HIGH COURT OF DELHI
+ ITA No. 964/2009, 967/2009, 1003/2009, 1013/2009, 1014/2009 & 1015/2009
Date of Decision January 30, 2012.
COMMISSIONER OF INCOME TAX (CENTRAL)- I
VERSUS
MOHAN MEAKIN LIMITED
ORDER
R.V. EASWAR, J.:
These are six appeals filed by the revenue under Section 260A of the Income Tax Act (Act, for short). We have taken up ITA 964/2009 as the lead matter. In this appeal, the following substantial question of law was admitted on 22nd October, 2009:-
“Whether ITAT was correct in law in deleting the addition made by the Assessing Officer on account of unclaimed credit balances written off by the assessee in its books of accounts for the year under consideration, invoking the provisions of Section 41(1) of the Income Tax Act.” 2. The facts giving rise to the present appeal may be briefly noticed. The assessee is a public limited company engaged in the manufacture of IMFL, beer, mineral water, juices, breakfast food, glass bottles etc. For the assessment year 1995-96, a return was filed on 30th November, 1995 declaring income of Rs.3,00,33,390/-. In the course of the assessment proceedings under Section 143(3) of the Act, the Assessing Officer made several additions and disallowances to the returned income. Included in them was an amount of Rs.17,39,263/-. This amount represented the aggregate of several items written back by the assessee in the books of accounts for the relevant previous year and as per para 15.2 of the assessment order they are as follows:-
“15.2. As discussed above the amounts written back include the following amounts:
(i) Miscellaneous Income
a. Salary & wages 59,088
b. Relating to parties 10,72,329
c. Security forfeited —
d. Uncashed cheques 1,97,758
e. Excess dividend paid In earlier year written back 14,916
i) Excess provision for doubtful debts And advances written back 17,133
ii) Unclaimed bonus written back Disallowed in the earlier assessment year 14,133
iii) Tax on immovable property for the Year 1990-90 – 3,730
iv) Excess provision for excise duty payable Relating to assessment years 1986-87 To 1989-90 written back 2,95,200
v) Excess provision of sales-tax in the
Assessment year 1990-91 written back 63,757
________
7,39,263/- ”
3. In the return of income the aforesaid amount was claimed to be not taxable under the Act. The Assessing Officer called upon the assessee to explain how the aforesaid items were not taxable. In response to the query, the assessee submitted a written reply dated 18th December, 1998. Briefly stated, the assessee took up the plea that the aforesaid items did not represent any expenditure or loss or liability allowed in any of the earlier years as a deduction, that the amount of Rs.10,72,329/- represented small credit balances in the account of the customers and suppliers out of advance received from them for supplies to be made subsequently which they did not collect or which could not be fully adjusted against the supplies made to them, that the essential requisites for invoking Section 41(1) of the Act were absent, that Section 28(iv) was also not applicable and that in these circumstances the aggregate amount of Rs.17,39,263/- cannot be brought to tax.
4. The Assessing Officer first dealt with the amount of Rs. 10,72,329/. He noted that the amounts have been written back in the assessee’s books of account after the period of limitation for recovery of the same had expired. According to him the amount represented a trading receipt which was initially adjusted by the assessee in its books of accounts and thus fell to be added as the assessee’s income. As regards the rest of the items aggregating to Rs.6,36,693/- the assessee’s plea that the provisions of Section 41(1) or Section 28(iv) were not applicable, was rejected by the Assessing Officer by observing in paragraph 15.6 of the assessment order as follows:-
“15.6 I have carefully considered the assessee’s reply and do not agree with it. Details of these expenses clearly show that these expenses are allowable expenses under the Income-tax Act and the same have been claimed and allowed to the assessee in earlier years. In my considered view these expenses are fully covered with the provisions of section 41(1) of the Income-tax Act, and writing back of these amounts in the profit & Loss Account definitely establishes that there has been a cessation of liability on the part of the assessee. The assessee has written back the amount only after the expiry of the period of limitation available under the limitation Act. When the so called creditors have no legal remedy or enforceable right on the assessee to make any recovery then it is legitimate cessation of liability and writing back of these amounts in the profit & Loss Account makes it taxable.” Thus the aggregate amount of Rs.17,39,263/- was brought to assessment. In support of the addition, the Assessing Officer referred to and relied upon the judgment of the Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344.
