Tca/184/2010 Of Commissioner Of Income Tax v. M/S Rayala Corporation P Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANandTHE HONOURABLE MS.JUSTICE K.B.K.VASUKI The Commissioner of Income TaxChennai. ...Appellant-vs- M/s.Rayala Corporation P. Ltd.144/7, Old Mahabalipuram RoadKottivakkam, Chennai-41. ...Respondent PRAYER: Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal, 'B'Bench, Chennai, dated 29.05.2009 passed in ITA No.309/Mds/2009against the order of Commissioner of Income Tax (Appeals)-V, Chennaidated 24.12.2008 passed in ITA No.111/2006-2007 against the order ofAssistant Commissioner of Income Tax Company Circle V (3), Chennai,dated 11.10.2007 in AABCR 7230 D/53043-R. The Revenue is on appeal as against the order of the Income TaxAppellate Tribunal, Madras 'B' Bench, dated 29.05.2009 inITA.No.309/Mds/2009 relating to the assessment year 2001-02, raisingthe following substantial questions of law:"1. Whether on the facts and the circumstances of thecase, the Tribunal was right in holding that claimof deduction of interest, in the return which wasallowed to become non est, by opting not torectify the defects, pursuant to notice underSection 139(9) cannot be treated as disallowanceof deduction? 2. Whether on the facts and circumstances of thecase, the Tribunal was right in consequentlyholding that the interest waived by the bank for https://hcservices.ecourts.gov.in/hcservices/ the prior period pertaining to assessment years1994-95 to 1998-99 during financial yearpertaining to assessment year 2001-02 cannot beassessed as income that arose due to cessation ofliability under Section 41(1) of the Act?" 2. The assessment year under consideration herein relates to2001-02. The assessee herein derived income from leasing ofproperties. It is seen from the facts narrated that the AssessingOfficer brought to tax the amount waived by Canara Bank amounting toRs.3.81 crores on the income chargeable under Section 41(1) of theIncome Tax Act, 1961 (hereinafter called the "Act"). It is seen fromthe facts that during the assessment year under consideration, theassessee availed one-time settlement scheme of Canara Bank, by whichthe Bank waived the interest portion accrued and payable by theassessee, relating to the assessment years 1988-89 to 1998-99, whichthe assessee had claimed deduction in the return filed for therespective years. On account of the waiver granted by the Bank, thesaid interest amount became assessable as income as per Section 41(1)of the Act. According to the assessee, since the returns filed forthe assessment years 1994-95 to 1998-99 were held as non-est, theinterest claimed as deduction in those returns had to be held as notallowed. Hence, the said interest for those period could not betreated as income that arose on account of cessation of liabilityunder Section 41(1) of the Act. The Assessing Officer rejected thesaid contention that it was the assessee who had not responded to thenotice issued under Section 139(9) offered to rectify its returns.In the absence of specific order on disallowance, the said interestrelating to the period 1994-95 to 1998-99 was liable to be includedas income under Section 41(1) of the Act. 3. The assessee went on appeal before the Commissioner of IncomeTax (Appeals). It is seen from the facts stated that on the issue ofinterest waiver and added under Section 41(1) and the disallowance ofset off of brought forward loss, the Commissioner of Income Tax(Appeals) allowed the relief for Rs.58,71,867/- for the assessmentyear 1999-2000 and Rs.76,73,156/- for 2000-2001. It was pointed outthat since no deduction was granted on the interest payable to CanaraBank, the question of bringing the interest waived by Canara Bankrelevant to the assessment years could not be brought to tax underSection 41(1) of the Act. The assessee went on appeal before theIncome Tax Appellate Tribunal. By order dated 26.04.2007 in ITANo.103/Mds/05, the Tribunal set aside the order of the Commissionerof Income Tax (Appeals) and restored the matter to the AssessingOfficer with a direction to decide the issue afresh after providingadequate opportunity. Thus the Assessing Officer passed freshassessment order, holding that even though the return for theassessment years 1994-95 to 1998-99 was non-est in the eye of law,when the assessee had not complied with the intimation under Section139(9) of the Act, the claim of the assessee for deduction of https://hcservices.ecourts.gov.in/hcservices/ interest for the assessment years 1994-95 to 1998-99 was deemed tohave been allowed. However, the assessee was not allowed to carryforward the loss on account of the amount treated as non-est. Thus,the income deemed in terms of Section 41(1) of the Act relating tothe interest was added. 