[1980] 123 ITR 755 (Mad

[1980] 123 ITR 755 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax

P.K. Kaimal

SETHURAMAN AND BALASUBRAHMANYAN, JJ.

TAX CASE NO. 722 OF 1975

OCTOBER 23, 1979

JUDGMENT

Sethuraman, J.—The Income-tax Appellate Tribunal has referred the following three questions under section 256(1) of the I.T. Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, the assessment of the sum of Rs. 15,847 as profits chargeable to tax under section 41(4) in the hands of the assessee cannot be sustained?

2. Whether, having regard to the provisions of section 41(4), it has been rightly held that the assessee in whose hands bad debt had been allowed and the person who had recovered the bad debts subsequently should be same person so as to invoke the provisions of section 41(4)?

3. Whether, on the facts and in the circumstances of the case, the bad debt recovered by the assessee-partner allowed as a deduction in the hands of the firm cannot be deemed to be the profits chargeable to tax under section 41(4) especially when the same business was continued to be carried on by the partner?"

The assessee is an individual carrying on business in distribution of films. He was a partner in a firm known as Thirumeni Pictures, which was dissolved on 1st July, 1968. Under the dissolution arrangement, he took over the business and carried it as a sole proprietary concern, under the same name and style. During the previous year relevant for the assessment year 1970-71, there was a realisation of Rs. 25,999 and the assessee stated that this sum represented recovery of the amount written off as bad debt by the firm. A sum of Rs. 15,847 had been allowed as bad debt in the assessment years 1967-68, 1968-69, and 1969-70. The ITO, therefore, came to the conclusion that the realisation of Rs. I 5,847 was taxable under section 41(4) of the I.T. Act, 1961. He overruled the objections raised by, the assessee on the ground that the assessee in whose hands the bad debts had been allowed should be, the same assessee who had recovered the debts, and that only in such cases, section 41(4) would apply. He rejected also another contention of the assessee, viz., that the character of the amount taken over would be capital in his hands.

The assessee appealed to the AAC, who upheld the contentions of the assessee that section 41(4) could not be applied in his hands as the said provision would have to be applied only in the case of the same assessee, who had got the allowance of the bad debt.

The ITO appealed to the Tribunal and it confirmed the order of the AAC. It is this order of the Tribunal that has given rise to the three questions extracted above.

Actually all the three questions raise a single point, viz., whether section 41(4) was applicable to the facts here, when the bad debts had been allowed as deduction in the hands of the firm and the recovery was by another assessee, who took over the said business?

Section 41 is a special provision made for deeming certain profits as being liable to charge. Section 41(1) provides :

"Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently,during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not."

Thus, this provision deals with cases where an assessee obtains some benefit in cash or in kind in respect of a loss or expenditure or some benefit in respect of a trading liability, by way of remission, which was earlier allowed as deduction.

Sub-section (2) of section 41 deals with a case wherein a depreciable asset owned by the assessee and used for the purpose of business or profession is sold, discarded, demolished or destroyed. If the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value is chargeable to income tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

Sub-section (4), which is the material provision, may be reproduced here:

"(4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-section (1) of section 36, then, if the amount subsequently are covered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not."

There is an explanation to the said provision, which states that the expression "moneys payable" and the expression "sold" in sub-sections (2) and (3) of section 41 shall have the same meanings as in sub-section (1) of section 36.

Section 36(1)(vii) to which reference is made in the above provision [section 41(4)], provides for the deduction in the computation of income of any debt or part thereof, which is established to have become a bad debt in the previous year. The idea behind section 41(4) is that an assessee, who had the benefit of a deduction of a bad debt, 'should have to pay the tax to the extent of the allowance obtained already, if he subsequently recovers the whole or part of the debt. Sections 36(1)(vii) and 41(4) are the counterparts of section 10(2)(xi) with its proviso of the Indian I.T. Act, 1922.

The contention for the revenue is that so long as the business is the same, the recovery would have to be dealt with under section 41(4), even if there is a change in the ownership of the business, and the amount contemplated by that provision should be brought to tax in case there was an earlier allowance under section 36(1)(vii). The learned counsel for the assessee submitted that the background of this provision is to require the assessee to disgorge the benefit, which he had obtained by reason of allowance of the bad debt, and that this background would really require the assessee being identical in order to be visited with the liability to pay the tax. In other words, the argument runs, unless the assessee, who had obtained the benefit of the deduction or allowance of a bad debt, recovered the amount subsequently, he could not be taxed under section 41(4).

During the course of the arguments, the point was sought to be emphasised on the basis of the presence of the word "the assessee" occurring in section 41(1) and the absence of the said expression in section 41(4). It was submitted for the department that while section 41(1) would perhaps require the identity of the assessee being the same because of the expression "the assessee" used in the said provision, it is absent in section 41(4). In the absence of such expression in section 41(4), it would be enough if the identify of the business is established so as to attract tax.

This contention appears to us to ignore the closing part of section 41(4) which provides that the liability under that provision would arise whether the business or profession in respect of which the deduction had been allowed, was in existence in that year or not. Therefore, continued existence of the business is not a condition for applying section 41(4). If the continued existence of the business is not the criterion, then there could be only one basis for applying both sections. 41(1) and 41(4) and that is, the identity of the assessee being the same. It may also be mentioned here that in section 41(1) also, the liability to pay the tax arises even if the business or profession in respect of which allowance or deduction had been made was in existence in the relevant year or not. Thus, notwithstanding the closure of the business, so long as the assessee continued to be the same, the assessee would have to be taxed in the manner contemplated by section 41 (1) or 41(4), as the case may be. The absence of the expression "the assessee" in section 41(4) is thus not of any significance. Obviously, the draftsmen could not import the said expression in section 41(4) because of the way in which it is worded. But the background, which brought into the statute these two provisions being identical, the same interpretation would have to be placed on both the provisions. In fact, section 10(2)(xi) of the Act of 1922 has been split up into two provisions, viz., section 36(1)(vii) and section 41(4) of the 1961 Act. There inno indication in the new Act that the meaning of the provision was s intended to be changed. In section 10(2)(xi) (main part), the word "assessee" occurs. It was not, therefore, necessary to repeat the word in the proviso. It is the proviso which was transposed as section 41(4), so that similar items of income could all find a place in a single section. The absence of the word assessee in section 41(4) cannot, therefore, be invested with any significance so as to change the concept of liability under the new Act as compared with the earlier Act. It is not also proper to attribute to Parliament, in the absence of clear words to that effect, an intention to tax a person who had not reaped the benefit of the allowance. The intention is to take away the benefit of an allowance already granted. If one did not get that benefit, he cannot be required to pay the tax. Realisation of a debt is not income. The provision enacts a fiction and would have to be construed strictly on its language. This is also, in a way, a charging provision and the charge must be clearly made out. It is not made out on the successor.

It is thus the identity of the assessee, who enjoyed the benefit of the allowances, that is to be established in invoking this provision. In the present case, from the facts set out by the Tribunal in its order and from the statement of the case, it is clear that the partnership which carried on the business was dissolved. It is the assessee, who took over or succeeded to the said business and in such a case, the identity of the assessee is lost. The result is that the first two questions are answered in the affirmative and in favour of the assessee. The third question is answered on the basis that section 41(4) cannot be applied to tax the receipt in the hands of the assessee here. The assessee will be entitled to costs. Counsel fee Rs. 500.