[CIT v. Mohan Meakin Ltd., 18 Taxman.com 47 (Del.)]
In the A.Y. 1995-96, the assessee had written back certain amount representing (a) unclaimed salaries, wages and bonus; (b) credit balances unclaimed by the suppliers; (c) credit balances unclaimed by the customers; (d) uncashed cheques; (e) excess dividend; and (f) excess provision made for doubtful debts in its books of account. The Assessing Officer added these amounts as deemed income relying on the provisions of section 41(1) of the Income-tax Act, 1961. The Tribunal deleted the additions.
On appeal by the Revenue, the Delhi High Court upheld the deletion and held as under:
“(i) Salaries, wages and bonus
The contention of the assessee was that there was no cessation or remission of the liability and, therefore, by merely writing back the credit balances in the books of account, which is an unilateral action of the assessee, the liability cannot be said to have ceased.
The concerned assessment year was 1995-96. Explanation 1 to section 41(1) was added by the Finance (No. 2) Act, 1996 with effect from 1-4-1997. The Explanation provides that the unilateral act of the assessee by way of writing off such liability in its accounts would be considered as remission or cessation of the liability. In Circular No. 762, dated 18-2-1998, which is reported in (1998) 230 ITR (St.) 12, the CBDT has explained the reason behind insertion of the above Explanation. In paragraph 28.3 of the Circular it has further been stated that the amendment will take effect from 1-4-1997 and will, accordingly, apply in relation to A.Y. 1997-98 and subsequent years. The Explanation, therefore, does not have any retrospective effect. It does not, therefore, apply to the A.Y. 1995-96. For this reason, the mere writing back of the loan in relation to unclaimed salaries, wages and bonus cannot amount to cessation of the liability.
(ii) Suppliers’ credit balances and customers’ credit balances
So far as the suppliers’ credit balances and the customers’ credit balances are concerned, the same reasoning is applicable for the year under consideration. Accordingly, those two additions made by the Assessing Officer are also not in accordance with law.
(iii) Uncashed cheques
In the case of the uncashed cheques, the finding of the Tribunal is that there was no claim for deduction in any of the earlier years and, therefore, the amount cannot be added u/s.41(1). It is not in dispute, as it cannot be, that the amount of uncashed cheques was not allowed as deduction in any of the earlier assessment years. As per the assessee this represents the cheques received and remaining on hand on the last day of the accounting period. The Tribunal has accepted this stand. The Assessing Officer and the Commissioner (Appeals) have not stated why the stand of the assessee was not acceptable. The Revenue has also not stated and averred that in the assessment order now passed, this aspect was not considered and examined. In these circumstances, section 41(1) can hardly have any application. Accordingly, the decision of the Tribunal deleting the addition is to be upheld.
(iv) Excess dividend
Dividend paid by a company to its shareholders is not an allowable deduction under the Income-tax Act as it represents an appropriation of the profits after they have been earned. If the dividend is not allowable as a deduction, the excess written back cannot also be assessed as income u/s.41(1).
(v) Excess provision for doubtful debts
The finding of the Commissioner (Appeals) is that the provision was never allowed as a deduction in the earlier years. Since the finding that the provision was not allowed in the earlier year as a deduction is not under challenge, the amount cannot be added u/s.41(1) when it is written back in the accounts. The decision of the Tribunal is to be upheld.”