4. It is seen from the order of assessment that from the detailsgiven as regards the interest debited and concession allowed by theBank on the One Time Settlement claim relating to the assessmentyears 1988-89 to 1993-94 totalling to a sum of Rs.55,58,381/-, theassessee itself admitted that this amount of Rs.55,58,381/- could beconsidered for the purpose of assessment under Section 41(1) of theAct. The interest referable to the assessment years 1999-2000 and2000-2001 of a sum of Rs.58,71,867/- and Rs.76,73,196/- respectivelywere disallowed and hence, not added back under Section 41(1) of theAct. The assessee, however, contended that there being no assessmentin respect of the remission of liability for the assessment years1994-95 to 1998-99, no addition could be made under Section 41(1) ofthe Act. In this connection, the assessee placed reliance on thedecision of this Court in the case of Narayanan Chettiar IndustriesVs. ITO reported in 277 ITR 426 (Mad) as well as the decision of theSupreme Court in the case of Tirunelveli Motor Bus Services Co. Pvt.Ltd. Vs. CIT reported in (1970) 78 ITR 55 and held that there couldbe no addition by invoking Section 41(1) of the Act. 5. The claim of the assessee that there could be no question ofinvoking Section 41(1) of the Act in the absence of explicitconsideration of disallowance of interest in the assessment yearswas, however, negatived by the Assessing Officer. He viewed that inspite of informing the assessee to rectify the defect under Section139(9) of the Act, the assessee had not chosen to rectify the defectsin the returns; in the background of this fact, it was not open tothe assessee to turn around and claim that there being no deductionallowed in the assessment, the question of invoking Section 41(1) ofthe Act does not arise. In other words, the assessee could not takeadvantage of his own conduct read against the applicability of theprovisions of the Act. 5. The claim of the assessee that there could be no question ofinvoking Section 41(1) of the Act in the absence of explicitconsideration of disallowance of interest in the assessment yearswas, however, negatived by the Assessing Officer. He viewed that inspite of informing the assessee to rectify the defect under Section139(9) of the Act, the assessee had not chosen to rectify the defectsin the returns; in the background of this fact, it was not open tothe assessee to turn around and claim that there being no deductionallowed in the assessment, the question of invoking Section 41(1) ofthe Act does not arise. In other words, the assessee could not takeadvantage of his own conduct read against the applicability of theprovisions of the Act. 6. Aggrieved by this, the assessee went on appeal before theFirst Appellate Authority, who dismissed the appeal, holding that theclaim of interest cost in the books of account for the previous yearswould constitute an allowance or deduction of expenditure or tradingliability incurred by the assessee in those years offered; eventhough the returns filed for these years were treated as non-estreturns by the Department, yet, waiver of interest during the periodunder consideration could also constitute a benefit received inrespect of such trading liability by way of remission or cessationthereof; consequently, waiver of interest granted by Canara Bank wastreated as deemed income for the year under consideration. 7. Aggrieved by this, the assessee went on further appeal beforethe Income Tax Appellate Tribunal. Referring to the first round oflitigation, the Tribunal held, on the admitted fact, that the returnswere treated as non-est in the eye of law. There being noconsideration on the granting of allowance or deduction by theAssessing Authority, there could be no addition under Section 41(1)of the Act. Thus, the assessee's appeal was allowed. Aggrieved bythis, the present appeal has been filed by the Revenue. 