M/S The Rajasthan State Co-Operative Bank Ltd., 2Nd Floor,Apex Building, Nehru Bazar, Chaura Rasta, Jaipur v. Assistant Commissioner Of Income Tax, Circle-06, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 267/2017 M/s The Rajasthan State Co-Operative Bank Ltd., 2Nd Floor,Apex Building, Nehru Bazar, Chaura Rasta, Jaipur ----Appellant Versus Assistant Commissioner Of Income Tax, Circle-06, Jaipur ----Respondent For Appellant(s) : Mr. Gunjan Pathak with Ms. Ishita RawatFor Respondent(s): Mr. R.B. Mathur with Mr. Prateek Kedawat HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS 06/03/2018 Judgment 1.By way of this appeal, the appellant has assailed thejudgment and order of the tribunal whereby tribunal has dismissedthe appeal preferred by the assessee and confirmed the order ofCIT(A) and AO. 2.This court while admitting the appeal on 9.10.2017 framedfollowing substantial question of law:- “Whetherunderthefactsandcircumstances of the case and in law, theld. ITAT was justified in confirming theaddition of Rs.1,18,99,651/- made to theincome of the appellant based on thefinding that in the years of transfer to theReserve Fund of the excess provisionsmade for establishment and otherexpenses in earlier years when thebusiness income of the Appellant Bank wastotally exempt under the section 80P of the Income Tax Act, 1961 amounts tocessation of those liabilities and therefore,chargeable to tax in the current year being2007-08 under Section 41(1) of IncomeTax Act, 1961.? 3.The facts of the case are that the assessee is an apex Co-op.Bank of Rajasthan deriving income from Banking business. Theincome of assessee co-operative Bank was exempt u/s 80P(2) ofI.T. Act, 61 in all the earlier year(s) and from this assessment year2007-08, the entire income from Banking business of assesseeBank became taxable on withdrawal of exemption by insertion ofsection 80P(4) by Finance Act, 2006 w.e.f 1-4-07. The originalassessment was completed u/s 143(3) at an income of Rs.32,94,27,120/- making disallowance of Rs. 1,18,99,651/- onaccount of transfer to statutory Reserve out of carried forwardaccount of provision for expenses treating the same as taxable u/s41 of I.T.Act, 1961 and disallowance of Rs. 1,00,21,000/- out ofcontribution to PAC Managers salary. 4.The matter was argued time and again and on 16.1.2018following order was passed:- Prima facie, the argument canvassedby the counsel for the appellant isrequired to be viewed very seriously inview of the three decisions i.e. KeralaHigh Court in Commissioner ofAgricultural Income Tax vs. KeralaEstate reported in (1974) 96 ITR 210wherein it has been as under:- “5.As we understand this decision,the principle behind it is that moneyembezzled from an assessee retains thecharacter of income of the assessee inthe hands of the person who embezzledthe money and when he either returnsit to the assessee, or when it is 4.The matter was argued time and again and on 16.1.2018following order was passed:- Prima facie, the argument canvassedby the counsel for the appellant isrequired to be viewed very seriously inview of the three decisions i.e. KeralaHigh Court in Commissioner ofAgricultural Income Tax vs. KeralaEstate reported in (1974) 96 ITR 210wherein it has been as under:- “5.As we understand this decision,the principle behind it is that moneyembezzled from an assessee retains thecharacter of income of the assessee inthe hands of the person who embezzledthe money and when he either returnsit to the assessee, or when it is recovered by the assessee, it comesback to the assessee as his income, theamount not having changed itscharacter. In the meanwhile thatincome had not been taken into accountin any assessment year as, under theIncome Tax Act, it was deductible as aloss arising from the carrying on of thebusiness. It is only in such peculiarcases, we think that the rule inthatdecision can be applied. We thinkthe same principle has been applied byFinlay J. in Gray v. Lord Penrhyn, [193721 T.C. 252 (K.B.) in a case ofmisappropriation committed by theofficials of a slate quarry, but notdetected by the auditors who later onmade good the amount. The principlebehind these decisions cannot bepressed into service in cases where thecreditor due to generous considerationsor to be more realistic when he findsthat it is necessary for the very purposeof his business that the assessee fromwhom he had claimed large amounts byway of interest or price of goods or asremuneration payable for servicesrendered has to be helped in continuinghis business and, therefore, either givesup his right to receive the amounts thathad accrued due or returns theamounts which he had actuallyreceived. The money that had eitherbeen given up or had been refunded ismoney that belonged to the creditorwhich could no longer be the income ofthe assessee and it comes to theassessee in the form of a windfall. Thisaspect had been noticed very clearly inthe judgment of Rowlatt J., hisjudgment which gave rise to thedecision of the House of Lords in BritishMexican Petroleum Co. v. Jackson. Insuch cases the money received is notthe income of the assessee; we thinkthat it is to cover cases of this naturethat Sub-section (2A) of Section 10 wasintroduced in the Indian Income Tax Actof 1922 and reintroduced in the form ofSection 41 of the Income Tax Act,1961. The learned judges of the MysoreHigh Court, on a very exhaustivesurvey of the decision in Commissionerof Income Tax