ORDER
R.K. Bali, Accountant Member
1.to 8. [These paras are not reproduced here as they involve minor issues].
9. Ground of appeal No. 5 is that the learned CIT(A) has erred in treating a sum of Rs. 2,01,432 being miscellaneous credit balances on account of purchase of goods from various parties written back as a revenue receipt by applying the provisons of Section 41(1) of the Income-tax Act. The Assessing Officer has discussed this aspect of the case in para 9 of the assessment order. It was found that the assessee-company had credited a sum of Rs. 2,01,432 as amount written back in its profit & loss account and this was offered for taxation in the original return filed on 11-10-1985 by the assessee. However, subsequently a revised return was filed on 17-9-1986 in which this amount of Rs. 2,01,432 was claimed as exempt. According to the assessee, these amounts are credit balances on account of purchase of goods, commission payable, etc., to various parties and although these had been written back by the assessee as credit in the profit & loss account, they are not revenue receipts and as such not liable to tax. The Assessing Officer did not accept the claim of the assessee and treated the amount of Rs. 2,01,432 as its income liable to tax. On first appeal, the learned CIT(A) agreed with the Assessing Officer for the reasons given in paragraphs 3 & 4 of the appellate order relating to ground No. 7 of the grounds of appeal.
10. Before us, Shri Kamat, the learned Representative of the assessee has submitted that the amount of Rs. 2,01,432 is not revenue receipt and there has been no cessation of liability of the assessee to repay this amount. Accordingly, it was submitted that the provisions of Section 41(1) of the Income-tax Act are not applicable to the case of the assessee. Reliance was placed on the decision of the Hon’ble Bombay High Court in J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578, Gannon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428, CIT v. Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128. Shri Kamat, learned representative of the assessee, has submitted that the learned first appellate authority has wrongly observed in the appellate order that the trading liabilities were written off after the creditor’s agreement for such write off. It was submitted that this finding of the learned appellate authority is totally incorrect and the assessee has taken a specific ground in this regard. Accordingly, it was submitted that in view of the decisions of the Hon’ble Bombay High Court referred to above, the order of the first appellate authority is required to be reversed.
11. Shri Balakrishnan,the learned Representative of the department strongly relied on the order of the first appellate authority and submitted that by its own conduct of writing back these amounts in the profit & loss account as a credit, the assessee has treated these amounts as trading receipts in the original return and now with a view to avoiding payment of tax the assessee is claiming that the liability in respect of these amounts has not ceased as yet. He accordingly pleaded that the order of the CIT(A) should be confirmed in this regard.
12. We have considered the rival submissions and have also perused the details of this sum of Rs. 2,01,432 which have been furnished by the assessee at pages 3 to 5 of the paper book. A perusal of the details indicates that this represents liabilities right from the years 1979-80 to 1984-85 and contains various amounts ranging from Re. 0.28 to Rs. 95,207. The following are the amounts exceeding Rs. 5,000 which are noted below for facility of reference :-
Party's name Year Amount
Rs.
1. M/s. Hightex Embroidery 1982-83 5,676.54
2. Provision for overseas Buyer's 1981-82 95,207.31
commission.
3. M/s. Sheth Brothers 1979-80 5,291.10
4. M/s. Gokuldas Vallabhdas 1978-79 6,994.12
5. M/s. Amar Fabrics Corporation 1979-80 38,855.00
The liabilities written back by the assessee, which are the subject-matter of dispute, can be of the following types :
(i) Surplus deposits made by the customers which remain unclaimed with the assessee after adjustment of the sale price of goods sold by the assessee. These excess deposits will be in respect of specific transactions of sales and will be the result of adjustment of the sale price of the goods sold by the assessee. These liabilities will be closely connected with the transaction of sales and since the assessee has transferred the excess deposits remaining in its hands to the profit & loss account during the previous year, although shown as liabilities, such amounts are assessable to tax as trading receipts in the hands of the assessee irrespective of the provisions of Section 41(1) as held by the Hon’ble Bombay High Court in the case of CITv. Batlibol & Co. (P.) Ltd. [1984] 149 ITR 604.
