ORDER
M. RAMAKRISHNA, J. M. :
In this appeal by the assessee, directed against the order of the CIT(A)-I, Hyderabad, dt. 10th Nov., 1995, for the asst. yr. 1992-93, the only effective grievance of the assessee is against an addition of Rs. 1,66,62,866 made by the AO under s. 41(1) of the Act, which has been confirmed by the CIT(A).
2. Brief facts that led to the filing of this appeal are as follows :
(a) The assessee-company is engaged in the manufacture and sale of biscuits. The company was getting biscuits manufactured through Ampro Industries Pvt. Ltd., hereinafter referred to as the conversion unit, during the period of 27th Sept., 1982, to 30th Sept., 1985, on payment of conversion charges, in accordance with the agreement between the assessee-company and the conversion unit, dt. 30th June, 1982. The said agreement stipulates that the raw-material including packing material would be supplied to the conversion unit for producing biscuits and delivering them back to the assessee-company, and the conversion charges would be paid at an agreed rate. The conversion unit had to pay the Central Excise duty at the time of delivery of the biscuits to the assessee, and the same would be reimbursed by the assessee in accordance with the agreement. Thus, the assessee was liable to discharge the Central Excise obligation of the conversion unit.
(b) The excise duty is payable on the assessable value as computed under s. 4 of the Central Excises and Salt Act, 1944. In support of the assessable value, the assessee has to file a price-list with the excise authorities for their approval. While the assessment would be completed as per the price-list if the said price-list meets the approval of the excise authorities, if the price-list was not acceptable to the Excise Department due to any dispute, it would be approved provisionally, and during the pendency of the dispute, assessee would be permitted to clear the goods on payment of the duty as worked out by the assessee on a provisional basis, subject to the assessee executing a bond under r. 9-B of the Central Excise Rules for the differential amount of duty, i.e., the difference between the duty paid by the assessee and the duty as finally assessed by the AO, after the settlement of the dispute. Under r. 9-B of Central Excise Rules, the assessee binds himself for payment of difference between the amount of duty as provisionally assessed and the duty as finally assessed, and in the bond executed in Form B-13 also, the assessee has to bind himself to pay all dues which shall be demandable in respect of such goods on the basis of the value, description or quality as ascertained after final assessment by the proper officer. The Bond B-13 continues to be in full force till final assessment is made by the AO and the differential amount is paid by the assessee.
(c) A dispute had arisen between the conversion unit before us and the Central Excise Department during 1982 regarding the assessable value to be adopted for the deliveries of biscuits made to the appellant company. The conversion unit has filed a price-list claiming that the Central Excise duty should be levied on the basis of conversion charges alone. The price-list was rejected by the Assistant Collector of Central Excise, vide his order dt. 16th July, 1982, and the conversion unit was asked to pay the Central Excise duty on the value of the goods at which the biscuits were sold in the market by the assessee. The conversion unit at the instance of the assessee filed a writ petition before the Andhra Pradesh High Court, whereupon the Andhra Pradesh High Court passed an interim order dt. 28th July, 1982, permitting the conversion unit to pay the Central Excise duty on the basis of conversion charges and clear the goods on execution of bond for the disputed amount with a bank guarantee. Accordingly, the conversion unit paid the duty on the basis of conversion charges and executed the bonds for the disputed amount from time to time with the required bank guarantee and cleared the goods to the assessee-company. As the assessee-company was liable for the demand of the disputed duty amount for which the conversion unit had executed the requisite bonds, the assessee had provided for the contractual liability to discharge the Central Excise liability of the conversion unit in its books of account as follows :
Financial Year
Amount
Rs.
1982-83
1,14,64,323.00
1983-84
1,21,55,787.88
1984-85
1,20,65,983.23
1985-86
62,69,269.31
Total
4,19,55,363.42
Subsequently, the High Court disposed of the writ petition without going into the merits of the case and directed the conversion unit to seek redressal through the appellate avenues available under s. 35 of the Central Excises and Salt Act, 1944.
(d) Thereafter, the Asstt. Collector issued a show-cause notice to the conversion unit asking it to show cause why the duty should not be determined and demanded on the basis of the price at which the assessee sold the biscuits in the market under s. 4 of the Central Excises and Salt Act, 1944. The conversion unit again submitted that Central Excise duty is payable only on the basis of the conversion charges paid by the assessee for the manufacture of biscuits and not on the basis claimed by the Department. Rejecting the contention of the conversion unit, the Asstt. Collector by his order, dt. 22nd Oct., 1986, held that the Central Excise duty should be levied on the basis of the prices at which the goods were sold in the market by the assessee. At the instance of the assessee, the conversion unit appealed to the Collector of Central Excise(Appeals) against the order dt. 22nd Oct., 1986, passed by the Asstt. Collector, claiming that the conversion charges alone constitute the assessable value for the purpose of computing the duty.
(e) During the pendency of the dispute, the Excise Department insisted for bank guarantee for the entire disputed duty amounts for making provisional assessment under r. 9-B and under B-13 Bond. Accordingly, the conversion unit cleared biscuits on payment of duty on the basis of conversion charges under provisional assessment under r. 9-B and B-13 Bond with bank guarantee for the disputed amount. The conversion unit was also paying the arrears of disputed Central Excise duty due from 29th July, 1982; in respect of Unit-I and from 29th Dec., 1983; in respect of Unit-II in instalments. The Excise Duty amounts paid by the conversion units were reimbursed by the assessee as and when paid by the conversion unit. Thus, against the total arrears amount of Central Excise duty of Rs. 4,19,55,363.42, an amount of Rs. 2,92,497.42 was paid by the conversion unit which was reimbursed by the assessee, and the balance of Rs. 1,66,62,866 which has to be discharged by the assessee in terms of the agreement was payable by the conversion unit to the Central Excise Department.