v. Lakshmamma, cameto the conclusion that the general law even before Section 10 was amendedby introducing Sub-section (2A) wassuch as to enable the benefit accruingfrom remissions or benefit accruingfrom payment made by a creditor beingtaxed. With very great respect we donot think this is a correct statement ofthe law. 7. Apart from the principle stated in thedecision in Severne v. Dadswell, when ayear's account has been finally settledwith reference to the liabilities, therecan be no question of reopening thatyear's assessment made on that factualand real basis. The only question thenis whether what has been given up by acreditor in favour of an assessee orreturned to him can be said to beincome of the assessee. We find itdifficult to accept the proposition that itwould be income. What was returned tothe assessee has nothing to do with theactivities of the assessee; it does notarise from the business nor docs it arisefrom agricultural operations when theassessee is an agriculturist. Theprinciple of the decision of the House ofLords case must apply to such a case. 7. Apart from the principle stated in thedecision in Severne v. Dadswell, when ayear's account has been finally settledwith reference to the liabilities, therecan be no question of reopening thatyear's assessment made on that factualand real basis. The only question thenis whether what has been given up by acreditor in favour of an assessee orreturned to him can be said to beincome of the assessee. We find itdifficult to accept the proposition that itwould be income. What was returned tothe assessee has nothing to do with theactivities of the assessee; it does notarise from the business nor docs it arisefrom agricultural operations when theassessee is an agriculturist. Theprinciple of the decision of the House ofLords case must apply to such a case. 8.We answer the question referredto us in the affirmative, that is, infavour of the assessee and against thedepartment. As we indicated at thebeginning, since the question is asomewhat difficult one and thedecisions have not all been uniform, thereference is justified and for thesereasons we direct the parties to beartheir costs. “ Another decision of Allahabad HighCourt in Elgin Mills Co. Ltd. vs.Inspecting Assistant Commissioner ofIncome Tax (1992) 198 ITR 81 whereinit has been held as under:- “5.The petitioner's contention is thatSection 41(1) was not attracted in thefacts and circumstances of the case ;that the said amount of Rs. 51,61,166was allowed as a deduction by theTribunal in the assessment year 1972-73 though the said amount representedthe liability which accrued in the previous assessment years. The liabilityfor which the said amount was setapart still exists ; it has not ceased. Noreverse entries have also been made bythe petitioner in his account booksrelating to the said amount. In suchcircumstances,Section 41(1) has41(1) has hasabsolutely no application. Section 41(1) has41(1) has has 6. Learned counsel for the petitionersubmits that merely because thepetitioner has reverted to the oldpractice of debiting to the profit andlossaccount, amounts actually paid orpayable to workers retiring in that year,it cannot be said that the liability forwhich the aforesaid amount wasprovided, has ceased. It is true, sayslearned counsel, that prior to theassessmentyear1972-73,thepetitioner was following the practice ofdebiting the profit and loss account,with amounts actually paid or payableto the retiring workers in each year andhad shifted to the actuarial valuationsystem from that assessment yearonwards and has, in later years, shiftedback to the old system, it does notfollow therefrom that either the liabilityfor which the said amount was providedhas ceased or that there are any otherfacts or grounds attracting theprovisions contained in Section 41(1) ofthe Act. Learned counsel also explainsthat the petitioner has transferred backthe amount of Rs. 81,20,209representing the amount which was setapart as a provision for meeting theretirement gratuity liability, on actuarialvaluation, during the assessment years1973-74 and 1974-75, but thecompany has not transferred back thesaid amount of Rs. 51,61,166, theamount which was set apart asprovision during the assessment year1972-73 in respect of liability whichaccrued in the previous years. In otherwords, the disputed amount has neverbeen transferred back to the profit andloss account and, if so, there is nooccasion for invoking Section 41(1).” Decision of Supreme Court inCommissioner of Agricultural IncomeTax vs. Kerala Estate MooriadChalapuram reported in (1986) 161 ITR 155 wherein it has been held as under:- Decision of Supreme Court inCommissioner of Agricultural IncomeTax vs. Kerala Estate MooriadChalapuram reported in (1986) 161 ITR 155 wherein it has been held as under:- 5. In order to eliminate such acontroversy in cases falling under theIndian Income-tax Act, 1922 Sub-section (2A) was added in Section 10 ofthat Act, whereby a receipt such as thiswas expressly made liable to tax bylegal fiction as profits and gains ofbusiness, profession or vocation. Sub-section (2A) was inserted inSection 10 in 1955. Before that Chagla,C.J., speaking for the Court in MohsinRehan Penkar v. Commissioner ofIncome-tax, Bombay City [1948] 16ITR 183 (Bom) had observed: "It isimpossible to see how a mere remissionwhich leads to the discharge of theliability of the debtor can ever becomeincome for the purposes of