5. The assessee appealed to the CIT(A) against the aforesaid addition. It would appear that before the CIT(A) the following breakup of the addition was given:-
1. Salaries, wages and bonus 59088/-
2. Supplier’s credit balances 639005/-
3. Customer’s credit balances 433324/-
4. Uncashed cheques 197758/-
5. Cash advance 1219/-
1330394/-
6. Excess dividend paid in earlier
years written back 14916/–
Total 1345310/-
It may be noticed from the aforesaid breakup that there is no difference in the figure of salaries, wages and bonus and the figure of uncashed cheques between what was given before the Assessing Officer and what was filed before the CIT(A). The figure of Rs.10,72,329/- given before the Assessing Officer as amounts “relating to parties” has been divided into two amounts of Rs.6,39,005/- representing suppliers’ credit balances and Rs.4,33,324/- representing customers’ credit balances. The excess dividend of Rs.14,916/- paid in the earlier year and written back in the books of accounts in the year under appeal was deleted by the CIT(A) since the amount had not been earlier allowed as a deduction by way of an expenditure/liability.
6. The CIT(A) then considered the aggregate of item Nos.3 & 5 (Rs.4,33,324/- + 1,219/-). He applied the judgment of the Supreme Court cited (supra) and held that since the assessee itself had written back the amount as its income, the same was rightly added by the Assessing Officer.
7. As regard item Nos.1, 2 & 4 aggregating to Rs.8,95,851/-, he held that the same was also assessable as the assessee’s income under Section 41(1) of the Act on the basis of the aforesaid judgment of the Supreme Court. He also observed that that the assessee has obviously written back these liabilities as they have remained unclaimed for a long time and their recovery had become barred by limitation. Since these were also transferred to the profit and loss account, he held that they were rightly taxed under Section 41(1).
8. The CIT(A) separately dealt with the excess provision of Rs.17,133/- made for doubtful debts which was written back in the accounts in the year under consideration. He noted that the provision had not been allowed in any of the earlier assessment years as a deduction and, therefore, held that Section 41(1) was not applicable in the year in which the provision was written back. He accordingly deleted the addition.
9. The following items of addition were separately dealt with by the CIT(A) in paragraph 13 of his order under the head “provisions for tax, duty etc. written back”:-
1.Tax on immovable property for the year 1990-91
Written back:Rs. 3,730/-
2.Unclaimed bonus for earlier years written back: Rs. 14,133/-
3.Excess provision for excise duty for Assessment years 1986-87 to 1989-90
Written back: Rs.2,95,200/-
4.Excess provision for sales tax For assessment year 1990-91
Written back: Rs. 63,757/-
TOTAL: Rs.3,76,820/-
10. It was submitted before the CIT(A) that none of the aforesaid items of expenditure had been claimed as a deduction in the earlier years in which the provision for the payments had been created because of Section 43B of the Act and, therefore, the writing back of the provisions in the books of account for the year under appeal on the ground that those provisions were no longer required, does not attract Section 41(1). This contention of the assessee was accepted by the CIT(A) with regard to the first, third and fourth items aggregating to Rs.3,62,687/- and the addition to this extent was deleted. However, in respect of the unclaimed bonus of Rs.14,133/-, the CIT(A) held that it must have been claimed and allowed as a deduction in the earlier year, presumably because Section 43B did not apply to provision created for bonus. He accordingly upheld the addition under Section 41(1).
11. Thus the CIT(A) decided the correctness of the various additions in the following manner:-