(f) The Collector of Central Excise(Appeals) disposed of the appeal of the conversion unit against the Asstt. Collectors order dt. 22nd Oct., 1986, by his order dt. 29th April, 1987, directing the Asstt. Collector to determine the assessable value on the basis of the value of comparable biscuits produced/manufactured by other manufacturers of the same locality/town/city during the relevant assessment period. In pursuance of this appellate order, the Asstt. Collector passed an order dt. 23rd March, 1990, wherein he held that the assessable value of the conversion unit should be taken at prices of comparable goods produced by M/s. Super Food Products with certain abatements. Having been aggrieved by the order of the Asstt. Collector, dt. 23rd March, 1990, the Department preferred appeal before the Collector of Central Excise(Appeals), who by his order dt. 16th July, 1991 again set aside the order of the Asstt. Collector, dt. 23rd March, 1990, and remanded the case back to the Asstt. Collector for de novo proceedings, and for passing a speaking and specific order after comparing the prices of M/s. Super Food Products and other manufacturers of the same locality/town/city during the relevant assessment period. The Asstt. Collector has accordingly passed a fresh order dt. 17th April, 1992, holding that M/s. Super Food Products is found to be closest to the assessee in comparison of other biscuit manufacturers existing at the relevant time, and hence the prices of products manufactured by M/s. Super Food Products are found comparable and that the assessable values of the products manufactured by the assessee can be fixed based on comparison with the prices of Super Food Products. He accordingly directed the Superintendent of Central Excise to confirm/raise the demand based on the price-lists which were approved by the Asstt. Collector on 23rd March, 1990, but which were set aside by the Collector of Central Excise (Appeals) on 16th July, 1991.
(g) In pursuance of the order of the Asstt. Collector, dt. 27th April, 1992, the Superintendent of Central Excise had made final assessment of R. T. 12s for the period from 29th July, 1982, to 30th Sept., 1985, for conversion unit-I and for the period from 29th Dec., 1983, to 30th Sept., 1985, for conversion unit-II on 18th/19th May, 1993. On the basis of the order of the Superintendent of Central Excise, the conversion unit became entitled for refund of Rs. 12,70,649.83 for conversion unit-I and Rs. 5,03,316.83 for conversion unit-II and the duty liability of Rs. 1,66,866 abated and the B-13 Bonds were discharged. Consequently, the contractual liability due to the conversion unit also came to an end in the hands of the assessee.
(h) Consequent upon the receipt of order of the Asstt. Collector, dt. 27th April, 1992, from the conversion unit, the assessee felt that as against the Central Excise liability of the conversion unit amounting to Rs. 4,19,55,363, the final liability would come to Rs. 2,53,92,497. It was further felt that an the conversion unit had paid the same to the Central Excise Department which was reimbursed to it by the assessee, the further liability of Rs. 1,66,62,866 provided in the books of account for the earlier years by the assessee as contractual liability due to the conversion unit and appearing in the outstanding liability was no longer required. The assessee had written back the provision of Rs. 1,66,62,866 to the P&L Account and included it in the Prior Period Adjustments. Despite the fact that the order of the Asstt. Collector, dt. 27th April, 1992, was received subsequent to the close of the financial year on 31st March, 1992, the amount was written back in the books of account for the year ending 31st March, 1992, since it is a major event occurring after the balance sheet, and since it felt that this should be taken into account for the true and fair view of the financial statements.
(i) Thereupon, the assessee informed the conversion unit on 4th March, 1992, affirming its liability to pay the Central Excise duty liability amount to the conversion unit, to clear any misunderstandings that may be entertained by the conversion unit, consequent to write back of the contractual liability, in the following words :
“According to the advice given to us, the excise duty liability of your company on the basis of Asstt. Collectors orders dt. 27th April, 1992, will work out to Rs. 2.53 crores as against original liability of Rs. 4.20 crores. Consequently there is likely to be a reduction in the Central Excise duty liability approximately to the extent of Rs. 1.67 crores. Based on this advice and working, we have written back the balance of liability of Rs. 1,66,62,866 to the P&L Account for the year 1991-92 even though the Superintendent of Central Excise is yet to determine the Central Excise duty liability in your case.
We assure you that we will abide by the agreement entered with you under which we have undertaken to discharge all Central Excise duty liabilities levied on you on account of biscuits manufactured on our behalf. In particular, we hereby undertake to pay the Central Excise duty liability of Rs. 1,66,62,866 or any part thereof if the Superintendent of Central Excise determines on the basis of Asstt. Collectors order dt. 27th April, 1992, that the Central Excise duty liability of Rs. 1,66,62,866 or any part thereof is payable by you.”
(j) However, while computing the total income for the asst. yr. 1992-93 for income-tax purposes, the assessee excluded the amount Rs. 1,66,62,866 so written back. In the note appended to the computation of total income enclosed to the return for the asst. yr. 1992-93, the reasons for exclusion of the write back of the contractual liability are enumerated, in the following manner :
“The Superintendent of Central Excise is yet to pass an order determining the exact quantum of balance of statutory Central Excise duty liability of AILP. As soon as such liability has been determined in the case of conversion unit, the company will be liable to pay, in terms of the agreement, the additional amount or will be entitled to receive any refund out of the amount already paid depending on the determination of the statutory liability in the hands of conversion unit. According to the advice given to the company, the statutory liability of conversion unit will work out to Rs. 2.53 crores as against the original liability of Rs. 4.20 crores and consequently the balance of liability of Rs. 1.67 crores to conversion unit provided in the accounts of earlier years will be no longer required. Based on this advice and acting on the principle that major events occurring after the balance sheet, should be taken into account and incorporated in the financial statements, the company has written back further balance of liability of Rs. 1,66,62,866 to the P&L Account and included the same in the Prior Period Adjustments in the P&L Account even though the Central Excise authorities are yet to determine the statutory liability in the case of conversion unit. After determination of the actual statutory liability by Central Excise authorities in the case of conversion unit the extent of the liability which is no longer required will be determined and will be included in computation of the total income under s. 41(1) of the IT Act.”
