2006 (4) TMI 70 - HC - Income Tax

Issues Involved:
1. Deletion of addition on account of cessation/remission of liabilities.
2. Deletion of addition on account of disallowance of bank interest.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Cessation/Remission of Liabilities:

The respondent-assessee-company had written off liabilities towards payment of commission expenses in its books of account, which were previously allowed as deductions. The Assessing Officer invoked section 41(1) of the Income-tax Act, 1961, and added Rs. 22,78,980 to the assessee's income, considering this unilateral action as remission or cessation of liabilities. The Commissioner of Income-tax (Appeals) affirmed this addition.

The Tribunal, however, relied on the Supreme Court's decision in CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518, which held that unilateral action by the assessee in writing off liabilities does not amount to remission or cessation of liability. The Tribunal thus allowed the appeal and deleted the addition.

The Revenue argued that the Tribunal's order was incorrect, citing the Supreme Court's decision in CIT v. T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344, which dealt with the appropriation of money received by the assessee as trading receipts.

The court noted that for section 41(1) to apply, there must be an actual remission or cessation of liability, which involves an overt act by the creditor. The court found no evidence of any act by the creditors that extinguished the liability of the assessee. The court also emphasized that the mere fact that creditors did not lodge claims before the BIFR does not extinguish the liabilities.

The court concluded that the Tribunal was correct in holding that section 41(1) could not be invoked merely based on the unilateral action of the assessee in writing off liabilities in its books. The Supreme Court's decision in CIT v. Sugauli Sugar Works P. Ltd. was found to be applicable, and the appeal by the Revenue was dismissed.

2. Deletion of Addition on Account of Disallowance of Bank Interest:

The second issue involved the deletion of an addition of Rs. 97,22,082 on account of disallowance of bank interest. The assessee had written off this interest in its books for the accounting period ending on March 31, 1993, relevant to the assessment year 1993-94, following a waiver by the BIFR under a rehabilitation scheme sanctioned on May 27, 1993.

The Tribunal deleted the addition, noting that the waiver of interest liability occurred in the financial year 1993-94, relevant to the assessment year 1994-95, and not in the assessment year 1993-94. The Tribunal also noted that the BIFR order exempted the assessee from the operation of section 41(1) concerning the waived liabilities.

The court upheld the Tribunal's decision, stating that the waiver of interest liability by the BIFR took effect in the financial year 1993-94, and thus, the liability did not cease in the financial year 1992-93. The court emphasized that the unilateral action of the assessee in writing off the interest in its books for the earlier period did not alter the legal effect of the BIFR order, which took effect from May 27, 1993.

The court also noted that Explanation 1 to section 41(1), inserted with effect from April 1, 1997, was not retrospective and did not apply to the assessment year 1993-94. The court concluded that the Tribunal was correct in deleting the addition made by the Assessing Officer under section 41(1) for the assessment year 1993-94, as the remission or cessation of liability occurred in the subsequent financial year.

Conclusion:

The court dismissed the Revenue's appeal, affirming the Tribunal's decision to delete the additions made on account of cessation/remission of liabilities and disallowance of bank interest. The court emphasized the importance of the timing of the remission or cessation of liabilities and the applicability of section 41(1) based on judicial precedents.