taxation".This observation was noted by theMysore High Court in C.I.T. v.Lakshmamma (supra), and appearsfrom what was said by them to havereceived that tacit approval of thelearned Judges. It was made the basisof distinguishing the case before themfrom that decided by the Bombay HighCourt. However, counsel for the respondenthas relied upon the decision ofSupreme Court in Polyflex (India) Pvt.Ltd. vs. Commissioner of Income Tax,Karnataka reported in (2002) 257 ITR343 (SC) wherein it has been held asunder:- “7. We are inclined to think that in acase where a statutory levy in respectof goods dealt in by the assessee isdischarged and subsequently theamount paid is refunded, it is the firstclause that more appropriately applies.It will not be a case of benefit accruingto him on account of cessation orremission of trading liability. It will be acase which squarely falls under theearlier clause, namely, "obtained anyamount in respect of such expenditure".In other words, where expenditure isactually incurred by reason of paymentof duty on goods and the deduction orallowance had been given in theassessment for earlier period, theassessee is liable to disgorge that benefit as and when the obtainsrefundof the amount so paid. Theconsideration whether there is apossibility of the refund being set atnaught on a future date will not be arelevant consideration. Once theassessee gets back the amount whichwas claimed and allowed as businessexpenditure during the earlier year, thedeeming provision in Section 41(1) ofthe Act comes into play and it is notnecessary that the Revenue shouldawait the verdict of higher Court orTribunal. If the Court or Tribunalupholds the levy at a later date, theassessee will not be without remedy toget back the relief. 8. True, expenditure and trading liabilitymay be over-lapping concepts; but thelaw-makers apparently intended to dealwith allied concepts separately andspecifically so as to make the provisionas comprehensive as possible in order toeffectuate the objective underlying theprovision. The anatomy of the Sectionand the collocation of the wordsemployed therein would suggest thatthe test of cessation or remission ofliability has to be applied vis-a-vistrading liability and it cannot beprojected into the previous clause. 8. True, expenditure and trading liabilitymay be over-lapping concepts; but thelaw-makers apparently intended to dealwith allied concepts separately andspecifically so as to make the provisionas comprehensive as possible in order toeffectuate the objective underlying theprovision. The anatomy of the Sectionand the collocation of the wordsemployed therein would suggest thatthe test of cessation or remission ofliability has to be applied vis-a-vistrading liability and it cannot beprojected into the previous clause. 11. The High Court correctlyappreciatedthescopeofSection 41(1) and applied the secondlimb of the sub-section to the factsituation. It may be noted that theassessee did neither pay the exciseduty to the Government nor did it getrefund of duty from the concernedauthority. Notwithstanding the HighCourt's judgment in favour of thepetitioner, the stage had not yetreached when it can be said that theliability for which allowance was givenearlier ceased. The view taken by theHigh Court in substance is that thebenefit in respect of the trading liabilitywould accrue only when the liabilitydefinitely ceased after the terminationof the proceedings in the Apex Court infavour of the petitioner. This verydecision of the Allahabad High Courtwas relied upon by the Tribunal withoutappreciating the correct ratio of the decision.”At this stage, counsel for therespondent seeks time, list on30.1.2018. 5.Mr. Pathak appearing for the assessee has taken us to theorder of the AO who while passing the order in the first round oflitigation observed as under:- (iii). Contribution to PACS Managers salary:The assessee was asked to file the detailsofprovisionsforexpensesofRs.3,48,54,592/- made in F.Y. 2006-07. Onperusal of details filed it was seen that itincludes PACS Managers salary amountingto Rs. 1,00,21,000/-. Therefore, theassessee was asked to explain as to whyPACS Managers salary had not yet beendisbursed despite making a provision onthis account. On perusal of the balance sheet it is seenthat since inception every year assesseemakes the provision on account of PACSmanager salary, but no disbursement hasbeen made out of this payment. On theface of it, it apears that it is either disputedor contingent liability and thus notallowable. In response to the issue raised theassessee has replied as under: “The amount lying in the said account is ofthe Registrar of Co-operative SocietyRajasthan an the said authority canwithdraw the same at any time as per theirrequiremnt. The account in assesseebank’s book is like other liabilities forexpenses account and the assessee bankha no right to utilize the said amount for itsown purpose.” 5.1He also taken us to the order of CIT(A) passed in first roundof litigation where CIT(A) held as under:- Contention of the AR is that the factsof the case are that the assesseecooperative bank was statutorily In response to the issue raised theassessee has replied as under: “The amount lying in the said account is ofthe Registrar of Co-operative SocietyRajasthan an the said authority canwithdraw the same at any time as per theirrequiremnt. The account in assesseebank’s book is like other liabilities forexpenses account and the assessee bankha no right to utilize the said amount for itsown purpose.” 