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PETITIONER: POONJABHAI VARMALIDAS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, AHMEDABAD

DATE OF JUDGMENT09/10/1990

BENCH: THOMMEN, T.K. (J) BENCH: THOMMEN, T.K. (J) SAHAI, R.M. (J)

CITATION:  1991 AIR    1            1990 SCR  Supl. (2) 206  1992 SCC  Supl.  (1) 182 JT 1990 (4)   106  1990 SCALE  (2)698

ACT:       Income Tax Act,  1922: S.  10(2)(xi)/ Income Tax  Act, 1961: ss 36(1)(vii), 36(2) and 41(4): Bad debts written  off subsequently    recovered--Business    discontinued--Amounts whether assessable to tax.

HEADNOTE:     Section  10(2)(xi) of the Income Tax Act, 1922  provided for deduction of bad and doubtful debts. The proviso thereto laid  down  that if the amount ultimately recovered  on  any such debt was greater than the difference between the  whole debt and the amount allowed the excess shall be deemed to be a profit of the year in which it was recovered. These provi- sions  were  re-enacted in the Income Tax, Act, 1961  as  s. 36(1)(vii)  provides,  subject to the provisions  of  sub-s. (2), for deduction of amount of any debt established to have become  a  bad debt in the previous year, whereas  s.  41(4) provides  for bringing to tax amounts of such bad debts,  if recovered  subsequently, as the income of the previous  year in  which it was recovered, whether the business in  respect of which the deduction had been allowed was in existence  in that year or not.     Certain amounts which had been allowed to be written off as bad debts in terms of s. 10(2)(xi) of the Income Tax Act, 1922  in the year 1959-60, but subsequently received by  the assessee were sought to be brought to tax in the  assessment years  1964-65,  1965-66 and 1967-68 under s. 41(4)  of  the Income Tax Act, 1961. The assessee’s business had discontin- ued prior to the relevant years of recovery of the  amounts. The  orders  of assessment were confirmed by  the  Appellate Assistant Commissioner. The Tribunal, however, held that the amounts  could not be taxed under s. 41(4) of the  1961  Act for  that section had no application to amounts written  off in 1959-60 in terms of s. 10(2)(xi) of the 1922 Act when  it was in force.     On a reference, the High Court held that the amounts  in question were includable in computing the taxable income  of the assessee in respect of the relevant years under s. 41(4) of  the 1961 Act. It took the view that there was no  incon- sistency  between the relevant provisions of the two  enact- ments  and that s. 24 of the General Clauses Act,  1897  was

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attracted  as a result of which the order in terms of  which the amounts 207 had been written off was deemed to have been made under  the reenacted provisions, as contained in s. 36(1)(vii).     In  these appeals by certificate, it was  contended  for the  appellant that the relevant provisions of the 1922  Act and  1961 Act were not in pari materia, that s. 41(4)  would be attracted only where the bad debt had been written off in terms of s. 36(1)(vii), and that what has been allowed as  a deduction in terms of s. 10(2)(xi) of the 1922 Act could not on  recovery  be brought to tax under s. 41(4) of  the  1961 Act,  unless the business itself had continued to  exist  at the time of recovery. Dismissing the appeals, the Court,     HELD:  1. If the amounts had been received prior to  the repeal  of  the 1922 Act the entire transaction  would  have been  covered by the provisions of section 10(2)(xi) of  the Act, and the business having been discontinued prior to  the relevant years of receipt, these amounts would not have been taxable. [209H; 210A]     Commissioner of Income Tax, Madras v. Express Newspapers Ltd., 53 ITR 250 referred to.     2.1 The effect of section 24 of the General Clauses Act, 1897,  in  so far as it is material, is that where  the  re- pealed  and re-enacted provisions are not inconsistent  with each  other,  any order made under the  repealed  provisions would  be  deemed to be an order made under  the  re-enacted provisions. [212B]     2.2  Section 10(2)(xi) of the 1922 Act is equivalent  to sections  36(1)(vii), 36(2) and 41(4) of the 1961  Act.  The repealed  section  10(2)(xi)  is thus  a  composite  section containing  the  ingredients  of  the  re-enacted   sections 36(1)(vii),  36(2) and 41(4). Consequently, when a  debt  is written off by an order in terms of section 10(2)(xi) of the 1922 Act, the Income Tax Officer exercises the same power as he  would  have  exercised  on  the  enactment  of   section 36(1)(vii) of the 1961 Act. These two provisions are, there- fore,  consistent  with each other.  Section  36(1)(vii)  is subject  to the provisions of sub-section (2) of  that  sec- tion.  Therefore, both sections 36(1)(vii) and 36(2) of  the 1961 Act, being two of the ingredients of section  10(2)(xi) of the 1922 Act, must be read together with reference to  an order  under which debts had been written off.  Accordingly, in the light of section 24 of the General Clause Act,  1897, the relevant order made under section 10(2)(xi) of the  1922 Act  with reference to which the debt in question  had  been written off, would be 208 deemed  to be an order made under section 36(1)(vii) of  the 1961  Act and such order is what is contemplated under  sec- tion 41(4) of that Act. Any amount which is recovered on any such debt is attracted by the provisions of section 41(4) of the  1961 Act and is, therefore, chargeable to tax in  terms of that sub-section to the extent of the ’excess’  specified therein. [212C-G]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal  Nos.  1431- 33(NT) of 1976. Appeals by Certificate from the Judgment and Order dated 27.2. 1976 of the Ahmedabad High Court in Income Tax  Refer- ence

