1973-VIL-429-KER-DT
Equivalent Citation: [1974] 96 ITR 327
KERALA HIGH COURT
Income-Tax Reference No. 37 of 1971
Date: 02.02.1973
COMMISSIONER OF INCOME-TAX, KERALA
Vs
V.T. KUTTAPPU & SONS
BENCH
Judge(s) : K. SADASIVAN., P. GOVINDAN NAIR.
JUDGMENT
The judgment of the court was delivered by
GOVINDAN NAIR J.- The Income-tax Appellate Tribunal, Cochin Bench, has referred the following questions for our decision :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the amounts of Rs. 16,513 is not assessable under section 41(1) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, there is any material for the Tribunal to hold that there was no remission or cessation of liability in respect of the sum of Rs. 6,725 ? "
This is a reference at the instance of the department. The Tribunal held that out of the amount of Rs. 16,513 a sum of Rs. 9,788 cannot be treated as income under section 41(1) of the Income-tax Act, 1961, because that amount was not allowed to the assessee as a deduction, and, therefore, section 41 was not attracted. Regarding the sum of Rs. 6,725 the Tribunal held that there was no cessation of any liability and so section 41 was inapplicable.
The sum of Rs. 16,513 mentioned in question No. 1 is part of the amount of Rs. 29,191.27 which is the sum total of two credit entries made on March 31, 1967, in the names of two partners of the firm which is the assessee. The total of this amount represented unclaimed credit balances in the accounts of 30 creditors of the firm. This was shown as unclaimed credit balances for a number of years. During the assessment years 1961-62 and 1962-63, a total of Rs. 12,678 out of this amount of Rs. 29,191.27 was taxed under section 41(1). The balance is the amount, Rs. 16,513, sought to be assessed for the year 1967-68, the year with which we are concerned. The credit entries have been made admittedly during the related accounting period.
As regards the sum of Rs. 9,788 it is an admitted fact that the deductions were permitted not to the assessee-firm which is a separate entity for the purpose of income-tax assessment but to the Hindu undivided family whose business the assessee-firm took over. Section 41(1) in terms is not, therefore, applicable or attracted because, as we read it, the section would apply only when the deduction had been made in the computation of the income of the same assessee who is sought to be taxed by applying the section. The view taken by the Tribunal in this regard is, therefore, unassailable.
The question in regard to the sum of Rs. 6,725 is whether there had been a cessation of liability. This is more difficult to deal with. It is said that there has been such a cessation of liability because the debts had become irrecoverable due to the provisions in the law of limitations and further because the assessee himself treated these debts as irrecoverable, decided that it was unnecessary to show the amounts as due to creditors and then proceeded to divide the amounts and included them in the capital asset of the partners of the firm and made credit entries of these amounts in their individual accounts. The question is whether the lapse of time and the debts getting barred in consequence, and the attitude of the assessee that he would not pay these amounts, and his refusal to show these amounts in his account books as due, and further treating these amounts as belonging to himself would be sufficient to say there has been " a cessation of liability ". Counsel for the revenue contended that this amounts to an admission on the part of the assessee that the liability had ceased and that, therefore, the burden is on the assessee to establish that it is a wrong admission made on a mistaken basis or on some such plausible ground. We are unable to accept this argument. When a debtor decided not to show an amount as due to the creditor because the amount had become irrecoverable under the statute of limitations and when he proceeded to divide the amount for his own purposes all that it meant is that the amount is not recoverable from him and that he does not intend to pay that amount if an action is taken by the creditor against him. There is in terms no admission that there is no liability. It is a well-known principle that if a recovery of a debt had become barred what is barred is only the remedy and not the right. A fortiori the corresponding obligation must continue even after the recovery of the debt had become barred. We require something tangible and far more specific than the material that was available before the taxing authority in this case to show that there was an admission that the liability itself had ceased to exist. We cannot spell out such an admission from the fact that the debtor realised that the amount was not recoverable and that he need not make any provision for its payment in his account. The very first step in the argument of the department, therefore, cannot stand and there is, therefore, no need to consider the question whether there was any evidence that the admission was mistaken or not. We do not think that the decisions relied on by counsel for the revenue in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd. and Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax, have any application to the facts of this case. The decision of the Andhra Pradesh High Court in Semakurti Somanna v. Vankadari Subbarao has also no application. The relevant decision seems to be that of the Supreme Court in Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay referred to by the Tribunal for the proposition that under the law a debt notwithstanding that its recovery had been barred by limitation continued to exist. The recognition of the fact that the recovery of a debt is barred by limitation does not imply or import an admission that the liability ceased to exist. The other ruling that is important is the one also relied on by the Tribunal of the Bombay High Court in J. K. Chemicals Ltd. v. Commissioner of Income-tax. The decision is exactly on all fours with the facts of this case though an additional ground is mentioned in that case for holding that the liability continued to exist. Even without this additional ground the court was willing and did come to the conclusion that there was no cessation of liability. Counsel for the revenue contended that the view taken by the Bombay High Court requires reconsideration. We respectfully agree with the view taken by the Bombay High Court as we do not see any reason to differ from it.
In the light of the above, we answer both the questions referred to us in the affirmative, that is, in favour of the assessee and against the department. We direct the parties to bear their respective costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by sub-section (1) of section 260 of the Income-tax Act, 1961.
Questions answered in the affirmative.
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