(k) The AO was not convinced with the above reasoning given by the assessee for excluding the amount written back from the total income of the asst. yr. 1992-93. According to him, since the assessee has written back the liability no longer required unilaterally, it has taken a decision that this amount was no longer required to be paid to conversion unit, and this unilateral action itself has brought about a cessation of liability to the extent of the said amount of Rs. 1,66,62,866. He is further of the view that the computation of income of an assessee has to be in accordance with the books of account maintained by the assessee and the entries in the books of account are pieces of admissible evidence and, therefore, since the assessee has written back the amount in the books of account, it has to be treated as the assessees income in the year in which it is written back. He also noted that the reduction of excise duty liability in the case of conversion unit has come into existence when the Collector of Central Excise(Appeals) passed an appellate order dt. 16th July, 1991, directing to follow the case of M/s. Super Food Products in the case of conversion unit also, which direction was followed by the Asstt. Collector of Central Excise and Superintendent of Central Excise, and as such, he held that the order of the Collector of the Central Excise(Appeals), dt. 16th July, 1991, in effect brought about the actual reduction of liability. He accordingly added the sum of Rs. 1,66,62,866 to the income returned by the assessee, while completing the assessment under s. 143(3), by the order of assessment dt. 22nd March, 1995, for the asst. yr. 1992-93.
(l) Aggrieved by the addition of Rs. 1,66,62,866 made by the AO, the assessee preferred appeal before the CIT(A) contending inter alia that the write back resulted neither in the accrual of income nor in remission or cessation of liability and that the provisions of s. 41(1) were not attracted as there was no remission or cessation of the liability either in fact or in law. The CIT(A) finding no merit in the contentions of the assessee, confirmed the addition made by the AO. He agreed with the AO that the liability of the assessee being merely contractual in character by writing back the amount of Rs. 1,66,62,866, the assessee has for all practical purposes disowned such contractual obligation. He further observed that this write back had not been disputed or agitated by the conversion unit, and the assessees action in writing back the liability in the books of account pertaining to asst. yr. 1992-93 indicated that the assessee for all practical purposes eschewed its contractual liability. The CIT(A) also observed that there is indeed real and not hypothetical income accrued to the assessee during the asst. yr. 1992-93 in terms of the cessation of liability to the tune of Rs. 1,66,62,866, and by passing entry in the books of account for this year, the assessee merely recognised the said cessation of liability. He further observed that the assessee having written back the sum of Rs. 1,66,62,866, cannot now turn back and say that the entry should be ignored for the purpose of determining the assessable profit or income. Further observing that the principle to be adopted for the purpose of valuation having been determined irrevocably by the order of the Collector of Central Excise (Appeals), dt. 16th July, 1991, the disputed matter got settled with the same, the CIT(A) confirmed the addition of Rs. 1,66,62,866 made by the AO, by his impugned order, dt. 10th Dec., 1995.
(m) Aggrieved by the order of the CIT(A), dt. 10th Dec., 1995, assessee preferred this further appeal before us.
3. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that in order that an amount may be deemed to be income under s. 41(1) of the IT Act, there must be remission or cessation of liability. The benefit contemplated by the section must be by way of remission or cessation of liability. According to him, the transfer of an entry in the books of accounts by way of write back of the liability to the P&L Account is a unilateral act and does not bring out the cessation of liability of the debtor. He submitted that there can be cessation of liability by the bilateral acts of the creditor and debtor, and in no case can a debtor bring the liability to an end on his own volition. He submitted that in order to bring a case under s. 41(1), it has to be shown by the Department that there has been remission or cessation of the liability, and the remission of a liability occurs only when the creditor voluntarily gives up the claim and cessation of a liability arises only when it ceases to exist in the eye of law for all intents and purposes. In view of this legal position, he disputed the conclusion drawn by the lower authorities that the unilateral act of the debtor is sufficient to bring about the cessation of the liability. Inviting our attention to the note appended to the return of income, which in extracted in para 2(i) hereinabove, he submitted that the assessee has clarified that after the determination of the actual liability in the hands of the conversion unit, such determined excess excise liability would be included in the computation of total income under s. 41(1). He further submitted that by writing a letter to the conversion unit on 4th May, 1992, on finalisation of balance-sheet, relevant portion of which is extracted in para 2(i) of this order, the assessee has affirmed that it would discharge the Central Excise duty liability of the conversion unit under the agreement and specifically undertook to pay the Central duty liability of Rs. 1,66,62,866 or any part thereof, if the same was determined as payable by the Superintendent of Central Excise. On the basis of the note appended to the return and the letter addressed to the conversion unit, it is reiterated that there is no disclaimer of the liability to pay to the conversion unit, and in fact, the assessee reaffirmed that it would pay whatever Central Excise duty had been determined in the hands of the conversion unit by the Superintendent of Central Excise. He submitted that the assessee has written back the liability to the P&L Account only because major events occurred after the balance sheet date, since as per its interpretation of the principle, major events occurring after the balance sheet date should be incorporated in the financial statements, and it has nothing to do with either the cessation or remission of the liability, which did not cease to exist during the previous year relevant to this appeal, and the assessee has in fact clarified this position in the note appended to the return, and reaffirmed the existence of the liability in the letter addressed to the conversion unit. In this view of the matter, it is submitted that there is absolutely no basis for the lower authorities to hold that the assessee had disowned, renounced or eschewed the contractual liability, which was silently accepted by the conversion unit without any dispute or agitation.
4. Disputing the other ground on which the addition was sustained by the CIT(A), viz., since the assessee has treated the write back as its income in its books of account, it has to be treated as income under the Income-tax Act as well, the learned counsel for the assessee submitted that the conclusions drawn by the lower authorities are not based on the provisions of the Income-tax Act. He submitted that the question whether remission of debt was income was considered by the House of Lords in British Mexican Petroleum Co. Ltd. vs. Jackson 16 Tax Cases 570, wherein it was held that the trading liability remitted could not be included as a revenue receipt in the account of the year of remission and that the accounts of the preceding year where the debt was debited should not be reopened and adjusted by reference to the remission. He submitted that the above principle of general law was superseded by s. 41(1) which expressly made the amount remitted taxable as the deemed income of the year of remission. In this view of the matter, he submitted that while in general law remission or cessation of trading liability does not constitute income, it becomes taxable only by virtue of the deeming provisions of s. 41(1) of the IT Act. Hence, according to him, such remission or cessation of liability, even though it is shown as profit in the books of account cannot be assessed as income under general law, without invoking the provisions of s. 41(1) of the IT Act. He submitted that it has been consistently held by various Courts that for assessing the remission or cessation of trading liability, the entries in the books of account are not relevant, and provisions of s. 41(1) only should be applied. In this connection, he invited our attention to the provisions of s. 41(1) and submitted that the said provisions have no reference at all either to the books of account and entries therein with regard to the remission or cessation of liability or the system of accounting followed by the assessee, and they refer only to actual remission or cessation of trading liability, viz., extinguishment of trading liability in the eye of law. In this view of the matter, he submitted that the income accrues only under s. 41(1) and not by virtue of the entries in the books of account, and as such the lower authorities were not correct in proceeding to assess the liability towards Central Excise, only on the basis of the entries in the books of account.
