AR will make section 41(1) infructous in such cases. 5.7 In light of above discussions, it is clear that the income that is eligible for deduction under section 80P has to be computed in accordance with the provisions of Act and which includes section 41(1) of the Act. Therefore, firstly the income has to be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er Clause (b) of Section 147. Subsequently, the petitioner received a letter dated April 8, 1980, from the respondents stating merely that he has initiated the proceedings under Clause (b) of Section 147 but without giving or setting out the reasons on the basis of which he assumed the jurisdiction in the matter. Under the said letter, the respondents called upon the petitioner to submit his return before he could consider the petitioner's request for supplying the "reasons" recorded under Sub-section (2) of Section 148. The petitioner's contention is that Section 41(1) was not attracted in the facts and circumstances of the case ; that the said amount of Rs. 51,61,166 was allowed as a deduction by the Tribunal in the assessment year 1972-73 though the said amount represented the liability which accrued in the previous assessment years. The liability for which the said amount was set apart still exists ; it has not ceased. No reverse entries have also been made by the petitioner in his account books relating to the said amount. In such circumstances, Section 41(1) has absolutely no application. 6. Learned counsel for the petitioner submits that merely because the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of misappropriation committed by the officials of a slate quarry, but not detected by the auditors who later on made good the amount. The principle behind these decisions cannot be pressed into service in cases where the creditor due to generous considerations or to be more realistic when he finds that it is necessary for the very purpose of his business that the assessee from whom he had claimed large amounts by way of interest or price of goods or as remuneration payable for services rendered has to be helped in continuing his business and, therefore, either gives up his right to receive the amounts that had accrued due or returns the amounts which he had actually received. The money that had either been given up or had been refunded is money that belonged to the creditor which could no longer be the income of the assessee and it comes to the assessee in the form of a windfall. This aspect had been noticed very clearly in the judgment of Rowlatt J., his judgment which gave rise to the decision of the House of Lords in British Mexican Petroleum Co. v. Jackson. In such cases the money received is not the income of the assessee; we think that it is to cover cases of this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....48]16ITR183(Bom) had observed: "It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation". This observation was noted by the Mysore High Court in C.I.T. v. Lakshmamma (supra), and appears from what was said by them to have received that tacit approval of the learned Judges. It was made the basis of distinguishing the case before them from that decided by the Bombay High Court. 6.4 In State Bank of Patiala vs. Commissioner of Income Tax (1996) 219 ITR 706, it has been as under:- 12. A fair reading of the above decisions would go to show that if the transfer of amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as 'reserve'. In this case, substantial amounts were set apart as reserves. No amount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which "it ought", in anticipation, make a provision and such provision for anticipated liability should be equated with known and existing liability and should be construed as a provision. The question in such cases, is whether the liability was "known" or "anticipated" on the date when the balance sheet was prepared. The question is not whether the assessee "can anticipate" or "reasonably anticipate" on the date when the balance sheet was prepared about "the bad and doubtful debts". The High Court was in error in surmising that the assessee being a banking company is bound to have bad and doubtful debts. It need not necessarily be so. It is not bound to anticipate on the date of preparation of balance sheet that all or any of its debts "are bound to be bad and doubtful". It all depends upon facts and circumstances. We are of the view that the High Court misunderstood the scope of the observations in Saran Engineering Co.'s case (supra) and surmised that the observations quoted at page 748 will even cover cases, where the liability was not factually anticipated on the date of the preparation of the balance sheet, but also will apply to cases, where the compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Indian currency instead of Rs. 36 lakhs and Rs. 18 lakhs. The assessee thus suffered a loss Rs. 11 lakhs in one case and Rs. 5,50,000/- in other in the process of conversion of Pakistani currency into Indian currency. It is no doubt true-and this was strongly relied upon by the High Court for taking the view that no loss was suffered by the assessee-that the books of account of the assessee did not disclose any loss nor was any loss reflected in the balance-sheet or profit and loss account of the assessee. The reason was that though, according to the then prevailing rate of exchange, the equivalent of Pakistani profit in terms of Indian rupee was Rs. 1,68,97,232/- and that was the amount included in the assessment of the assessee for the assessment year 1954-55, the assessee in its books of account maintained at the Head Office did not credit the Pakistani profit at the figure of Rs. 1,68,97,232/-, but credited it at the same figure as in Pakistani currency. The result was that the loss arising on account of the depreciation of Pakistani rupee vis-a-vis Indian rupee was not reflected in the books of account of the assessee and hence it could not figure in the balance-sheet and Prof....