Madhya Pradesh High Court
Commissioner Of Income-Tax vs Combined Transport Co. Pvt. Ltd. on 14 March, 1988
Equivalent citations: (1988)74CTR(MP)140, [1988]174ITR528(MP)
JUDGMENT
G. G. SOHANI, ACTG. C.J. - By this reference under section 256 (1) of the Income-tax Act, 1961, (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, Indore Bench, Indore, has referred the following question of law to this court for its opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that a sum of Rs. 55,440 was not assessable under section 41(1) of the Act in the assessment year 1974-75 ?"
The material facts giving rise to this reference briefly, are as follows : The assessee is a private limited company. While framing the assessment of the assessee for the assessment year 1974-75, the income-tax Officer found that the assessee had written off a sum of Rs. 55,440 on account of salary and that payment of such salary was claimed and allowed as a deduction in the earlier Years. The Income-tax Officer held that there was a cessation of the liability and the benefit so accruing was liable to tax under the provisions of section 41(1) of the Act. Aggrieved by that order; the assessee preferred an appeal before the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer in that behalf. On further appeal before the Tribunal, the Tribunal held that there was no justification for the addition of Rs. 55,440 on account of salary written off. In this view of the matter, the appeal preferred by the assessee to that extent was allowed. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question has been referred to this court for its opinion.
To appreciate the contentions advanced on behalf of the parties, it would be useful to refer to the provisions of section 41(1) of the Act :
"41. (1) 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."
From a perusal of the aforesaid provision, it is clear that the following conditions must be fulfilled before section 41(1) of the Act could be held to be applicable :
(i) In the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him.
(ii) (a) Any amount is obtained in respect of such loss or expenditure, or
(b) Any benefit is obtained in respect of such trading liability by way of remission or cessation thereof.
(iii) Such amount or benefit is obtained by the assessee; and
(iv) Such amount or benefit is obtained in a subsequent year.
It was contended on behalf of the Revenue that the conduct of the assessee in writing off the amount in question showed that the assessee treated that amount as income. We have, therefore, to consider the question as to whether a unilateral act on the part of the debtor in making a transfer entry would bring about the cessation of the liability.
In CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. [1980] 125 ITR 326, a Division Bench of the Bombay High Court held that the transfer of an entry was a unilateral act and did not bring about the cessation of the liability of the debtor. On behalf of the Revenue, reliance was placed on the decision of the Allahabad High Court in Indian Motor Transport Co. v. CIT [1978] 114 ITR 677 but, with respect, that decision, in our opinion, does not take into account the fact that there can be a "cessation" of liability only when the liability has finally ceased without there being a chance of its revival. A unilateral act by a debtor cannot, by itself, bring about the cessation of the liability. Therefore, agreeing with the view taken in CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. [1980] 125 ITR 326 (Bom), the Tribunal, in our opinion, was right in holding that the sum of Rs. 55,440 was not assessable under section 41(1) of the Act in the assessment year 1974-75.
Our answer to the question referred to this court is, therefore, in the affirmative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.