5. Disputing the conclusion of the lower authorities that the reduction of Central Excise liability of the conversion unit has come into existence when the Collector of Central Excise(Appeals) passed the order on 16th July, 1991, the learned counsel, narrating the history of the dispute with regard to assessable values between the conversion unit and the Central Excise Department, submitted that the matter of valuation of the biscuits manufactured by the conversion unit was under dispute with the Department from 1982, and the Collector of Central Excise (Appeals) by his order dt. 16th July, 1991, had reiterated the earlier order of his predecessor, dt. 19th April, 1987, and directed the Asstt. Collector to determine the assessable values under r. 6(b)(i) by virtue of r. 7 taking into account the prices of other manufacturers of the same locality as ordered by his predecessor. He set aside the assessable values determined by the Asstt. Collector on 23rd March, 1990, on the basis of M/s. Super Food Products, and remanded the matter for de novo proceedings and for passing a speaking and specific order in the light of the discussion in the said order of 16th July, 1991. In this view of the matter, it is submitted that no funality can be attached to the order of the Collector of Central Excise (Appeals), and the dispute with regard to assessable values has not ended with the Collector(Appeals) order of 16th July, 1991, since in accordance with the said order, further orders were expected to be passed by the Asstt. Collector. For that matter, it is submitted that since the Collector of Central Excise (Appeals) has set aside the order of the Asstt. Collector passed earlier, and remanded the matter to him for de novo consideration and for passing a speaking and specific order, the entire matter was thrown open before the Asstt. Collector, for conducting fresh proceedings and for passing fresh orders in accordance with the directions of the Collector of Central Excise (Appeals). In these circumstances, it cannot be said that the date of order of the Collector of Central Excise (Appeals), viz., 16th July, 1991, is crucial for determination of the date of remission or cessation of liability, even if any, since the said order has not brought about any finality with regard to the assessees liability to the conversion unit on account of Central Excise. In this view of the matter, he submitted that the lower authorities were not justified in holding that the order of the Collector (Appeals) dt. 16th July, 1991, having been passed during the previous year relevant to this appeal, the liability written back has correctly been assessed in the year under appeal.
6. He further submitted that pursuant to the order of the Collector of Central Excise (Appeals), dt. 16th July, 1991, the Asstt. Collector passed fresh order on 27th April, 1992, stating that the prices of biscuits manufactured by M/s. Super Food Products are found to be comparable and that the assessable value of the products manufactured by the conversion unit can be fixed based on the comparison with the prices of M/s. Super Food Products. He accordingly directed the Superintendent to confirm/raise the demand accordingly. Thereupon, the final order of assessment was passed by the Superintendent on 18th/19th May, 1993, consequent upon which only final refund/liability was determined by the Central Excise Department. As such, it is submitted that the benefit of cessation of the outstanding Central Excise duty liability accrued to the conversion unit only on 18th/19th May, 1993, and this resulted in cessation of outstanding trading liability of the assessee on 18th/19th May, 1993, only and either on the basis of order of the Collector (Appeals), dt. 16th July, 1991, or even the order of the Asstt. Collector, dt. 27th April, 1992, assessee could not have secured any right to claim refund or abatement of liability. It is further submitted that the liability of the conversion unit under the bank guarantees executed by it under r. 9-B and bonds executed in Form No. 13, continued till the final assessment has been made by the Superintendent of Central Excise on 18th/19th May, 1993, in the following words in the case of Unit-I.
“It is declared that the R. T. 12s for the period 29th July, 1982, to 30th Sept., 1985, of M/s Ampro Food Products (Pvt.) Ltd., Unit-I, were finally assessed and found that an amount of Rs. 12,70,649.83 was excess paid by the assessee and a similar order was also passed in respect of Unit-II in the following words it is declared that the R. T. 12s for the period 29th Dec., 1982, to 30th Sept., 1985, of M/s Ampro Food Products (Pvt.) Ltd., Unit-II, are finally assessed and found that Rs. 5,03,316.83 was excess paid by the assessee.”
In view of the above, it is submitted that till the final order was passed by the Superintendent of Central Excise on 18th/19th May, 1993, the liability of the conversion unit continued and automatically the liability of the assessee also continued under the agreement entered with the conversion unit.
7. The learned counsel for the assessee has filed before us a paper-book containing inter alia statement of total income filed along with the return, financial statements filed with the return, written submissions made before the AO, orders of the Central Excise authorities, dt. 16th July, 1991, of Collector (Appeals), of the Asstt. Collector, dt. 27th April, 1992, and of the Superintendent, dt. 18th/19th May, 1993 among others, besides headnotes of various decisions referred to by the lower authorities, and relied upon by the assessee. He also filed a separate paper-book containing written submissions and data-sheet furnishing various details with regard to the point in dispute before us. He also filed a another paper-book furnishing copy of the agreement dt. 30th June, 1982, between the assessee and the conversion unit, relevant provisions of Central Excise Act, copy of order of the Superintendent of Central Excise, dt. 18th/19th May, 1993, duly typed for legibility; and copy of the decision of the Delhi Bench of the Tribunal in Jay Engineering Works Ltd. vs. IAC (1994) 50 TTJ (Del) 551.
