(Appeal by special leave from the judgment and order, dated November 19, 1999 of the Kerala High Curt in I.T.R. No. 16 of 1997).

Income‑tax‑‑‑

‑‑‑Deemed profits‑‑‑Remission or cessation of trading liability‑‑ Provision made towards purchase tax liability in earlier year‑‑‑Written back in accounts‑‑‑Sales Tax Department pursuing claim‑‑‑Amount written back cannot be taxed as deemed profit‑‑‑Unilateral action of assessee not conclusive‑‑‑Indian Income Tax Act, 1961, S.41(1) (before introduction of Expln. 1).

During 1978‑1981, the assessee, engaged in the business of tea, spices, etc., had made provision for purchase tax liability. The liability to purchase tax was in dispute and the Sales Tax Department persisted in its claim for purchase tax. During the previous year relevant to the assessment year 1985‑86, the assessee‑‑‑apparently for the reasons that the decision of the Supreme Court had dismissed the State's special leave petition to appeal from the decision of the High Court in Neroth‑Oil Mills (1982) 49 STC 249 (Ker.)‑‑‑wrote back in its accounts the sum of Rs.14,65,997 out of the provisions for purchase tax liability, which sum the Assessing Officer brought to tax under section 41(1) of the Income Tax Act, 1961, as deemed profit. On appeal, the Commissioner (Appeals) held that out of the sum of Rs.14,65,997, two amounts, viz., of Rs.6,61,413 and Rs.5;10,826, had already been brought to tax in the assessment years 1980‑81 and 1981‑82 and only the balance of Rs.3,02,758 could be brought to tax. On appeal, the Appellate Tribunal held that the sum of Rs.3,02,758 could not be brought to tax, since the sales tax department was pursuing the matter in respect of the purchase tax liability of the assessee as .late of 1993 and the cases were still pending decision before the Sales Tax Authorities and the judgment of the Kerala High Court was concerned with only one of two aspects relating to exemption from purchase tax, and the other aspect was still involved in the assessee's case, there was no cessation of liability and 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 a reference, the High Court affirmed the decision of the Appellate Tribunal. On appeal to the Supreme Court:

Held, affirming the decision of the High Court, that the Appellate Tribunal as well as the High Court were justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question: despite the finality attained by the judgment in Neroth Oil Mills' case (1982) 49 STC 249 (Ker.), the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the Sales Tax Department continued. The unilateral act on the part of the assessee by way of writing off the liability in its accounts did not necessarily mean that the liability had ceased in the eye of law.

CIT v. Sugauli Sugar Works (P.) Ltd. (1999) 236 ITR 518 (SC) fol.

CIT v. T.V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC) distinguished.

CIT v. Kesaria Tea Co. Ltd. (2000) 243 ITR 362 affirmed.

Deputy CST v. Neroth Oil Mills Co. Ltd. (1982) 49 STC 249 (Ker) ref.

R.P. Bhatt, Senior Advocate (Rajiv Tyagi and B.V. Balram Das, Advocates for Appellant.

Ms. Asha Gopalan Nair, Advocate for Respondent.

JUDGMENT

P. VENKATARAMA REDDI, J.‑‑‑The opinion recorded by the Kerala High Court in I.T.R. No.16 of 1997 (see (2000) 243 ITR 362), 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, 1961, for the opinion of the High Court (page 364):

"Whether, 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 the Commissioner of Income‑tax (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.

The 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 March 31, 1985), the assessee "wrote back" in its accounts a sum of Rs.14,65,997 representing the provisions 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 Deputy CST v. Neroth Oil Mills (1982) 49 STC 249. The S.L.P. 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 provisions made earlier towards purchase tax, and therefore, made the entries in the books of account during the year ending on March 31, 1985. The Assessing Officer added the sum of Rs.14,65,997 which represents the provisions 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 March 31, 1985. In the first appeal, the Commissioner of Income‑tax (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. However; 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 the S.L.P. in Neroth Oil Mills' case (1982) 49 STC 249 (Ker.), in November, 1984. Certain observations were also made as regards the includibility of the sums pertaining to the assessment years 1980‑81 and 1981‑82 in respect of which reassessments were made. However, in this appeal, we need not go into the details thereof.

On 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 cessation of liability within the meaning of section 41(1) of the Income‑tax‑Act during the relevant year on account of dismissal of the S.L.P. in another case. The Tribunal observed that for claiming exemption from purchase tax on the ground that the transaction was in the course of export, two conditions were required to be fulfilled: (1) the things purchased and exported are one and the same; and (2) the purchases were against firm orders for export. Neroth Oil Mills' case (1982) 49 STC 249 (Ker) was concerned only with the first aspect and not the second aspect. Therefore, the Tribunal observed that the judgment in Neroth Oil. Mills' case (1982) 49 STC 249 (Ker), 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 a 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 the Revenue by special leave.

It may be noted that the provisions 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 March 31st, 1985 for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exist 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 years, 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: (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the years in which such event occurred; (3) in that situation the value of the benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of the benefit is made chargeable to income tax as the income of .the previous year wherein such benefit was obtained. The 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. Despite the finality attained by the judgment in Neroth Oil Mills' case (1982) 49 STC 249 (Ker) the other issues having bearing .on the exigibility of purchase tax still remained and the dispute between the assessee and the Sales Tax Department was still going on. There is no material on record to rebut these factual observations made by the Tribunal. Nor can it be said that the reasons given by the Tribunal are irrelevant.

The 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 the amount of Rs.3,20,758 deeming the same as income of the years 1985‑95 under section 41(1) is well‑justified of the Act. But, what the assesse has done is not conclusive. As observed by the Tribunal, a 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 v. Sugauli Sugar Works (P.) Ltd. (1999) 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).

The decision of this Court in CIT v. T. V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344, has been cited by learned counsel for the appellants. We find no relevance of this decision to the determination of the question involved in the present case. The factual matrix and the provisions of law considered therein is entirely different.

For 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.

M.B.A./1095/FCAppeal dismissed.