8. Learned Standing Counsel appearing for the Revenue placedheavy reliance on the opening part of Section 41(1) of the Act andsubmitted that the expression "Where an allowance or deduction hasbeen made in the assessment for any year in respect of loss,expenditure or trading liability incurred by the assessee" has to beread as a claim made in the accounts and it need not be followed byan assessment order. He further submitted that when the expressionused in the Section does not contemplate an order to be passed on theclaim, a mere entry made in the self-assessment made by the assesseein the account would be sufficient enough to invoke Section 41(1) ofthe Act; in other words, even in the absence of an assessment orderpassed on the question of allowance or deduction, the expression"where an allowance or deduction made for any year" has to beconsidered as a claim made per se. He further pointed out that onthe facts of this case, the assessee's returns were treated as non-est as per Section 139(9) of the Act; however, considering Section140A of the Act, which provides for self-assessment, the assessee hadremitted the tax based on self-assessment on the state of affairs.Thus, even in the absence of returns, the self-assessment being anassessment made for any year, the Income Tax Appellate Tribunalcommitted serious error in allowing the appeal filed by the assessee. 9. We do not subscribe to this submission of the learned StandingCounsel appearing for the Revenue. As rightly submitted by thelearned counsel for the assessee, in the decision in the case ofTirunelveli Motor Bus Service Co. P. Ltd. Vs. Commissioner of IncomeTax, Madras reported in 78 ITR 55, a similar contention was taken onthe interpretation of Section 10(2A) of the Indian Income Tax Act,1922, which is in pari materia with the present provision underSection 41(1) of the Act. The facts in the reported decision werethat in the accounts relating to the year 1950-51, the assesseeclaimed establishment charges, which included annual bonus payable tothe employees. Since the assessee ran into financial difficulty, thebonus remained unpaid for some years. However, in respect ofassessment year 1957-58, the assessee arrived at one time settlementon the bonus payable at Rs.17,470/- which was paid to the employeesin full settlement and the balance of Rs.54,479/- was credited to theprofit and loss account. This was treated as deemed profit underSection 10(2A). The Tribunal held that there was nothing on recordto indicate that in estimating the income for 1950-51, the Income TaxOfficer had made any allowance in respect of bonus and unless the Department could identify the items as having been actually allowedas a deduction in the earlier assessment year, conclusively, Section10(2A) was not available for recoupment. The Apex Court pointed outthat Section 10(2A) was not attracted. Reversing the decision of theHigh Court, the Apex Court held "the question whether the allowancehad been granted or deduction made in respect of trading liabilitywas to be decided by referring to the order relating to theassessment year 1950-51 and it could not be determined by drawinginferences from what was done in respect of earlier year." Thus, theApex Court held that the reversal of recoupment of the relief grantedwould be available under Section 10(2A) if and only there had beendeliberate act on the part of the Assessing Officer in consideringsuch claim for deduction in the assessment. 10. Applying the said decision to the facts of the case, we findthat the order of Income Tax Appellate Tribunal does not call for anyinterference. Section 10(2A) of the Indian Income Tax Act, 1922,reads as under: " Business.--(1)...(1)... (2A) Where for the purpose of computing profits orgains under this section, an allowance ordeduction has been made in the assessment for anyyear in respect of any loss, expenditure ortrading liability incurred by the assessee and,subsequently during any previous year, theassessee has received, whether in cash or in anyother manner whatsoever, any amount in respect ofsuch loss or expenditure or has obtained somebenefit in respect of such trading liability byway of remission or cessation thereof, the amountreceived by him or the value of the benefitaccruing to him shall be deemed to be profits andgains of business, profession or vocation and tohave accrued or arisen during that previous year."gains under this section, an allowance ordeduction has been made in the assessment for anyyear in