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Iyer, J., speaking on behalf, of this Court in Badri Das Dage v. C.I.T. MANU/SC/0081/1958 : [1958]34ITR10(SC) but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereignpower. The loss is as much a trading loss as any other and it makes no difference that it is occasioned by devaluation brought about by an act of State. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. Take for example the stock-in-trade of a business which is sold at a l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ould be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. This is clearly borne out by the decided cases which we shall presently discuss. 10. The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the Tribunal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is under no obligation to utilise this interest income to reduce its liability to pay interest to its creditors. It can re-invest the interest income in land or share, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well-settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. Pondkherry Railway Co. Ltd. v. C.I. T. 12. It is difficult to follow this reasoning. If a person borrows money for business purpose but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ived and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there s obviously neither accrual nor receipt of. Income, even though an entry to that, effect might,, incineration circumstances, have been made in the books of, account. This is exactly what has happened in this case, as it happened in the Bombay case, which was approved by this court. Here too, the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This; was not a. gift by the assessee firm to the manager companies. The reduction was a part of the agreement entered into by the assesses firm to secure a long-term managing agency arrangement for the two companies which it had floated. 6.9 In Commission....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he whole of the expenditure is to be allowed as revenue expenditure and consequently there would be no question of grant of depreciation on such expenditure. 6. In these circumstances, we feel that no interference with the impugned order of the tribunal is called for. The tribunal has correctly appreciated the law on the point and has applied the same to the undisputed facts. 7. No substantial question of law arises for our consideration. The appeals are dismissed. 7. He contended that issue is required to be answered in favour of the assessee and against the department. 8. Mr. Mathur appearing for the department has strongly contended that in view of the concurrent finding of all the authorities and also the observations made by AO after remand which reads as under:- ii. The provisions for establishment of Rs. 1,18,99,651/- comprises provisions for establishments expenses of Rs. 1,12,02,831.40/- (provisions for establishment expenses of Rs. 30,00,000/- for the period ending on 31.3.2004, Rs. 40,00,000/-) for the period ending on 31.3.2005 and Rs. 40,00,000/- for the period ending on 31.3.2006) balance amount of Rs. 2,02,831/- pertains to the period....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 41(1) were not attracted in the facts of this case because the assessee's liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view. 19. We fail to see how these deposits were in any way different from the deposits which came for consideration in the case of Punjab Distilling Industries Ltd. v. Commissioner of Income Tax, Simla MANU/SC/0066/1958 : [1959]35ITR519(SC) . The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits were taken in course of the trade and adjustments were made against these deposits in course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account. 22. The principle laid down by Atkinson, J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nefit accruing to him on account of cessation or remission of trading liability. It will be a case which squarely falls under the earlier clause, namely, "obtained any amount in respect of such expenditure". In other words, where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance had been given in the assessment for earlier period, the assessee is liable to disgorge that benefit as and when the obtains refund of the amount so paid. The consideration whether there is a possibility of the refund being set at naught on a future date will not be a relevant consideration. Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in Section 41(1) of the Act comes into play and it is not necessary that the Revenue should await the verdict of higher Court or Tribunal. If the Court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief. 8. True, expenditure and trading liability may be over-lapping concepts; but the lawmakers apparently intended to deal with allied concepts separa....