8. The learned Departmental Representative, on the other hand, strongly supporting the orders of the lower authorities, submitted that while the liability of the conversion unit is statutory, the liability of the assessee is only a contractual one. Though in the normal circumstances, it is not an income assessable to tax, because of provisions of s. 41(1) it is deemed to be income. He submitted that it is a case of remission of liability and not cessation of liability. Relying on the decision of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. vs. CIT (1992) 196 ITR 845 (Cal), the learned Departmental Representative submitted that where an assessee treats a given amount as his own income and mentions that the amount has been forfeited, the assessing authority would be entitled to treat the amount as the income of the assessee, and the onus is on the assessee to established that in law, it was not entitled to treat the said amount as part of its income or that it was not entitled to forfeit the same and, therefore, its liability did not cease. He also relied upon the decision of the Calcutta High Court in the case of CIT vs. Asoka Marketing Ltd. (1993) 199 ITR 619 (Cal), and submitted that in similar circumstances, observing that there was no material before the Tribunal to show that the Sales Tax Department had filed any further appeal against the setting aside of the ex parte assessment order and the order passed originally raising demand of sales-tax was no longer in existence and had ceased to exist, held that the AO was fully justified in bringing the said amount of demand to tax, by applying the provisions of s. 41(1) of the Act. He also placed reliance on the decision of the Bombay High Court in the case of CIT vs. Bennett Coleman & Co. Ltd. (1993) 201 ITR 1021 (Bom), which was also relied upon by the lower authorities in the impugned orders.
9. In reply, the learned counsel for the assessee submitted that the assessees accounting year ended on 31st March, 1992, and there was no order that effectively resulted in the cessation of the assessees liability, passed by the Central Excise authorities, which fell during the previous year relevant to this appeals. In this connection, he submitted that the order of the Asstt. Collector passed in pursuance of the order of Collector (Appeals), dt. 16th July, 1991, on 27th April, 1992, and the order of the Superintendent of Central Excise, dt. 18th/19th May, 1993, which ultimately determined the liability of the conversion unit towards Central Excise, came to be passed subsequent to the close of the accounting year relevant to this appeal. As regards the decision of the Calcutta High Court in Kesoram Industries & Cotton Mills Ltd. (supra), relied upon by the learned Departmental Representative, he submitted that the observation of the Honble High Court on page 858 of the reports (196 ITR) are in favour of the assessee. In this connection, he submitted that the assessee has appended a note to the statement of income appended to the return, clarifying the position with regard to its contractual liability to the conversion unit on account of Central Excise duty. Even the decision of the Calcutta High Court in the case of Asoka Marketing Ltd. (supra) relied upon by the learned Departmental Representative, is distinguishable from the facts of the case on hand, since, as per the learned counsel for the assessee, the Collector (Appeals) remitted the matter to the Asstt. Collector for de novo consideration and passing fresh speaking and specific order in accordance with the discussion in his order of 16th July, 1991. and as such the order of the Collector(Appeals) dt. 16th July, 1991 was not the end of the matter, and further proceedings were expected to be initiated de-novo by the Asstt. Collector concerned. Even the decision of the Bombay High Court in CIT vs. Bennett Coleman & Co. Ltd. (supra) has no application to the facts of this case, since according to the learned counsel for the assessee, that case relates to bilateral expression of intention of debtor not to treat amount the recovery of which is barred by limitation, as a liability. He submitted that even in that case it is specifically held that in cases where the recovery has not become barred by operation of law bilateral act of the parties is necessary for the cessation of the liability. In this connection, he also invited our attention to the ratio laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) and in the case of CIT vs. India Discount Co. Ltd. (1970) 75 ITR 191 (SC), by the Calcutta High Court in CIT vs. Provincial Farmers (Pvt.) Ltd. (1977) 108 ITR 219 (Cal), by the Kerala High Court in CIT vs. Kerala State Drugs & Pharmaceuticals Ltd. (1991) 192 ITR 1 (Ker), by the Calcutta High Court in Ondal Investments Co. Ltd. vs. CIT (1979) 116 ITR 143 (Cal), by the Bombay High Court in Navjivan Udyog Mandir (P) Ltd. vs. CIT (1994) 207 ITR 47 (Bom), by the Gujarat High Court in CIT vs. Rashmi Trading (1976) 103 ITR 312 (Guj) and CIT vs. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj) (FB), by the Calcutta High Court in CIT vs. Sugauli Sugar Works (P) Ltd. (1983) 140 ITR 286 (Cal), by the Bombay High Court in J. K. Chemicals Ltd. vs. CIT (1966) 62 ITR 34 (Bom) and by the Delhi Bench of the Tribunal in Jay Engineering Works Ltd. vs. IAC (1994) 50 TTJ (Del) 551, relevant extracts from which are also furnished before us in the paper-book filed by the assessee.
10. We have considered the rival submissions and perused the orders of the lower authorities, papers filed before us in the three paper-books filed by the assessee, and the decisions relied upon by the learned counsel for the assessee and the learned Departmental Representative. The lower authorities have justified the impugned addition of Rs. 1,66,62,866 for the asst. yr. 1992-93 primarily on three counts. They are (1) since the assessee has written back the liability no longer required unilaterally, it has taken a decision that this amount is no longer required to be payable to the conversion unit. This unilateral action itself has brought about a cessation of liability to the extent of the said amount of Rs. 1,66,62,866; (2) The computation of income of an assessee has to be in accordance with the books of account maintained by the assessee and the entries in the books of accounts are pieces of admissible internal evidence and, therefore, since the assessee has written back the amount in the books of accounts, it has to be treated as the assessees income in the year in which it was written back (3) The reduction of excise duty liability in the case of conversion unit has come into existence when the Collector of Central Excise (Appeals) passed an appellate order dt. 16th July, 1991, wherein he has given a direction to follow the case of M/s. Super Food Products in the case of conversion unit also, which were followed by the Asstt. Collector of Central Excise and Superintendent of Central Excise, and as such the order of the Collector of Central Excise (Appeals), dt. 16th July, 1991, in essence and in effect brought abut the actual reduction of liability. Let us examine the validity of these grounds, which led to the impugned addition being made by the AO and sustained by the CIT(A) in the impugned orders.