5.1He also taken us to the order of CIT(A) passed in first roundof litigation where CIT(A) held as under:- Contention of the AR is that the factsof the case are that the assesseecooperative bank was statutorily required by Registrar of CooperativeSocieties under Primary AgriculturalCo-Op. Society Managers, selection,appointment & service condition rules,2003 (PAC Managers salary) tocontribute0.15%ofaverageoutstanding loans of last year (thecopy of said Rules are submittedherewith). The making of contributionby assessee bank is compulsory andcontributed fund will be held by ApexBank for and on behalf of Registrar ofCo-Op. Societies. The Registrar of Co-Op. Societies is to use the fund forpayments of PAC Managers salary incase of sufficint funds are not availablefor their salary. The PAC Managers areappointedbyauthorityforsafeguarding the recovery fo loansadvanced by other co-operative Banksand Apex Bank. Thus the measure isfor commercial benefit of assesseeBank who advances loans to suchPACs. Thus the liability of contributionfor PAC Managers salary is a statutoryliability being crystalized at clos ofevery year and, the contribution afterit is made becomes at the disposal ofRegistrar Co-operative Society which ispayable as and when demanded byRegistrar Co-operative Society. It willbe clear and evident from copy of rulessubmitted that liability of contributionis statutory liability crystallizing at theend of every year and not in a natureof disputed/contingent liability. Thecontribution of assessee Bank to PACManagers salary amounting toRs.10021000/- during the year is thusallowable deduction and AO is wrongand has erred in law in disallowing thesame holding it as disputed/contingentliability. Allowability of contribution by the ApexBank for PAC Managers salary is astatutory liability which is crystalized atthe end of every year. The Contributionhowever, once made become at thedisposal of Registrar of Co-operativeSociety which is payable as and whendemanded by Registrar of Co-operativeSociety alongwith interest on it. Thus,it is not contingent liability but astatutory liability which is crystallized at the end of every year and hence theliability is allowable. The AO is,therefore, directed to delete theaddition of Rs.10021000/-. The 2[nd]ground of appeal is decided in favourof the appellant. 5.2He has taken us to the order of the Tribunal passed in firstround of litigation observing as under:- Allowability of contribution by the ApexBank for PAC Managers salary is astatutory liability which is crystalized atthe end of every year. The Contributionhowever, once made become at thedisposal of Registrar of Co-operativeSociety which is payable as and whendemanded by Registrar of Co-operativeSociety alongwith interest on it. Thus,it is not contingent liability but astatutory liability which is crystallized at the end of every year and hence theliability is allowable. The AO is,therefore, directed to delete theaddition of Rs.10021000/-. The 2[nd]ground of appeal is decided in favourof the appellant. 5.2He has taken us to the order of the Tribunal passed in firstround of litigation observing as under:- The intention of the assessee is thatthe amounts which have now beentransferred from provisions to reservefunds were added back in earlier year.However, the amount credited toreserve from the provisions has notbeen identified in respect of theprovisions credited for a particularassessment year. The carried forwardprovision has been debited and reservefund has been credited. In case theamounts which have now beentransferred from provision to reservehas been added back in the year inwhich such provision was credited thenthe same cannot be taxed now in theassessment year when the same isbeing transferred from provision toreserve. There must be somecorrespondence to show as to whyprovisions is being transferred toreserve as it is not required formeeting the liability. We are neitherhaving the necessary details nor thedetails of quantum of provisions whichhas been transferred during the yearwas debited in the P & L A/c of whichyear. We are also not aware as towhether the provisions are beingentered below the net profit. If it is apart of P & L A/c appropriation then itis to be considered as added backbecause the appropriation from P & LA/c cannot be considered as anadmissible expenditure. The Hon'bleApex Court in the case of CIT Vs. StateBank of Patiala, 219 ITR 706 had anoccasion to consider the distinctionbetween the provision and reserve. Ifthe transfer of amount is made adhocwhere there is no information or anticipated liability, such fund can onlybe treated as reserve that where afund has been credited to meet theliability which has actually arisen and isknown on the date of preparation ofthe balance sheet , it would obviouslybe a provision. Provisions madeagainst the anticipated loss andcontingencies are charges againstprofits and to be taken into account incourse of receipt and P & L A/c in thebalance sheet while reserves areappropriation of profits. We are notaware as to how the assessees iscrediting amount under reserve andprovisions by the assessee. Since theaccounts are being audited and arebeing prepared as per Reserve Bank ofIndia guidelines therefore, we feel thatthe reserve and surplus are made bythe assessee as understood incommercial parlance. Thus the issue is not to be decidedsimply on the basis that the entrireshave been made in the balance sheetand not in the P & L A/c. We are nothaving sufficient details to decide theissue before us as to whether theamount could have been added or notand therefore, we restore back theissue on the file of the AO. The AO willascertain the nature of the provisionswhich has been written back during theyear and will also ascertain as towhether such provision was addedback in the year in which suchprovision was credited in the balancesheet. Thus this issue is restored backon the file of the AO and AO will decideas to whether provision written backwas included in expenses claimed inthe year in which such provisioncreated. If it was claimed then amountwritten back will be income. 