COMMISSIONER OF INCOME TAX Vs. ABDUL AHAD

JUDGEMENT

(1.) BY this reference under Section 256(1) of the Income-tax Act, 1961 (the "Act"), made at the instance of the Revenue, the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (the "Tribunal"), has referred the following question of law to this court for opinion :

(2.) THIS reference pertains to the assessment year 1964-65. The controversy is about the inclusion of a sum of Rs. 41,453 in the taxable income of the assessee as "profits chargeable to tax" under Section 41(l)(a) of the Act. The material facts giving rise to this controversy, briefly stated, are as follows. In the course of the assessment of the assessee for the assessment year 1964-65, the Income-tax Officer observed that a sum of Rs. 41,453, representing certain balances in respect of which allowance or deduction had been made in the assessments of the assessee in the past, had been written off by the assessee during the relevant previous year and credit given to the partners in their profit sharing ratio. He was of the opinion that it was a case of remission of liability and hence that amount was chargeable to income-tax under Section 41(l)(a) of the Act. He, accordingly, included the sum of Rs. 41,453 in the taxable income of the assessee under the head "Profits and gains of business". The assessee appealed to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner observed that the ground of appeal challenging the inclusion of the above amount in the taxable income of the assessee was not pressed. He, however, rejected the claim of the assessee in this regard on the merits also. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal found that the Appellate Assistant Commissioner had not given any reason for holding that this amount was taxable under Section 41(1) of the Act. The matter was, therefore, remitted to the Appellate Assistant Commissioner for re-adjudicating this claim of the assessee after hearing' both the parties. The Appellate Assistant Commissioner, on hearing both the parties, observed that certain outstanding credit balances, in all amounting to R. 41,453, appearing in the accounts of the customers, employees, dealers and sub-contractors had been written off by the assessee in the previous year relevant to the assessment year 1964-65 and transferred to its profit and loss account and apportioned amongst its partners in their respective-pro fit ratio. The Appellate Assistant Commissioner also observed that there was no dispute about the fact that the deduction had been made in the assessments for earlier assessment years in respect of the amounts represented by the credit balances written off by the assessee during the relevant previous year and transferred to its profit and loss account. The Appellate Assistant Commissioner was, therefore, of the opinion that it was a clear case where the assessee had obtained benefit in respect of trading liability to the extent of Rs. 41,453 by way of remission of trading liability. The assessee appealed to the Tribunal. The Tribunal held that despite the fact that trading liability to the tune of Rs. 41,453 had been written off by the assessee and the amount transferred to its profit and loss account and apportioned amongst its partners in their profit-sharing ratio, no material was brought on record by the Revenue to establish that there was remission or cessation of the liability. While doing so, the Tribunal relied on the decision of the Bombay High Court in J. K. Chemicals Ltd. v. CIT [1966] 62 ITR 34.

(3.) RELIANCE was also placed on the decision of the Court of Appeal in England in Morley (H. M. Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 which has also been referred to by the Supreme Court in CIT v. T. V. Sun-daram tyengar and Sons Ltd. [1996] 222 ITR 344. Great stress was laid on the following passage from the said judgment which is quoted in the above decision of the Supreme Court (page 352) :