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Nos. 129 and 168 of 1974.     J.H. Parekh. P.H. Parekh  and Ms. Shalini Soni, for  the Appellant.     S.C. Manchanda. K.P. Bhatnagar and Ms. A. Subhashini for the Respondent. The Judgment of the Court was delivered by     THOMMEN,  J. These appeals under certificate arise  from the  common  judgment of the High Court of  Gujarat  in  the Commissioner of Income Tax, Gujarat 111 v. Poonjabhai Vanma- lidas. 105 ITR 388 Guj. The assessee is the same in all  the cases. The assessment years in question are 1964-65. 1965-66 and  1967-68. In the relevant previous years.  the  assessee received  certain amounts and they were assessed under  sec- tion 41(4) of the Income Tax Act, 1961 (hereinafter referred to  as the "1961 Act"). The contention of the  assessee  was that  he was not assessable under section 41(4) of the  1961 Act because these amounts had been written off as bad  debts in  the  year 1959-60 and his claim  tot  deduction,  though initially  disallowed by the Income Tax Officer. was  subse- quently  allowed  by the Income Tax  Appellate  Tribunal  in I.T.A. Nos. 673-676 (AHD) dated 12.7. 1963. The business  of the assessee had discontinued prior to the previous year  in which any part of the amount was received, and consequently, it  was  contended.  these amounts when  received  were  not assessable to income-tax under section 41(4) of the 1961 Act as  that  section  was  not in  pari  materia  with  section 10(2)(xi) of the Income Tax Act, 1922 (’1922 Act’) in  terms of which the amounts had been written off as bad debts. This contention  was rejected by the Income Tax Officer  and  the amounts  were brought to tax. The orders of assessment  were confirmed by the 209 Appellate  Assistant Commissioner. On further appeal by  the assessee,  the Tribunal held, accepting the assessee’s  con- tention,  that the amounts could not be taxed under  section 41(4)  of the 1961 Act, for that section had no  application to  amounts  written  off in 1959-60  in  terms  of  section 10(2)(xi) of the 1922 Act when it was in force. On a  refer- ence, the High Court held that the amounts in question  were includable  in computing the taxable income of the  assessee in respect of the relevant years under section 41(4) of  the 1961  Act. The questions referred were accordingly  answered by the High Court against the assessee and in favour of  the Revenue. Hence the present appeals. Section 10(2)(xi) of the 1922 Act reads: "10. Business:-(1) ..................................           (2) Such profits or gains shall be computed  after making the following allowances, namely:           (xi)  when the assessees’s accounts in respect  of any  part  of his business, profession or vocation  are  not kept  on  the cash basis, such sum. in respect  of  bad  and doubtful  debts, due to the assessee in respect of the  part of his business, profession or vocation, and in the case  of an assessee carrying on a banking or money-lending business. such sum in respect of loans made in the ordinary course  of such  business as the Income-tax Officer may estimate to  be irrecoverable but not exceeding the amount actually  written off as irrecoverable in the books of assessee:          Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall  be deemed to be a profit of the year in which  it  is recovered and if less, the deficiency shall be deemed to  be a business expense of that year;     There  is no dispute that the assessee’s  accounts  were