3.1 The second ground of appeal of therevenue is that the ld. CIT(A) haserred in deleting the addition of Rs.1,00,21,000/- holding that PACSManager salary is not contingentliability but a statutory liability.Whereas as per the provisions it is inthe nature of contingent/ disputed liability as no disbursement out of thesaid liabilities was made. 3.3 Before the ld. CIT(A),it wassubmittedthattheassesseecooperative bank was statutorilyrequired by the Registrar ofCooperative Societies under PrimaryAgriculturalCooperativeSocietyManagers, selection, appointment andservice condition rules, 2003 tocontribute0.15%ofaverageoutstanding loans of last year. Thecopy of this Rules were made availableto the ld. CIT(A). Such contribution iscompulsory and contributed fund willbe held by Apex Bank for and on behalfof Registrar of Cooperative Societies.The liability of contribution for PACManagers salary is a statutory liabilitybeing crystallized at close of everyyear and the contribution is payable asand when demanded by Registrar ofCooperative Society. The ld. CIT(A)after considering the contention of theassessee allowed the liability afterobserving as under:- ‘’Allowability of contribution by theApex Bank for PAC Managers salary isa statutory liability which is crystallizedat the end of every year. Thecontribution however once madebecome at the disposal of Registrar ofCooperative Society which is payableas and when demanded by Registrar ofCooperative Society alongwith intereston it. Thus, it is not contingent liabilitybut a statutory liability which iscrystallized at the end of every yearand hence the liability is allowable.’’ 5.3He has also taken us to the order of AO passed in secondround of litigation observing as under:- 6.1 In response to the queries reply ofthe assessee dt. 14.12.2011 isreproduced hereunder:- “ThefactsoftheamountRs.1,18,99,651/- are that the assesseebank carried forward reserve andprovision under various heads created from the exempted profits of theearlier year, amongst them theassessee co-operative bank as on01.04.2006 had brought forwardStatuoryReserveofRs.80,99,16,594.12/- and broughtforward provisions under the head‘provisions for establishment’ ofRs.1,18,99,651/-” On finding by theassessee bank that the said broughtforward provision under the headprovision for establishment is no longerrequired and accordingly the saidamount was transferred to StatutoryReserve in this year i.e. F.Y. 2006-07.Copy of statutory and provision forestablishment account are enclosed.From the said copy of accounts it isevident and verifiable that the saidprovision was made out of/from earlieryears exempted profits of the assesseebank and not from the income orprofits of the A.Y. 2007-08. 8.1In respect of observation of theHon’ble ITAT that ‘in case the amountswhich have now been transferred fromprovisions to reserve has been addedbank in the year in which suchprovisions was credited them the samecannot be taxed now in the A.Y. whenthe same is being transferred from theprovision to reserve’. The answer is that the provisiontransferred to reserve has not beenadded back in computation of incomein respective assessment years,therefore, the written back ofprovisions for expenses in the yearunder consideration amounts tocessation of liability and becomeincome in view of provision of section41(1) of the I.T. Act, 1961. 8.2 The contention of the assesseethat addition of amount of provisionsto the income as per profit and lossaccount and then claim of deductionu/s 80P(2) would result in NIL taxableincome. This exercise was omitted bynote appended to the computation ofincome. 9. In view of the above facts observedand discussed as per the direction of The answer is that the provisiontransferred to reserve has not beenadded back in computation of incomein respective assessment years,therefore, the written back ofprovisions for expenses in the yearunder consideration amounts tocessation of liability and becomeincome in view of provision of section41(1) of the I.T. Act, 1961. 8.2 The contention of the assesseethat addition of amount of provisionsto the income as per profit and lossaccount and then claim of deductionu/s 80P(2) would result in NIL taxableincome. This exercise was omitted bynote appended to the computation ofincome. 9. In view of the above facts observedand discussed as per the direction of the Hon’ble ITAT it is concluded thatprovisions for establishment expensesand other expesnes to the extent ofRs.1,18,99,651/- has been claimedand allowed as expenditure in theprofit and loss account in precedingassessment years. The provisions forexpenses have not been added back incomputation of income. Therefore, thetransfer of liability of expenses(provision for establishment expensesandotherexpensestotalRs.1,18,99,651/-) directly to reserveamounts to cessation of liabilities ofexpenses and is taxable as income inthe year in which it is transferred toreserve. 