Chief Commissioner of Income Tax, Cochin Vs. M/S. Kesaria Tea Co. Ltd.  Insc 150 (19 March 2002)
Babu, K.G. Balakrishnan & P. Venkatarama Reddi. P.Venkatarama Reddi, J.
opinion recorded by the Kerala High Court in ITR No. 16 of 1997 has given rise
to this appeal filed by the Chief Commissioner of Income-tax. The dispute
relates to the assessment year 1985-86. At the instance of the Revenue the
following question was referred under Section 256(1) of the Income-tax Act for
the opinion of the High Court:
on the facts and in the circumstances of the case, the Tribunal is right in law
and fact in holding that Rs.3,02,758/- cannot be brought to tax and in deleting
the addition of Rs.3,02,758/- sustained by CIT (Appeals)?" The High Court
accepted the view of the Tribunal which partly allowed the appeal of the assessee
and answered the question in favour of the assessee.
facts in brief are: The respondent-assessee is engaged in the business of tea,
spices etc. During the assessment year 1985-86 (previous year ending on
31.3.1985) the assessee 'wrote-back' in its accounts a sum of Rs.14,65,997/-
representing the provision made during earlier years (1978-1981) towards its
purchase tax liability. It appears that the liability to pay purchase tax on
certain goods was in dispute and, therefore, the provision was made. Further,
it appears that the assessee, in support of its claim for purchase tax relief,
inter alia, relied on the decision of the Kerala High Court in Neroth Oil
Mills' case . The SLP filed by the Kerala State against the decision of the High
Court in the said case was rejected by this Court in November, 1984.
Apparently, for that reason, the assessee thought it fit to reverse the
provision made earlier towards purchase tax and therefore made the entries in
the books of account during the year ending on 31.3.1985. The assessing officer
added the sum of Rs.14,65,997/- which represents the provision made towards
purchase tax during the assessment years 1978-79, 1979-80 and 1980-81, treating
the same as the income of the previous year ending on 31.3.1985. In the first
appeal, the CIT (Appeals) held that there was no justification to include the
sums which were already included in the course of reassessments made for the
years 1979-80 and 1980-81.
he upheld the addition of Rs.3,02,758 pertaining to the assessment year
1978-79. The Appellate Commissioner held that the liability of the assessee
finally ceased during the year 1985-86 in view of the rejection of SLP in Neroth
Oil Mills' case in November 1984. Certain observations were also made as
regards the includiblity of the sums pertaining to assessment years 1980- 81
and 1981-82 in respect of which reassessments were made.
in this appeal, we need not go into the details thereof.
further appeal by the assessee, the Tribunal set aside the addition of Rs.3,02,758/-
which was upheld by the Appellate Commissioner. The Tribunal did not agree with
the view taken by the first Appellate Authority that there was no cessation of
liability within the meaning of Section 41(1) of the Income-tax Act during the
relevant year on account of dismissal of SLP in another case. The Tribunal
observed that for claiming exemption from purchase tax on the ground that
transaction was in the course of export, two conditions were required to be
fulfilled: (1) things purchased and exported are one and the same and (2) the
purchases were against firm orders for export. Neroth Oil Mills' case was
concerned only with the first aspect and not the second aspect. Therefore, the
Tribunal observed that the judgment in Neroth Oil Mills' case, even if it had
attained finality does not put an end to the disputed issue involved in the
respondent-assessee's case. The Tribunal further noticed that as late as 1993,
the sales tax department was pursuing the issue relating to purchase tax
liability of the assessee from the assessment year 1974-75 onwards and the
cases were still pending decision before the Sales Tax Authorities. The
Tribunal pointed out that the unilateral action on the part of the assessee in
writing-back the amounts could not have the effect of extinguishing the
statutory liability. On reference, the High Court approved the view taken by
the Tribunal and held that Section 41(1) cannot be invoked in the instant case.
Hence, this appeal by revenue by Special leave.
be noted that the provision was made in the books of account towards purchase
tax which was under dispute and the benefit of deduction from business income
was availed of in the past years in relation thereto. The same was sought to be
reversed by the assessee during the year ending on 31.3.1985 for whatever
reason it be. The question is whether the circumstances contemplated by Section
41(1) exists so as to enable the Revenue to take back what has been allowed
earlier as business expenditure and to include such amount in the income of the
relevant assessment year i.e. 1985-86. In order to apply Section 41(1) in the
context of the facts obtaining in the present case, the following points are to
be kept in view :
the course of assessment for an earlier year, allowance or deduction has been
made in respect of trading liability incurred by the assessee;
Subsequently, a benefit is obtained in respect of such trading liability by way
of remission or cessation thereof during the year in which such event occurred;
that situation the value of benefit accruing to the assessee is deemed to be
the profit and gains of business which otherwise would not be his income; and
value of benefit is made chargeable to income tax as the income of the previous
year wherein such benefit was obtained.
High Court, agreeing with the Tribunal, rightly held that the resort to Section
41(1) could arise only if the liability of the assessee can be said to have
ceased finally without the possibility of reviving it. On the facts found by
the Tribunal, the Tribunal as well as the High Court were well justified in
coming to the conclusion that the purchase tax liability of the assessee had
not ceased finally during the year in question.
the finality attained by the judgment in Neroth Oil Mills' case, the other
issues having bearing on the exigibility of purchase tax still remained and the
dispute between the assesseee and the sales-tax department was still going on.
There is no material on record to rebut these factual observations made by the
can it be said that the reasons given by the Tribunal are irrelevant.
learned senior counsel appearing for the Income Tax Department has contended
that the assessee itself took steps to write-off the liability on account of
purchase tax by making necessary adjustments in the books, which itself is
indicative of the fact that the liability ceased for all practical purposes and
therefore, the addition of amount of Rs.3,20,758/- deeming the same as income
of the year 1985-86 under Section 41 (1) is well justified of the Act. But,
what the assessee has done is not conclusive. As observed by the Tribunal, an
unilateral action on the part of the assessee by way of writing-off the
liability in its accounts does not necessarily mean that the liability ceased
in the eye of law. In fact, this is the view taken by this Court in CIT vs. Suguli
Sugar Works (P) Ltd. [236 ITR 518]. We, therefore, find no substance in the
contention advanced on behalf of the appellant. Incidentally, we may mention
that the controversy relates to the period anterior to the introduction of
Explanation 1 to Section 41(1).
decision of this Court in Commissioner of ITR 344] has been cited by the
learned counsel for the appellant.
find no relevance of this decision to the determination of the question
involved in the present case. The factual matrix and the provision of law
considered therein is entirely different.
the reasons aforesaid, we affirm the opinion expressed by the High Court and
dismiss the appeal filed by the Revenue. There shall be no order as to costs.