VENKATARAMAIAH, J. -
(1.) THE assessee in this case is M/s Mysore Agencies Pvt. Ltd., Bangalore (in voluntary liquidation). THE assessment year is 1967-68. A total sum of Rs. 4,600 which had been debited in the books of accounts of the assessee during the earlier years towards rent payable to its landlord had been allowed as trading expense by the IT authorities in the orders of assessment passed earlier by them. During the assessment year in question the liquidator of the assessee which had gone into voluntary liquidation transferred the said sum of Rs. 4,600 which had been shown as the rent payable to the landlord in the earlier years to the PandL A/c of the year in question and treated it as an item of credit in its hands. THE ITO treated the said sum of Rs. 4,600 also as part of the taxable income on the basis of the PandL A/c presumably on the ground that s. 41(1) of the IT Act, 1961 (hereinafter referred to as "the Act"), was applicable. Aggrieved by the order of the ITO, the assessee filed an appeal before the AAC. In the course of the said appeal, it was contended on behalf of the assessee that the said sum of Rs. 4,600 should not have been treated as part of the taxable income as s. 41(1) of the Act was not attracted merely because the claim of the creditor in respect of the said amount had become barred by time. THE claim of the assessee was accepted by the AAC and the taxable income was reduced by Rs. 4,600. THE Department questioned the correctness of that order before the Tribunal, Bangalore Bench. Several questions were urged before the Tribunal by the assessee and the Department. We are, however, concerned only with one of them, namely, the tax liability in respect of the abovesaid sum of Rs. 4,600. THE Tribunal held that since the period of limitation prescribed for recovering the sums amounting to Rs. 4,600 had expired and since the liquidator of the assessee had expressed his intention to resist the claim by the landlord to recover the said amount there was cessation of the liability to the extent of Rs. 4,600 and, therefore, under s. 41(1) the said amount was taxable. Accordingly, it allowed the appeal of the Department in that regard.
(2.) AT the instance of the assessee, the following question has been referred to us by the Tribunal under s. 256(1) of the Act :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 4,600 was to be treated as the assessee's income under the provisions of s. 41(1) of the IT Act, 1961 ?"
The following facts are not in dispute :
(i) that several sums amounting to Rs. 4,600 had been treated as expenditure in the earlier orders of assessment passed by the Department. (ii) that by the year 1967-68 (the assessment year) the period of limitation for the landlord recovering the said amount had expired; and (iii) that the sum of Rs. 4,600 had been transferred to the PandL A/c of the company treating it as the amount standing to its credit on the ground that the liability of the assessee to the landlord in that regard had become barred by time.
Sec. 41(1) of the Act reads as follows :
"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."
A reading of sub-s. (1) of s. 41 shows that where any amount has been treated as an expenditure or trading liability in the assessment for any year and in a subsequent year the assessee has obtained any amount or benefit either in cash or in any other manner in respect of such expenditure or liability by way of remission or cessation thereof such amount or the value of such benefit obtained by the assessee shall be treated as income during such subsequent year. Hence, in order to bring a case under s. 41(1), it has to be shown by the Department that there has been a remission or cessation of the liability in question. The remission of the liability arises when the creditor voluntarily gives up the claim. In the instant case, it is not a case of remission of the liability. The cessation of such liability arises only when it ceases to exist in the eye of law for all intents and purposes. It is urged on behalf of the Department that when a debt is barred by time it ceases to exist. It is difficult to agree with the above submission. When a debt becomes barred by time, the creditor would not be able to recover the amount by enforcing his right in Court. But the right will not come to an end nor will the liability cease. That is not a case governed by s. 27 of the Limitation Act, 1963.
(3.) IN Salmond on Jurisprudence, Twelfth edition, the distinction between a perfect right and an imperfect right is explained as follows :
"Perfect and imperfect rights.--A perfect right is one which corresponds to a perfect duty; and a perfect duty is one which is not merely recognised by the law, but enforced. A duty is enforceable when an action or other legal proceeding, civil or criminal, will lie for the breach of it, and when judgment will be executed against the defendant, if need be, through the physical force of the State. Enforceability is the general rule. IN all ordinary cases, if the law will recognise a right at all, it will not stop short of the last remedy of physical compulsion against him on whom the correlative duty lies. Ought, in the mouth of the law, commonly means must. IN all fully developed legal systems, however, there are rights and duties which, though undoubtedly recognised by the law, yet fall short of this typical and perfect form. Examples of such imperfect legal rights are claims barred by lapse of time; claims unenforceable by action owing to the absence of some special form of legally requisite proof (such as a written document/; claims against foreign states or sovereigns, as for interest due on foreign bonds;.... IN all those cases the duties and correlative rights are imperfect. No action will lie for their maintenance; yet they are, for all that, legal rights and legal duties, for they receive recognition from the law. The statute of limitations, for example, does not provide that after a certain time a debt shall become extinct, but merely that no action shall thereafter be brought for its recovery. Lapse of time, therefore, does not destroy the right, but merely reduces it from the rank of one which is perfect to that of one which is imperfect. It remains valid for all purposes save that of enforcement. It may be good as a ground of defence, it may suffice to support any security given for it, and it may possess the capacity of becoming a perfect right. Money paid in satisfaction of a statute-barred debt cannot be recovered; a pledge securing the debt remains valid; and acknowledgment of the debt by the debtor will revive the creditor's right of action. All these cases of imperfect rights are exceptions to the maxim, Ubi jus ibi idem remedium. The customary union between the right and the right of action has been for some special reason severed, but the right survives."
The above view of the learned author, in principle, has been accepted as correct by the Supreme Court in Bombay Dyeing and Mfg. Co. Ltd. vs. State of Bombay, AIR 1958 SC 328, even though there is no reference to the above passage. IN para 23 of that decision the Supreme Court has observed as follows :
"23. It has been already mentioned that when a debt becomes time barred, it does not become extinguished but only unenforceable in a Court of law."
It is not, therefore, correct to hold that there was cessation of the liability of the assessee in respect of the said amount of Rs. 4,600 by reason of the law of limitation. The Tribunal was in error in treating the said sum as taxable under s. 41(1) of the Act. Our view receives support from the decisions of the Bombay and the Allahabad High Courts in Kohinoor Mills Co. Ltd. vs. CIT (1963) 49 ITR 578 (Bom) : TC19R.278 and Bhagwat Prasad and Co. vs. CIT (1975) 99 ITR 111 (All) : TC19R.174. The question referred to us is, therefore, answered in the negative and in favour of the assessee. The assessee is entitled to costs. Advocate's fee, Rs. 250.;