11. To bring to tax any income as deemed income in terms of s. 41(1), there must be remission or cessation of liability in respect of the said amount. At this juncture we may refer to the provisions of s. 41(1) of the Act, which read as follows :
“41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some other benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of the previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.”
So, as to attract the provisions of s. 41(1), the assessee must have obtained, whether in cash or in any other manner whatsoever, any benefit in respect of such trading liability by way of remission or cessation thereof. It is amply clear from the provisions of s. 41(1) of the IT Act, that unless there is cessation or remission of a liability in any previous year, subsequent to the year in which allowance or deduction in respect thereof has been allowed, there cannot be any deemed income in terms of s. 41(1) of the Act. It is equally clear from the afore-noted provisions of s. 41(1) of the Act that the amount obtained by him or the value of the benefit accruing to him, shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as the income of the previous year. Thus, the deemed income in terms of s. 41(1) shall be brought to tax in the previous year in which the assessee derives the benefit accruing to him on account of remission or cessation of the liability. Thus, so as to bring any liability in respect of which an allowance or deduction has been allowed within the purview of provisions of s. 41(1), there must be a cessation or remission of the liability, and such cessation or remission should have taken place in the previous year relevant to the assessment year in which the said liability was brought to tax. Hence, the points that clinch the issue are whether there was any cessation or remission of a liability, and the time when such a cessation or remission of liability can be said to have taken place.
12. In the case on hand, it is the contention of the assessee that though the order of the Asstt. Collector of Central Excise passed on 27th April, 1992, pursuant to the order of the Collector of Central Excise (Appeals), dt. 16th July, 1991, fell outside the previous year relevant to this appeal, basing on the principle that major events occurring after the balance sheet date, viz. 31st March, 1992, should be taken into account and incorporated in the financial statements, the outstanding liability was written back to the P&L Account for the year ended 31st March, 1992. It is this unilateral write back in the P&L Account, that has basically resulted in the lower authorities concluding that the remission or cessation of the liability has taken place in the previous year relevant to this appeal. Whether such unilaterally made entries in the books of account can be said to amount in cessation or remission of liability, has come up for consideration before the Bombay High Court in the case of Bennett Coleman & Co. Ltd. (supra), and it was held in that case as follows :
“It cannot be accepted that cessation of liability can take place only as a bilateral act. It will depend on the facts of each case. There may be cases where the liability is not barred by operation of law. In such cases, for the cessation of liability a bilateral act of the parties will be necessary. However, in cases where the recovery has become barred by limitation by operation of law, unilateral expression or intention of the debtor not to treat the amount any more as a liability might be sufficient to bring about a cessation of liability. Diversion of the amount of liability to the P&L account in one of the most unequivocal modes of such declaration.”
In that case, the Honble High Court was considering a case where the recovery of the liability has become barred by limitation, and the assessee has written back the same to the P&L account. However, in the case on hand, assessees liability has not become barred by limitation. As held by the Honble High Court, in the cases where the liability has not become barred by limitation, for the cessation of liability, a bilateral act of the parties will be necessary, and unilateral act of write-back in the books of account by the debtor would not clinch the issue. Considering the issue whether an assessee who has himself written off his time-barred liability from his accounts and transferred the amount to P&L account, thereby treating it as income, can be permitted to turn around when the question of inclusion of such amount in his income under s. 41(1) of the Act arises, and say that despite his own action, the liability did not cease, the High Court held that in the absence of extraordinary circumstances, such a thing cannot be permitted, while in extraordinary cases where the assessee wants to contend that despite his own action of the nature indicated above, the liability still survives, the onus will be on the assessee to bring sufficient materials on record to satisfy the authorities concerned in that regard. Though reliance was sought to be placed on behalf of the Revenue on this decision to contend that if despite write-back of the liability in the books of account, the liability still survived the onus is on the assessee to satisfy the authorities concerned by bringing on record sufficient material in that behalf, these observations of the Honble High Court have no relevance to the cases involving liabilities which are not time-barred, since the Honble High Court made these observation while considering the case of an assessee who has himself written off his time-barred liability from his accounts. In any event, despite the unilateral act of write-back of the liability and transferring the same to the P&L account, the assessee before us, has written letter dt. 4th May, 1992, to the conversion unit reaffirming its commitment to the conversion unit with regard to the Central Excise liability, despite write back of the same in its books of account. We have already extracted the relevant portion of the said letter in para 2(1) hereinabove. Even the note appended to the statement of income appended to the return for the year under appeal clarifies the position of the assessee in this behalf. As such, despite the write back of the liability and transfer of the same to the P&L Account, the assessee has made its mind abundantly clear by its letter dt. 4th May, 1992, addressed to the conversion unit and in the note appended to the return, that it has no intention to disclaim the liability towards its conversion unit on account of Central Excise duty as and when ultimately determined.
13. Similarly, in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), the Honble Supreme Court considering the deductibility of the sales-tax liability with regard to sales made during the accounting period, despite assessees failure to make entries in the books of account, held as follows :
“Whether the assessee in entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusion in the matter.”
In the case of India Discount Co. Ltd. (supra), the Honble Supreme Court inter alia held as follows :
“That the receipt being one which in law could not be regarded as income, it could not become income merely because the respondent erroneously credited it to the P&L account.”
Further, in the case of Kerala State Drugs and Pharmaceuticals Ltd. (supra), the Kerala High Court held as follows :
“In order to tax an income, one has to see whether it is the real income or whether the income has materialised. What is necessary to be considered is the true nature of the transaction and whether in fact the transaction has resulted in profit or loss to the assessee. Once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. Even under the mercantile system of accounting it is only the accrual of real income which is chargeable to tax. The income should not be hypothetical income, but real income. If income is given up unilaterally by the assessee after it had accrued, he could not escape liability to tax. When income is in fact received but subsequently given up, it remains the income of the recipient and tax is payable. When income has not resulted at all, there is neither accrual nor receipt of income even if there is an entry to that effect in the books of account. Mere posting of an entry in the account book would not always supply conclusive evidence on the question whether the disputed amount has accrued to the assessee or not. Mere effort on the part of the assessee to realise the amount by sending a bill or making a claim or filing a suit for recovery would not, in law, make it income which has accrued in the year in question. The transfer of the amount to the P&L account is benefit of any significance.