5.4He contended that AO has committed serious error inarriving at conclusion to add the amount of Rs.1,18,99,651/-towards provisions for expenses transferred to reserve fund. 5.5He relied on the provisions of Section 41(1) of the IncomeTax Act which reads as under:- 41. Profits chargeable to tax (1) Where an allowance or deduction has beenmade in the assessment for any year in respectof loss, expenditure or trading liability incurredby the assessee (hereinafter referred to as thefirst- mentioned person) and subsequentlyduring any previous year,- (a)the first- mentioned person has obtained,whether in cash or in any other mannerwhatsoever, any amount in respect of such lossor expenditure or some benefit in respect ofsuch trading liability by way of remission orcessation thereof, the amount obtained by suchperson or the value of benefit accruing to himshall be deemed to be profits and gains ofbusiness or profession and accordinglychargeable to income- tax as the income of thatprevious year, whether the business orprofession in respect of which the allowance ordeduction has been made is in existence in thatyear or not; or (b)the successor in business has obtained,whether in cash or in any other mannerwhatsoever, any amount in respect of which lossor expenditure was incurred by the first-mentioned person or some benefit in respect ofthe trading liability referred to in clause (a) byway of remission or cessation thereof, theamount obtained by the successor in business orthe value of benefit accruing to thesuccessor inbusiness shall be deemed to be profits and gainsof the business or profession, and accordinglychargeable to income tax as the income of thatprevious year. 5.6He contended that the said provision will not apply to thefacts of the case as there is no entry in the books of account fortransferring the amount in reserve fund. Merely, it has been donein view of the decision of the Supreme Court in State Bank ofPatiala vs. CIT reported in (1996) 219 ITR 706 for which matterwas remitted back. 5.7He has also taken us to the order of the CIT(A) wherein ithas been observed as under:- 5.6He contended that the said provision will not apply to thefacts of the case as there is no entry in the books of account fortransferring the amount in reserve fund. Merely, it has been donein view of the decision of the Supreme Court in State Bank ofPatiala vs. CIT reported in (1996) 219 ITR 706 for which matterwas remitted back. 5.7He has also taken us to the order of the CIT(A) wherein ithas been observed as under:- 7. It is not disputed by the appellant that theProvisions totaling to Rs.1,18,99,651/- werenot added back in the Computations ofIncome of the returns filed for earlierassessment years. It is also not disputed thatthe Provisions were debited in the P & Laccount, therefore, the conclusion in theassessment order of taxing the Provisionstotaling to Rs.1,18,99,651/- because theyhave been transferred to Reserve in the yearunder consideration is upheld, as Hon’bleITAT direction was only to confirm whetherthe Provisions were added back to income inearlier years or not. The answer is No theyhad not been added back. The addition ofRs.1,18,99,651/- is thus upheld. 5.8The aforesaid order is subject matter of appeal before thetribunal wherein while considering the case, the tribunal observedas under:- 5. We have heard the rival submissions andpursued the material available on record. Theprinciple contention raised by the ld. AR isthat the assessee’s income from its bankingbusiness was wholly exempt u/s 80P(2) of theAct in the earlier years (prior A.Y 2007-08)and by way of a note to the computation ofincome filed with return of each of the priorassessment years, it has stated that “asincome from its banking business is whollyexempt u/s 80P(2) of the Income Tax Act, ithas not been considered necessary to disturband add back items of profit and loss accountin conformity with the Income Tax Act/IncomeTax Rules including appropriation of profit inreserve funds”. It was submitted that theassessment for most of the prior years werecompleted u/s 143(3) wherein the return ofincome filed by the assessee was acceptedincluding the acceptance of the above saidnote appended to the computation of income.It was submitted that by way of said note tothe computation of income, all disallowableexpenses/deductions etc. were deemed tohave been considered and added back to thecomputation of income and as resultantincome would have been exempt u/s 80P(2),exercise of adding all disallowableexpenses/deductions etc. in assessment wasnot done. 5.3 Applying the same analogy to the firstlimb of section 41(1) which talks about “anyallowance or deduction made in theassessment for any year in respect of loss,expenditure or trading liability incurred by theassessee”, it means the actual deductionwhich has been claimed/made in thecomputation of income and thereafter upheldin the assessment order for the relevantassessment year. The same cannot beextended to include any loss, expenditure ortrading liability deemed to have been claimedand allowed to the assessee. Extending thesaid analogy further, it cannot be said thatcertain expenditure though claimed initially inthe