respect of any loss, expenditure ortrading liability incurred by the assessee and,subsequently during any previous year, theassessee has received, whether in cash or in anyother manner whatsoever, any amount in respect ofsuch loss or expenditure or has obtained somebenefit in respect of such trading liability byway of remission or cessation thereof, the amountreceived by him or the value of the benefitaccruing to him shall be deemed to be profits andgains of business, profession or vocation and tohave accrued or arisen during that previous year." 11. Section 41(1) of the Income Tax Act, 1961, as is relevant forthe present case, reads as under: 11. Section 41(1) of the Income Tax Act, 1961, as is relevant forthe present case, reads as under: "41.Profits chargeable to tax.--(1) Where an allowanceor deduction has been made in the assessment forany year in respect of loss, expenditure ortrading liability incurred by the assessee(hereinafter referred to as the first-mentionedperson) and subsequently during any previousyear,--... "or deduction has been made in the assessment forany year in respect of loss, expenditure ortrading liability incurred by the assessee(hereinafter referred to as the first-mentionedperson) and subsequently during any previousyear,--... " 12. Even though learned Standing Counsel appearing for theRevenue does not dispute the similarity of the provisions between theIndian Income Tax Act, 1922 and the Income Tax Act, 1961, yet, he emphasizes that the payment of tax being one under self-assessmentand even though the return is non-est in the eye of law, by virtue ofSection 139(9) of the Act, yet, one cannot ignore the state ofaffairs as regards the deduction claimed leading to the payment oftax. 13. We do not agree with the said view of the learned StandingCounsel appearing for the Revenue. A reading of Section 140A of theAct shows that while sub section (1) imposes an obligation on anassessee to pay tax on self assessment basis, sub section (2)provides that after a regular assessment under Section 143 or 144 ismade, the tax so paid will be deemed to have been paid towards suchregular assessment. Thus, when an assessee makes a self-assessmentunder Section 140A of the Act and pays the tax thereon, this self-assessment under Section 140A is for expediting collection of tax.This, however, cannot stand in the way of determination of theliability to tax at the time of making the regular assessment. Thus,the assessment made by an assessee as to his taxable income does notmean an assessment to be made by a competent authority under theprovisions of the Act. 14. As far as the present case is concerned, in the context ofSection 139(9) of the Act, with the return filed treated as non estin the eye of law, we hold that the expression "where an allowance ordeduction has been made in the assessment for any year" has to beread as any allowance or deduction considered in the assessment forthe purpose of invoking Section 41(1) of the Act. For theapplicability of Section 41(1) of the Act, the prerequisite conditionis that an allowance or deduction has been made in the assessment forany of the years in respect of an expenditure, loss or tradingliability incurred by the assessee and subsequently during anyprevious year, the assessee has received remission or obtained refundof the said amount. Thus Section 41(1) creates a legal fiction andhence, has to be strictly complied with if any addition to the incomeis sought to be made by the Revenue - (Refer [2005] 277 ITR 426(Narayanan Chettiary Industries v. Income-tax Officer). Thus unlessthe amount had been allowed as a deduction in the earlier years, thequestion of invoking Section 41(1) does not arise. 15. In the circumstances, the Tax Case Appeal fails and the sameis dismissed. The order of the Income Tax Appellate Tribunal isconfirmed. No costs. Sd/Deputy Registrar/true copy/ Sub Asst.Registrar To 1.The Commissioner of Income Tax, Chennai-34. Chennai-34. 2.The Commissioner of Income Tax (Appeals V) Chennai - 34. Chennai - 34. 3.The Income Tax Appellate Tribunal Chennai Bench 'B', Chennai-60. Chennai Bench 'B', Chennai-60. 4.The Assistant Commission of Income Tax, Circle V (3), Chennai – 34. Circle V (3), Chennai – 34. +One CC to Mr.V.Rajan, Advocate SR 29708 +One CC to Mr.N.V.Balaji, Sr.Standing Counsel of I.T SR29662 Tax Case (Appeal) No.184 of 2010 GGK(CO)PSI 15/07/2013