Considering the facts and circumstances of that case, the Honble High Court held that the price of drugs supplied by the assessee was only tentative. The entries made in the accounts represented mere claims and did not represent any income accrued or received. The excess amount credited in the accounts of the assessee was held to be not assessable as its income.
14. In the case of J. K. Chemicals Ltd. vs. CIT (supra), the Honble Bombay High Court, considering the provisions of s. 10(2A) and s. 13 of the IT Act, 1922, held as follows :
“Held, that, in order that an amount may be deemed to be income under s. 10(2A), there must be a remission or cessation of the liability in respect of that amount. The mere fact that more than three years had elapsed since the accrual of the liability and that the debts had become unenforceable against the assessee under the general law does not constitute cessation of the trading liability within the meaning of s. 10(2A). A mere entry of credit in the accounts in respect of the amount would also not bring about a remission of cessation of the liability. Sec. 10(3A) (sic) was not, therefore, applicable and the amount was not liable to be assessed as income of the accounting year in which the credit entry was made.
Though s. 1 3 provides that income, profits and gains under s. 10 or s. 13 are to be computed in accordance with the method of accounting regularly employed by the assessee, that does not mean that what is shown as the liability in the books of account of the assessee or what has been shown as income in the books of account of the assessee would necessarily be liability or income within the meaning of the Act.”
From the ratio laid down in the decisions discussed above, it is absolutely clear that the entries in the books of account are not the sole determining factor with regard to cessation or remission of any liability and unless the recovery of any amount is barred by limitation, no unilateral act on the part of an assessee by writing back and transferring the amount of said liability to the P&L account can bring about any cessation of the liability. Any cessation of liability, unless barred by limitation, has to be brought about by bilateral acts of both the parties.
15. Further, it is evident from the letter of the assessee addressed to the conversion unit on 4th May, 1992, relevant portion of which has already been extracted in para-2(i) above, that notwithstanding the write back of the liability in its books of account and transferring the same to the P&L Account, the assessee has no intention of either disclaiming or disowning its contractual liability to the conversion unit on account of Central Excise duty. By the said letter, the assessee has specifically undertaken to pay the Central Excise duty liability of Rs. 1,66,62,866 or any part thereof if the Superintendent of Central Excise determines on the basis of Asstt. Collectors order dt. 27th April, 1992, that the Central Excise duty liability or any part thereof is payable by it. Thus, notwithstanding the entries in the books of account, the assessee has no intention at all to bring about a cessation of the liability. This position is also clear from the note appended to the return, relevant portion of which is also extracted in para 2(j) above.
16. Apart from the acts on the part of the assessee, no order of the Central Excise authority rendering finality to the statutory liability of the conversion unit towards Central Excise duty, and consequently the contractual liability of the assessee to the conversion unit in that behalf, has been passed during the previous year relevant to this appeal. Though the lower authorities have considered the order of the Collector of Central Excise(Appeals), dt. 16th July, 1991, which was passed during the previous year relevant to this appeal, determined the liability and settled the dispute, we are not in agreement with the said view taken by the lower authorities. In para 19 of the said order of the Collector (Appeals), the appeals were disposed of in the following manner :
“19. In view of the findings as above, I remand back all these 9 cases to the concerned jurisdictional Asstt. Collectors for de novo proceedings for passing a speaking and specific order as discussed above.”
From the above order and direction of the Collector (Appeals), it cannot be said that the order of the Collector (Appeals) has determined the actual liability of the conversion unit towards Central Excise duty or cessation in respect thereof. When the Collector(Appeals) merely remanded the matter to the concerned Asstt. Collector for de novo proceedings for passing speaking and specific order it cannot be said that the order of the Collector(Appeals) is the end of the matter, since de novo proceedings in accordance with the directions of the collector(Appeals) were expected to be initiated by the Asstt. Collector to whom the matter was remanded. For that matter, even the consequent order of the Asstt. Collector dt. 27th April, 1992, on the basis of which entries in the books of account have been made to write back the liability cannot be said to have brought about the cessation of the liability, because on the basis of the said order of the Asstt. Collector, the Superintendent of Central Excise was expected to pass the necessary consequential orders giving effect to the order of the Asstt. Collector, to determine the actual liability of the conversion unit towards Central Excise duty and arrive at the figures of additional demand to be raised or the refund to be made to the conversion unit. Such order of the Superintendent of Central Excise in the instant case has been passed only on 18th/19th May, 1993, a typed copies of which are filed before us at pages 31 of the third paper-book of the assessee. It is only upon the passing of this order of the Superintendent of Central Excise, the bonds and bank guarantees executed by the conversion unit towards the provisional liability for Central Excise duty, would be released after adjusting the actual liability determined, and it is only at that stage when the Superintendent of Central Excise passed the order dt. 18th/19th May, 1993, that the cessation of liability of the conversion unit, and the consequent cessation of contractual liability of the assessee towards Central Excise duty, if any, can be said to have taken place.