profit/loss account were deemed to havebeen disallowed either in the computation of income by the assessee or subsequently bythe AO in the assessment order. Further, thenote to the computation of income is totallysilent about nature and quantum of provisionsfor administrative expenses which has beenmade subject matter of section 41(1) of theAct. Unless and until there is one to onecorrelation between the expenses disallowedearlier and benefit obtained now by way ofreversal of such provision for expenses, itcannot be held that the provisions of section41(1) are not applicable. Therefore, the abovesaid contention of the ld AR in respect ofdeemed disallowance of the provisions ofexpenses by way of a note in the computationof income and hence, not applicability ofsection 41(1) cannot be accepted. income by the assessee or subsequently bythe AO in the assessment order. Further, thenote to the computation of income is totallysilent about nature and quantum of provisionsfor administrative expenses which has beenmade subject matter of section 41(1) of theAct. Unless and until there is one to onecorrelation between the expenses disallowedearlier and benefit obtained now by way ofreversal of such provision for expenses, itcannot be held that the provisions of section41(1) are not applicable. Therefore, the abovesaid contention of the ld AR in respect ofdeemed disallowance of the provisions ofexpenses by way of a note in the computationof income and hence, not applicability ofsection 41(1) cannot be accepted. 5.5 We have given a careful consideration tothe said contention raised by the ld. AR butwe are unable to accept the same. Section41(1) talks about allowances/deductionswhich has been made in the assessment forany year in respect of loss, expenditure ortrading liability incurred by the assessee. Thesaid allowance/deduction u/s 41(1) has notbeen made subject to deduction underChapter-VIA of the Act as claimed ld. AR. Ifthe contention raised by the ld. AR isaccepted, then it leads to the situation whereno allowance or deduction will have beclaimed by the assessee and further, in suchcircumstances, provisions of section 41(1)cannot be invoked where an assessee iseligible for deduction under Chapter-VI-A ofthe Act. In our view, the said contention ofthe ld AR will make section 41(1) infructous insuch cases. 5.7 In light of above discussions, it is clearthat the income that is eligible for deductionunder section 80P has to be computed inaccordance with the provisions of Act andwhich includes section 41(1) of the Act.Therefore, firstly the income has to becomputed taking into consideration theprovisions of section 41(1) of the Act andthereafter, the deduction under Section 80Phas to be determined. It may so happen thatthe whole of the income so computed inaccordance with the provisions of the Act isheld eligible for deduction under section 80Pof the Act however, the same cannot be abasis to hold that provisions of section 41(1)are not applicable. There could also be situations where the business which is eligiblefor section 80P is no more in existence andthe assessee has obtained some benefit,provision of section 41(1) continues to apply.Similarly, where the assessee continues tocarry on the same business but in the lateryears, it is not eligible for section 80P due toamendment in the law as has happened in theinstant case, it cannot be held that theprovisions of section 41(1) are not applicable.The provisions of the Act, therefore, have tobe read harmoniously and in such a mannerthat none of the provisions are renderedinfructuous. In light above discussions, we donot see any infirmity in the order of the AOwho has rightly followed the directions of theCoordinate Bench and the order of the ld.CIT(A) which is hereby confirmed. The groundtaken by the assessee is thus dismissed. 6.He has relied upon the following decisions:- 6.1In Elgin Mills Co. Ltd. vs. Inspecting Assistant Commissionerof Income Tax (1992) 198 ITR 81, it has been held as under:- 6.He has relied upon the following decisions:- 6.1In Elgin Mills Co. Ltd. vs. Inspecting Assistant Commissionerof Income Tax (1992) 198 ITR 81, it has been held as under:- 5. This note constitutes the basis for theimpugned notice issued by the respondentunder Section 148. Soon after receiving theimpugned notice, the petitioner addressed aletter dated March 31, 1980, to therespondent stating that the impugned noticedoes not contain any reasons or grounds forwhich the assessment is sought to bereopened and asserting further that none ofthe grounds relevant for reopening of theassessment mentioned in either of the twoclauses in Section 147 are attracted in thiscase. The representative of the petitioner alsopersonally met the respondents. Therespondents informed the petitioner'srepresentative that he proposes to include theaforesaid amount of Rs. 51,61,166 in theincome of the petitioner-company in theassessmentyear1976-77underSection 41(1) of the Act. The petitioner'srepresentative was also apprised of the factthat action is sought to be taken under Clause(b) of Section 147. Subsequently, thepetitioner received a letter dated April 8,1980, from the respondents stating merely that he has initiated the proceedings underClause (b) of Section 147 but without givingor setting out the reasons on the basis ofwhich he assumed the jurisdiction in thematter. Under the said letter, the respondentscalled upon the petitioner to submit his returnbefore he could consider the petitioner'srequest for supplying the "reasons" recordedunder Sub-section (2) of Section 148. Thepetitioner'scontentionisthatSection 41(1) was not attracted in the factsand circumstances of the case ; that the saidamount of Rs. 51,61,166 was allowed as adeduction by the Tribunal in the assessmentyear 1972-73 though the said amountrepresented the liability which accrued in theprevious assessment years. The liability forwhich the said amount was set apart stillexists ; it has not ceased. No reverse entrieshave also been made by the petitioner in hisaccount books relating to the said amount. Insuchcircumstances,Section 41(1) hasabsolutely no application. 