1985 (3) TMI 98 - AT - Income Tax

Summary

Issues:
Liability write-back by assessee, inclusion in income, applicability of Section 41 of IT Act, 1961, remission of debts, cessation of liability, judgment of Calcutta High Court in CIT vs. Sugauli Sugar Works (P) Ltd.

Analysis:

1. The case involved the write-back of liabilities amounting to Rs. 28,667 by the assessee during the previous year relevant to the assessment year 1980-81. The assessee contended that there was no cessation of the liabilities and thus, they should not be included in the income. The Income Tax Officer (ITO) allowed a partial claim of Rs. 16,258 but disallowed the deduction of the remaining Rs. 12,409. The CIT(A) allowed the claim of Rs. 12,409 based on the judgment of the Calcutta High Court in CIT vs. Sugauli Sugar Works (P) Ltd. The Department contested the inclusion of Rs. 10,193 as deemed income under Section 41 of the IT Act, 1961.

2. The Departmental Representative argued that the write-off of liabilities by the assessee indicated cessation of liabilities, making it taxable income. It was contended that a significant portion of the claimed amount was related to royalty payable to State Governments for the years 1971 to 1976, which had already been deducted in previous assessments, suggesting non-existence of these liabilities.

3. The assessee's representative relied on the judgment in CIT vs. Sugauli Sugar Works (P) Ltd., asserting that liabilities could not be terminated solely by the assessee's unilateral act of writing them off, emphasizing that the liabilities still existed.

4. The interpretation of Section 41(1) of the IT Act was crucial in this case. The Calcutta High Court summarized the section, emphasizing that the cessation or remission of liabilities must be granted by the creditor, and the unilateral act of the debtor does not suffice to extinguish the liability.

5. The Court highlighted that the mere act of transferring liabilities to the profit and loss account indicated potential income. However, it stressed the need for a factual inquiry to determine if the liabilities genuinely ceased or were remitted. The judgment in CIT vs. Sugauli Sugar Works (P) Ltd. could not be applied without verifying the facts, leading to the cancellation of the CIT(A) order and a referral back to the ITO for further investigation.

6. Ultimately, the appeal was allowed for statistical purposes, emphasizing the importance of factual verification regarding the cessation or remission of liabilities before determining their tax treatment.