17. At this juncture, we may refer to the decision of the Calcutta High Court decision in the case of CIT vs. Ashoka Marketing Ltd. (supra) relied upon by the learned Departmental Representative in support of the Revenues stand that the order of the Collector (Appeals), dt. 16th July, 1991, is the crucial one to determine the time of cessation of the liability of the assessee. In that case, the assessee-company had claimed and was allowed a deduction of the sales-tax liability amounting to Rs. 17,78,867 in respect of four quarters ending 31st Aug., 1963. This liability was fastened upon the assessee on the basis of an ex parte order dt. 16th Aug., 1967, passed by the CTO. The assessee did not make any provision for this sales-tax liability in its books of account, but the claim was made based upon the ex parte order passed by the CTO on 16th Aug., 1967. Subsequently on an appeal filed by the assessee, the Asstt. Commissioner of Commercial Taxes, by his order dt. 4th Aug., 1973, set aside the ex parte order. On there facts, the Honble High Court held that there being no appeal against the order of the Asstt. Commissioner of Commercial Taxes setting aside the ex parte assessment order, and as such the said appellate order having become final, the sales-tax demand raised originally of Rs. 17,78,767, was no longer in existence and had ceased to exist. As such, it was held that the AO was fully justified in bringing to tax the said amount for assessment under s. 41(1) in the asst. yr. 1974-75. In the facts of the case on hand, further proceedings in pursuance of the order of the Collector of Central Excise(Appeals), by way of de novo proceedings were expected to be taken up, and as long as the ultimate liability of the conversion unit towards Central Excise liability is not determined and the bonds and bank guarantees upon such determination of the ultimate liability are not released for the excess provided for, if any, it cannot be said that the proceedings have reached finality, and the statutory liability of the conversion unit and the contractual liability of the assessee ceased to exist. In this view of the matter, the ratio laid down in the case of Ashoka Marketing Ltd. (supra), has no application to the facts of the case before us.
18. Interpreting the provisions of s. 41(1) for deciding the question as to in which year the deemed income is assessable, the Gujarat High Court in the case of CIT vs. Rashmi Trading (supra), held as follows :
“Held, that the words “obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure” (incurred in any previous year) in s. 41 clearly refer to the actual receiving of that amount. The cash may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual cash which is contemplated by the legislature when it used the words “has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure”.
Similarly, in the case of CIT vs. Bharat Iron & Steel Industries (supra), the Full Bench of the Gujarat High Court, interpreting the provision of s. 41(1), held as follows :
“…….. Sec. 41(1) introduces a fiction by which where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever 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 by him or the value of benefit accruing to him shall be deemed to be profits and gains of the business or profession and, accordingly, chargeable to income-tax as income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. The fiction is an indivisible one. It cannot be enlarged by importing another fiction, namely, that if the amount was obtained or was receivable during the previous year, it must be deemed to have been obtained or received during that year. The amount may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or the equivalent of cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the legislature when it used the words has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past. In the context in which these words occur, no other meaning is possible.”
Considering the facts and circumstances of that case, the Honble Gujarat High Court held as follows :
“Held, that, in view of the pendency of the review or revisional proceedings, the assessees claim for refund of the excise duty was in jeopardy. In other words, there was no final decision on the question whether or not the assessee was entitled to claim refund of excise duty of Rs. 1,81,427. It was only when the review or revisional proceedings were dropped on 30th April, 1976, that the assessee became finally entitled to claim refund of Rs. 1,81,427. The year of account of the assessee was the financial year and, therefore, the refund of excise duty of Rs. 1,81,427 was not includible in the assessees total income for the asst. yr. 1974-75 under s. 41(1).”
19. The Calcutta High Court in the case of CIT vs. Sugauli Sugar Works (P) Ltd. (supra) held that s. 41(1) of the Act, treats as income what had earlier been allowed as a deduction. It creates a liability to tax only in those cases where an allowance had been actually granted. Considering the scope of cessation of liability, it was held as follows :
“There can be a cessation of liability of a debt by the bilateral acts of both the creditor and debtor or by the refusal of the debtor to honour his liability when pressed for dues or by the discharge of the debt by making a payment of the dues. In no case can a debtor bring the liability to an end on his own volition.”
20. Similarly, the Tribunal in the case of Jay Engineering Works Ltd. vs. IAC (supra) held that provisions of s. 41(1) were not attracted where assessee wrote back its excise duty liability unilaterally in view of a judgment of the Supreme Court, while its own petition was pending before the Supreme Court and bond and bank guarantee given by assessee were still in force.
21. Even the decision of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills (supra) has no application to the facts of the case before us. In the cited case it was held that where an assessee treats a given amount as his own income and mentions that the amount has been forfeited, the assessing authority would be entitled to treat the amount as the income of the assessee. It is not the case of the assessee before us that the conversion unit has forfeited the amount due from the assessee towards the Central Excise duty liability, and for that matter, even the assessee itself has not disowned or disclaimed its contractual liability to the conversion unit on account of Central Excise liability, and has reaffirmed its commitment under the contract by its letter dt. 4th May, 1992, undertaking to meet the ultimate statutory liability towards Central Excise duty that may be determined. It was also held by the Calcutta High Court in that case, that the onus is on the assessee to establish that, in law, it was not entitled to treat the said amount as part of its income or that it was not entitled to forfeit the same, and, therefore, its liability did not cease. It is further noted that when the assessee itself comes to the conclusion that the amount in question would not be claimed by the concerned persons and thereafter, it proceeds to forfeit such amount and does not take such amount to a reserve account but writes back in the P&L account, the reasonable inference that will follow from these facts and circumstances and the conduct of the assessee is that the amount which was provided for was in fact not necessary and it was an excess provision. Even these observations of the Honble High Court in the case of Kesoram Industries & Cotton Mills (supra), cannot come to the aid of the Revenue, because, as already noted above, neither the assessee nor the conversion unit forfeited the liability of the assessee towards Central Excise duty liability that may ultimately be determined in the hands of the conversion unit, and notwithstanding the write back in the books of account, the assessee reaffirmed its commitment and undertook to fulfil its obligation with regard to Central Excise liability, in its letter to the conversion unit dt. 4th May, 1992. This letter of the assessee to the conversion unit and the note appended to the return of income clearly discharge the onus that lay on the assessee to prove that the liability under the contract has not ceased, and continued to subsist throughout the previous year relevant to this appeal.
22. Considering totality of facts and circumstances of the case and the legal position that emerges from the above discussion we are of the considered opinion that there was neither cessation nor remission of the assessees liability under its contract with the conversion unit with regard to Central Excise duty payable by the conversion unit, and notwithstanding the entries made by the assessee in the books of its account, the lower authorities were not justified in bringing to tax the said liability of Rs. 1,66,62,866 under s. 41(1) of the IT Act. We accordingly delete this addition of Rs. 1,66,62,866 made by the AO and sustained by the CIT(A) in the impugned order.
23. In the result, assessees appeal is allowed.