6. Learned counsel for the petitioner submitsthat merely because the petitioner hasreverted to the old practice of debiting to theprofit andloss account, amounts actually paidor payable to workers retiring in that year, itcannot be said that the liability for which theaforesaid amount was provided, has ceased.It is true, says learned counsel, that prior tothe assessment year 1972-73, the petitionerwas following the practice of debiting theprofit and loss account, with amounts actuallypaid or payable to the retiring workers in eachyear and had shifted to the actuarial valuationsystem from that assessment year onwardsand has, in later years, shifted back to the oldsystem, it does not follow therefrom thateither the liability for which the said amountwas provided has ceased or that there areany other facts or grounds attracting theprovisions contained in Section 41(1) of theAct. Learned counsel also explains that thepetitioner has transferred back the amount ofRs. 81,20,209 representing the amount whichwas set apart as a provision for meeting theretirement gratuity liability, on actuarialvaluation, during the assessment years 1973-74 and 1974-75, but the company has nottransferred back the said amount of Rs.51,61,166, the amount which was set apartas provision during the assessment year1972-73 in respect of liability which accrued in the previous years. In other words, thedisputed amount has never been transferredback to the profit and loss account and, if so,there is no occasion for invokingSection 41(1). 6.2In Commissioner of Agricultural Income Tax vs. Kerala Estatereported in (1974) 96 ITR 210, it has been held as under:- in the previous years. In other words, thedisputed amount has never been transferredback to the profit and loss account and, if so,there is no occasion for invokingSection 41(1). 6.2In Commissioner of Agricultural Income Tax vs. Kerala Estatereported in (1974) 96 ITR 210, it has been held as under:- 5.As we understand this decision, theprinciple behind it is that money embezzledfrom an assessee retains the character ofincome of the assessee in the hands of theperson who embezzled the money and whenhe either returns it to the assessee, or whenit is recovered by the assessee, it comes backto the assessee as his income, the amountnot having changed its character. In themeanwhile that income had not been takeninto account in any assessment year as,under the Income-tax Act, it was deductibleas a loss arising from the carrying on of thebusiness. It is only in such peculiar cases, wethink that the rule in that decision can beapplied. We think the same principle has beenapplied by Finlay J. in Gray v. Lord Penrhyn,[1937] 21 T.C. 252 (K.B.) in a case ofmisappropriation committed by the officials ofa slate quarry, but not detected by theauditors who later on made good the amount.The principle behind these decisions cannotbe pressed into service in cases where thecreditor due to generous considerations or tobe more realistic when he finds that it isnecessary for the very purpose of hisbusiness that the assessee from whom he hadclaimed large amounts by way of interest orprice of goods or as remuneration payable forservices rendered has to be helped incontinuing his business and, therefore, eithergives up his right to receive the amounts thathad accrued due or returns the amountswhich he had actually received. The moneythat had either been given up or had beenrefunded is money that belonged to thecreditor which could no longer be the incomeof the assessee and it comes to the assesseein the form of a windfall. This aspect hadbeen noticed very clearly in the judgment ofRowlatt J., his judgment which gave rise tothe decision of the House of Lords in British Mexican Petroleum Co. v. Jackson. In suchcases the money received is not the incomeof the assessee; we think that it is to covercases of this nature that Sub-section (2A)of Section 10 was introduced in the IndianIncome-tax Act of 1922 and reintroduced inthe form of Section 41 of the Income-tax Act,1961. The learned judges of the Mysore HighCourt, on a very exhaustive survey of thedecision in Commissioner of Income-tax v.Lakshmamma, came to the conclusion thatthe general law even before Section 10wasamended by introducing Sub-section (2A) wassuch as to enable the benefit accruing fromremissions or benefit accruing from paymentmade by a creditor being taxed. With verygreat respect we do not think this is a correctstatement of the law. 7. Apart from the principle stated in thedecision in Severne v. Dadswell, when ayear's account has been finally settled withreference ;to the liabilities, there can be noquestion of reopening that year's assessmentmade on that factual and real basis. The onlyquestion then is wh