(ii) Liabilities on account of purchases made by the assessee, which were not paid for a number of years and which might have become barred by limitation and which have been written back by the assessee to the credit of the profit & loss account.
(iii) Liabilities on account of expenses which must have been debited in the earlier years to the profit & loss account and for which no claim has been made by the creditors and which have been written back by the assessee to the profit & loss account.
13. For the treatment of liabilities referred to in (ii)(iii) above, the Bombay High Court in the series of decisions referred by Shri Kamat, learned Representative for the assessee, has held that the cessation of liability may occur:-
(a) by reason of the operation of law, Le., of the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor;
(b) the contract between the parties;
(c) by discharge of the debt, i.e., the debtor making payment thereof to his creditor.
The Bombay High Court has held that mere transfer of an entry is neither an agreement between the parties nor payment of liability. In the light of the above principle, the Hon’ble High Court held that as to whether a liability has actually ceased in a particular case will always be a question of fact whether or not the assessee has expressed unequivocally his intention not to honour the liability after it has become barred by limitation. In a given set of facts, a finding either way may be possible vide Chase Bright Steel Ltd. (No. 2)’s case (supra).
14. In the present case, the first item exceeding Rs. 5,000 is in relation to the payment of Rs. 5,676.54 due to M/s. Hightex Embroidery from the year 1982-83. On a specific query from the Bench, the learned Representative for the assessee stated that the above party has not made any claim on the assessee till December 1991 nor the assessee has taken any steps to discharge its liability due to M/s. Hightex Embroidery.
14.1 The second item is a sum of Rs. 95,207.31 on account of provision for overseas buyer’s commission. The details furnished by the assessee at pages 16 and 17 of the paper book indicate that this sum represents provision made for commission payable to parties in the Gulf area to which the assessee has been exporting its goods. The payment of commission to foreigner is governed by the Foreign Exchange Regulation Act and permission is required from the Reserve Bank of India for making payment of commission to the foreign nationals or foreign firms. On a queiy from the Bench, Shri Kamat, the learned Representative for the assessee, could not state categorically as to whether any attempt has been made by the assessee to seek permission of the Reserve Bank of India for making payment of commission to the various parties as mentioned at pages 16 & 17 of the paper book. Admittedly, till the date of hearing of this appeal, i.e., 12-12-1991, neither the parties have demanded payment of commission due to them from the assessee nor the assessee had made any effort to make arrangement for payment to those parties. Similar is the position with respect to items at serial numbers 3, 4 and 5 referred at page 6 para 12 of this order. Thus, it is clear that except the bald statement of the assessee that the liabilities had not ceased and the assessee is prepared to honour these liabilities as and when the creditors demand them from the company, there is no other evidence to suggest that the liabilities have not, in fact, ceased. The Supreme Court in the case of CIT v. DurgaPrasadMore [1971] 82 ITR 540 at page 541 [head-note (iii)] has observed as under :-
(iii) that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals; the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals.
Applying the ratio of the decision of the Supreme Court extracted above, we have to look into the surrounding circumstances to find out as to whether the liabilities written back by the assessee to the profit & loss account have actually ceased. As against the verbal statement of the assessee that the liabilities have not ceased, we have the action of the assessee whereby it has made transfer entries in the books of account by debiting the accounts of the creditors and crediting the profit & loss account. The assessee itself has shown the entries as credit to the profit & loss account as its income in the original return filed by it on 11-10-1985. It is only subsequently that the assessee made a claim that the liabilities in respect of these entries have not ceased. However, this contrary position taken by the assessee in the revised return is not supported by any evidence.
14.2 It is also seen that till 12-12-1991, the assessee has not paid a single paisa towards these liabilities as admitted by Shri Kamat, the learned Representative for the assessee, during the course of hearing on a specific query put by the Bench. Thus, keeping in view the totality of the facts and circumstances of the case, we are of the opinion that in the present case the liabilities of Rs. 2,01,431.83 which were originally declared by the assessee as profit by debiting to the various creditors’ account and crediting to the profit & loss account have, in fact, ceased and as such the authorities below were justified in taxing the same as the income of the assessee. In the result, this ground of appeal is decided against the assessee.
15. In the result, the appeal is partly allowed.