Holding

Section 41(1) can be invoked only when the liability has finally ceased without any possibility of revival; a unilateral writing‑back of a provision does not extinguish the statutory liability, so it could not be applied in this case.

Summary

The case concerned Kesaria Tea Co. Ltd., which had earlier claimed a deduction for a provision made towards purchase tax liability for the years 1978‑81. In the assessment year 1985‑86 the company wrote back the provision, believing that the liability had ceased following the rejection of a special leave petition in the Neroth Oil Mills case. The assessing officer treated the written‑back amount as income under Section 41(1) of the Income Tax Act, and the revenue appealed. The Supreme Court examined whether the purchase‑tax liability had finally ceased, a prerequisite for invoking Section 41(1). It held that a unilateral accounting entry does not extinguish a statutory liability and that, because the dispute over the liability remained pending, the liability had not finally ceased. Consequently, Section 41(1) could not be applied and the revenue’s appeal was dismissed.

Issues considered

Whether the purchase tax liability of the assessee had finally ceased during the assessment year 1985‑86 such that Section 41(1) of the Income Tax Act, 1961 could be invoked to bring back the earlier deduction as income.

Legislation cited

Income Tax Act, 1961s. 256(1), s. 41(1)

Subjects

purchase taxSection 41(1)income tax deductionliability cessationassessment yearSupreme Court

Judgment

THE CHIEF COMMISSIONER OF INCOME TAX, COCHIN A
v.
MIS. KESARIA TEA CO. LTD.

MARCH 19, 2002

[S. RAJENDRA BABU, K.G. BALAKRISHNAN AND B
P. VENKATARAMA REDD!, JJ.]

Income Tax Act, 1961-Section 41(1)-Applicability-Purchase tax
liability-Remission or cessatio1>-Benefit of-Assessee made provision in books C
of accounts towards purchase tax-Availed benefit of deduction from business
income in earlier assessment years-Assessee reversed the same by writing
back in its accounts a sum for a relevant assessment year-Assessing Officer
treated sum representing provision towards purchase tax during earlier
assessment year as income for relevant assessment year-Whether purchase
tax liability ceases and thus, S.41(1) can be invoked to enable Revenue to take D
back ;,hat it has allowed earlier as business expenditure and to include such
amount_qs income ofrelevant assessment year-Held, no since mere unilateral
act on the part of assessee writing back amount does not have the effect of
extinguishing statutory liability and Section 41(1) can be invoked only if liability
of assessee is assessed without the possibility of reviving it.
E
The question which arose for consideration in the present appeal was
whether the purchase tax liability of assessee ceased finally during the relevant
assessment year so that resort could be had to Section 41(1) of the Income
Tax Act enabling the Revenue to take back what has been allowed earlier as
business expenditure and to include such amount in the income of relevant F
assessment year.

Dismissing the appeal, the Court.

HELD: 1. In order to apply Section 41(1) of the Income Tax Act, 1961
." in the context of the facts in the instant case, the following points are to be G
taken into account : (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 year in
wltich such event occurred; (3) in that situation the value of benefit accruing
571 H
572 SUPREME COURT REPORTS [2002] 2 S.C.R.

A 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 benefit is made chargeable to
income tax as the income of the previous year wherein such benefit was
obtained. [574-E-F]

2. The High Court, agreeing with the Tribunal that an unilateral action
B on the part of the assessee in writing~back the amounts could not have the
effect of extinguishing the statutory liability has rightly held that 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
C to the conclusion that the purchase tax liability of the assessee had not ceased
finally during the year in question. [574-B-G]

Commissioner ofIncome Tax v. T. V Sundaram Iyengar and Sons Ltd, 222
ITR 344, distinguished.

D CIT v. Suguli Sugar Works (P) Ltd, 236 ITR 518, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1581 of
2001.

From the Judgment and Order dated 19.i 1.99 of the Kerala High Court
E in I.T.R. No. 16 of 1997.

R.P. Bhatt, Rajiv Tyagi and B.V. Balam Das for the Appellant.

Ms. Asha Gopalan Nair for the Respondent.

p The Judgment of the Court was delivered by

P. VENKATARAMA REDDI, J. The opinion recorded by the Kerala
High Court in ITR No. 16 of 1997 has given rise to this appeal filed by the
Chief Commissioner of Income-tax. The dispute relates to the assessment
year 1985-86. At the instance of the Revenue the following question was
G referred under Section 256(1) of the Income-tax Act for the opinion of the
High Court:

"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
H by CIT (Appeals)?"
CHIEFCOMMR. OF INCOME TAX v. KESARIA TEA CO. LTD. {P. VENKATARAMA REDDl,J.] 573
The High Court accepted the view of the Tribunal which partly allowed A
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 31.3.1985) the assessee 'wrote-back' in its accounts a sum of Rs. 14,65,997
representing the provision made during earlier years (1978-1981) towards its B
purchase tax liability. It appears that the liability to pay purchase tax on
certain goods was in dispute and, therefore, the provision was made. Further,
it appears that the assessee, in support of its claim for purchase tax relief,
inter alia, relied on the decision of the Kerala High Court in Neroth Oil Mills'
case. The SLP filed by the Kerala State against the decision of the High C
Court in the said case was rejected by this Court in November, 1984.
Apparently, for that reason, the assessee thought it fit to reverse the provision
made earlier towards purchase tax and therefore made the entries in the
books of account during the year ending on 31.3.1985. The assessing officer
added the sum of Rs. 14,65,997 which represents the provision made towards
purchase__tax during the assessment years 1978-79, 1979-80 and 1980-81, D
treating the same as the income of the previous year ending on 31.3 .1985. In
the first appeal, the CIT (Appeals) held that there was no justification to
include the sums which were already included in the course of reassessments
m.;d;;'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 E
Commissioner held that the liability of the assessee finally ceased during the
year 1985-86 in view of the rejection of SLP in Neroth Oil Mills' case in

--
November 1984. Certain observations were also made as regards the
includiblity of the sums pertaining to assessment years 1980-81 and 1981-82
in respect of which reassessments were made. However, in this appeal, we
need not go into the details thereof. F

• 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 no cessation of liability within the meaning of Section 41(1) G
of the Income-tax Act during the relevant year on account of dismissal of
SLP in another case. The Tribunal observed that for claiming exemption
from purchase tax on the ground that transaction was in the course of export,
two conditions were required to be fulfilled: (1) things purchased and exported
are one and the same and (2) the purchases were against firm orders for
export. Neroth Oil Mills' case was concerned only with the first aspect and H
574 SUPREME COURT REPORTS [2002] 2 S.C.R.

A not the second aspect. Therefore, the Tribunal observed that the judgment in
Neroth Oil Mills' case, even if it had attained finality does not put an end to
the disputed issue involved in the respondent-assessee's case. The Tribunal
further noticed that as late as 1993, the sales tax department was pursuing the
issue relating to purchase tax liability of the assessee from the assessment
year 1974-75 onwards and the cases were still pending decision before the
B Sa_les Tax Authorities. The Tribunal pointed out that the unilateral action on
the part of the assessee in writing-back the amounts could not have the effect
of extinguishing the statutory liability. On reference, the High Court approved
the view taken by the Tribunal and held that Section 41 (I) cannot be invoked
in the instant case. H~nce, this appeal by revenue by Special leave.
c It may be noted that the provision was made in the books of account
towards purchase tax which was und~r dispute and the benefit of deduction
from business income was availed of in the past years in relation thereto. The
same was sought to be reversed by the assessee during the year ending on
31.3 .1985 for whatever reason it be. The question is whether the circumstances
D contemplated by Section 41(1) exists so as to enable the Revenue to take
back what has been allowed earlier as business expenditure and to include
such amount in the income of the relevant assessment year i.e. 1985-86. In
order to apply Section 41 (1) in the context of the facts obtaining in the
present case, the following points are to be kept in view : (1) In the course
E 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 year in which such event occurred; (3) in that situation the
value of benefit accruing to the assessee is deemed to be the profit and gains
of business which otherwise would not be his income; and (4) such value of
F 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 (l) 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
G High Court were well justified in coming to the conclusion that the purcnase
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, the
other issues having bearing on the exigibility of purchase tax still remained
and the dispute between the assesseee and the sales-tax department was still
going on. There is no material on record to rebut these factual observations
H made by the Tribunal. Nor can it be said that the reasons given by the
CHIEFCOMMR. OF INCOME TAX v. KESARIA TEA CO. LTD. [P. VENKATARAMA REDDl,J.] 575

Tribunal are irrelevant. A
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 amount of Rs. 3,20,758 deeming the same as B
income of the year 1985-86 under Section 41 (1) is well justified of the Act.
But, what the assessee has done is not conclusive. As observed by the Tribunal,
an unilateral action on the part of the assessee by way of writing-off the
liability in its accounts does not necessarily mean that the liability ceased in
the eye of law. In fact, this is the view taken by this Court in CIT v. Suguli C
Sugar Works (P) ltd., [236 !TR 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 I to Section 41(1).

The decision of this Court in Commissioner of Income Tax v. T V. D
Sundaram Iyengar and Sons ltd., [222 !TR 344] has been cited by the learned
counsel for the appellant. We find no relevance of this decision to the
determination of the question involved in the present case. The factual matrix
and the provision of law considered therein is entirely different.

For the reasons aforesaid, we affirm the opinion expressed by the High E
Court and dismiss the appeal filed by the Revenue. There shall be no order
as to costs.

N.J. Appeal dismissed .

•