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not  kept on cash basis. There is also no dispute  that  the assessee’s  business had discontinued prior to the  year  of recovery of the amounts in question, If the amounts had been received  prior  to the repeal of the 1922  Act  the  entire transaction would have been covered by the provisions of 210 section 10(2)(xi) of that Act, and the business having  been discontinued  prior to the relevant years of receipt,  these amounts  would  not have been taxable. See  Commissioner  of Income  Tax, Madras v. Express Newspapers Ltd., 53 ITR  250. But  the amounts in question here were recovered  after  the coming  into force of the 1961 Act which repealed  the  1922 Act.  The question, therefore, is whether the amounts  which had  been written off in terms of section 10(2)(xi)  of  the 1922 Act, but subsequently received after the repeal of that provision. could be brought to tax in terms of the  relevant re-enacted provisions. Tax is sought to be levied under  the 1961 Act in terms of section 41(4) which reads: "41. Profits chargeable to tax .--          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  recovered 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 charge- able  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 exist- ence in that year or not. This sub-section. refers to the deduction allowed in respect of a bad debt under the provisions of section 36(1)(vii)  of the 1961 Act which reads as follows: "36.  Other deductions--(1). The deductions provided for  in the  following  clauses shall be allowed in respect  of  the matters dealt with therein, in computing the income referred to in section 28--          (vii) subject to the provisions of sub-section (2), the  amount  of any debt, or part thereof, which  is  estab- lished to have become a bad debt in the previous year: 211 Significantly sub-section (4) of section 41 of the 1961  Act specifically states that tax is attracted whether or not the business  or profession in respect of which  the  deductions had been allowed continued to be in existence in the year of receipt.  This is a fundamental deviation from  the  earlier provision  contained in section 10(2)(xi) of the  1922  Act. Furthermore, sub-section (4) of section 41 specifically says that the deductions should have been allowed in respect of a bad debt under the provisions of section 36(1)(vii) in order to attract section 41(4).     The  assessee,  therefore, contends  that  the  relevant provisions  of the two enactments are not in  pari  materia, and what has been allowed as a deduction in terms of section 10(2)(xi)  of  the 1922 Act cannot be brought to  tax  under section 41(4) of the 1961 Act. Any order made under  section 10(2)(xi) of the 1922 Act under which a debt-was written off would  not attract tax on recovery of the whole or  part  of such amount unless the business itself continued to exist at the time of the recovery. Furthermore, the assessee contends that  sub-section (4) of section 41 of the 1961 Act  is  at- tracted only where the bad debt was written off in terms  of section 36(1)(vii) of that Act, and not in terms of  section 10(2)(xi)  of the 1922 Act, the provisions of which are  not in  pari materia with either section 36(1)(vii)  or  section

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41(4).     Rejecting  the  contentions of the  assessee,  the  High Court  held  that  there was no  inconsistency  between  the relevant  provisions of the two enactments and that  section 24  of  the  General Clauses Act, 1897 was  attracted  as  a result of which the order in terms of which the amounts  had been written off was deemed to have been made under the  re- enacted provisions, as contained in section 36(1)(vii),  and consequently  the  amounts recovered on any such  debt  were chargeable under section 41(4).     Section  25 of the General Clauses Act, 1897, in so  far as it is material. reads: "24.  Continuation of orders, etc., issued under  enactments repealed and re-enacted--Where any Central Act or Regulation is,  after  the commencement of this Act, repealed  and  re- enacted  with  or without modification, then, unless  it  is otherwise expressly provided, any appointment, notification, order,  scheme, rule, form or bye?law, made or issued  under the  repealed Act or Regulation, shall, so far as it is  not inconsistent  with  the provisions re-enacted,  continue  in force, and be deemed to have been made or issued under 212 the provisions so re-enacted, unless and until it is  super- seded by any appointment, notification, order, scheme, rule, form  or bye-law made or issued under the provisions so  re- enacted  ......  "     The  effect  of section 24 of the General  Clauses  Act, 1897,  in  so far as it is material, is that where  the  re- pealed  and re-enacted provisions are not inconsistent  with each other, any order made under the repealed provisions  is deemed  to be an order made under the reenacted  provisions. The  question, therefore, is whether the provisions  of  the repealed  section 10(2)(xi), under which the bad debts  were written  off as irrecoverable in the books of the  assessee, are in terms re-enacted by the repealing Act. A  comparative table furnished i. The Law and Practice of Income Tax, Kanga and Palkiwala (Seventh Edition-Volume II) shows that section 10(2)(xi)  of  the  1922  Act  is  equivalent  to   sections 36(1)(vii),  36(2) and 41(4) of the 196 1 Act. The  repealed section 10(2)(xi) is thus a composite section containing the ingredients  of the re-enancted sections  36(1)(vii),  36(2) and  41(4).  Consequently when a debt is written off  by  an order  in  terms of section 10(2)(xi) of the 1922  Act,  the Income Tax Officer exercises the same power as he would have exercised on the enactment of section 36(1)(vii) of the 1961 Act.  These two provisions are, therefore,  consistent  with each other. Section 36(1)(vii) is subject to the  provisions of sub-section (2) of that section. Therefore, both sections 36(I)(vii)  and  36(2)  of the 1961 Act, being  two  of  the ingredients  of section 10(2)(xi) of the 1922 Act,  must  be read  together with reference to an order under which  debts had  been written off. Accordingly, in the light of  section 24 of the General Clauses Act, 1897, the relevant order made under  section 10(2)(xi) of the 1922 Act with  reference  to which  the debt in question had been written off, is  deemed to be an order made under section 36(1)(vii) of the 1961 Act and  such order is what is contemplated under section  41(4) of that Act. Any amount which is recovered on any such  debt is attracted by the provisions of section 41(4) of the  1961 Act  and is, therefore, chargeable to tax in terms  of  that sub-section to the extent of the ’excess’ specified therein.     The  contentions  of  the assessee thus  fail,  and  the appeals are accordingly dismissed. No order as to costs. P.S.S.                                               Appeals dismissed.

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