Narayanan Chettiar Industries v. The Income-Tax Officer, City Ward – V(3), Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON’BLE MR.MARKANDEY KATJU, CHIEF JUSTICEandTHE HON’BLE MR.JUSTICE F.M.IBRAHIM KALIFULLA T.C.(A) No.394 of 2001--------- Narayanan Chettiar Industries,14, Davidson Street,Chennai – 1. ..Appellant/Appellant. Vs. The Income-tax Officer,City Ward – V(3),Chennai...Respondent/Respondent. Appeal against the order of the Income-tax AppellateTribunal “C” Bench, Chennai dated 14.05.2001 in ITA No.761of 2000 against (the order of the Commmissioner of IncomeTax(Appeals)Chennaidt.19.3.98andmadeinG.I.No.PA.No.326 N the Assessment order dt.26.3.97 of theIncome Tax officer, city Ward V(3), Chennai for theAssessment year 1992-93).For Appellant :: Mr.P.P.S.Janardhana Raja For Respondent :: Mrs.Pushya Sitaraman, Sr.Standing Counsel for I.T. THE HON’BLE THE CHIEF JUSTICE This is an appeal under Section 260A of the Income-taxAct which was admitted on the following substantialquestion of law:- “Whether the Tribunal was right intreating the amount of Rs.23,66,695/- (the amountwhich was written off by the sister concern ofthe assessee) as the income in the hands of theassessee and on that count liable to be taxedunder Section 41(1) of the Income-tax Act?”https://hcservices.ecourts.gov.in/hcservices/ 2. We have heard the learned counsel for the parties andperused the records, including orders of the Income-taxauthorities. All the authorities have decided on the above pointagainst the assessee. 3. The question is as to whether the amount in question canbe added as income in the hands of the assessee under Section 41(1) of the Income-tax Act. 4. It is well settled that the revenue can add a sum to theassessee’s income under Section 41(1) of the Income-tax Act onlyif it can prove that the allowance or deduction has been made inthe assessment in the previous year in respect of the loss,expenditure or trading liability. 5. As observed by the Supreme Court in Tirunelveli MotorBus Service Co. (P) Ltd. Vs. CIT, (1970) 78 ITR 55, unless it isestablished that a deduction of liability was allowed whilemaking the assessment in the earlier year, the addition asdeemed profits under Section 41(1) in respect thereof would notbe permissible. 6. The same view was taken in CIT Vs. Thakurdas, (1984) 147ITR 549, CIT Vs. Kharaiti Lal & Co. (1989) 175 ITR 265, CIT Vs.Lal Textile Finishing Mills (P) Ltd. (1989) 180 ITR 45, CIT Vs.Pranlal P.Doshi, (1993) 201 ITR 756, CIT Vs. Western RollingMills, (1994) 72 Taxman 155, etc. 7. The learned counsel for the appellant/assessee hassubmitted that in this case there is no deduction or allowancemade in the assessment of any year and there is no finding tothis effect. 8. On the other hand, the learned counsel for thedepartment has contended that the assessee had not raised thisissue before the Income-tax Tribunal, as can be seen from thegrounds of appeal before the Tribunal. 9. We have perused the grounds of appeal filed before theTribunal. We find that there is no such ground which was raisedbefore the Tribunal which is being sought to be raised before usnow. However, there is a general ground being ground No.1 whichwas raised before the Tribunal:- “The Commissioner of Income-tax (A) erred, bothin law and on the facts of the case, in determiningthe profit u/s.41(1) of the Act”. https://hcservices.ecourts.gov.in/hcservices/ 10. In the order of the Assessing Officer it has beenstated (in page – 3):- “……………………………………. ii) No deduction had been allowed in respect ofthe above amounts received from M/s.India LeatherCorporation (P) Ltd., and the assessee did not deriveany benefit in respect of the above liability”. 11. In the order of the CIT (Appeals) also it has beenstated at page –2:- “It was also pleaded that no deduction hadbeen allowed in respect of the above amount and theappellant firm did not derive any benefit in respectof the above liability”. “The Commissioner of Income-tax (A) erred, bothin law and on the facts of the case, in determiningthe profit u/s.41(1) of the Act”. https://hcservices.ecourts.gov.in/hcservices/ 10. In the order of the Assessing Officer it has beenstated (in page – 3):- “……………………………………. ii) No deduction had been allowed in respect ofthe above amounts received from M/s.India LeatherCorporation (P) Ltd., and the assessee did not deriveany benefit in respect of the above liability”. 11. In the order of the CIT (Appeals) also it has beenstated at page –2:- “It was also pleaded that no deduction hadbeen allowed in respect of the above amount and theappellant firm did not derive any benefit in respectof the above liability”. 12. No doubt, before the Tribunal this ground which issought to be taken now before us was not taken in clear cutterms (though it is included in the general ground No.1 beforethe Tribunal). However, in our opinion, this ground goes to theroot of the matter since unless an allowance or deduction hasbeen made in the computation of profit or gains of the businessor profession in respect of loss, expenditure or tradingliability incurred by the assessee no addition can be made underSection 41(1), vide Juggilal Kamlapat Vs. CIT, (1975) 101 ITR40, Sharma & Co. Vs. ITO, (1972) 86 ITR 741, Indian MotorTransport Co. Vs. CIT, (1978) 114 ITR 677, etc. 13. Section 41(1) of the Income-tax Act creates a legalfiction, and hence has to be strictly complied with if anyaddition in the income is sought to be made by the revenue. 14. Thus, the question sought to be raised before us goesto the root of the matter because unless an allowance ordeduction has been made in the previous year in respect of loss,expenditure or trading liability there can be no addition underSection 41(1) of the Income-tax Act. 15. A perusal of the impugned order of the Income-taxAppellate Tribunal shows that there was no finding of theTribunal that any deduction or allowance was made in theassessment of the assessee in an earlier year. In thecircumstances, we set aside the impugned order of the Tribunaland remand the matter to the Tribunal for a fresh decision inaccordance with law after hearing the parties concerned in whicha clear finding should be given whether any deduction has beenhttps://hcservices.ecourts.gov.in/hcservices/allowed in the assessment of the assessee in an earlier year so as to comply with Section 41(1) of the Income-tax Act. Thisappeal is allowed, the impugned order of the Tribunal is setaside, and the matter is remanded to the Tribunal for a freshdecision in accordance with law. smSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo1. The Asst. Registrar, Income Tax Appellate Tribunal, III Floor, Rajaji Bhavan, Besant Nagar, Chennai-600 090.2. The Commissioner of Income Tax(Appeals), 121, Mahatma Gandhi Raod, Chennai-34.3. The Income Tax Officer, City Ward V(3), Chennai.+1 CC to Ms.Pushya Sitaraman, Advocate,SR.Sc.for IT, Chennai SR. No.28529.RRN(C.O)BG/22.07.2005.T.C.(A) No.394 of 2001