2005 (7) TMI 71 - HC - Income Tax

Whether the Tribunal was right in treating the amount of Rs. 23, 66, 695 (the amount which was written off by the sister concern of the assessee) as the income in the hands of the assessee and on that count liable to be taxed under section 41(1) of the Income-tax Act? - It is well settled that the Revenue can add a sum to the assessee s income under section 41(1) of the Income-tax Act only if it can prove that the allowance or deduction has been made in the assessment in the previous year in respect of the loss expenditure or trading liability - A perusal of the impugned order of the Income-tax Appellate Tribunal shows that there was no finding of the Tribunal that any deduction or allowance was made in the assessment of the assessee in an earlier year. In the circumstances we set aside the impugned order of the Tribunal and remand the matter to the Tribunal for a fresh decision in accordance with law appeal is allowed

Summary

Issues:
1. Interpretation of section 41(1) of the Income-tax Act regarding treatment of written-off amount as income in the hands of the assessee.

Analysis:
The High Court of MADRAS heard an appeal under section 260A of the Income-tax Act, 1961, focusing on whether an amount written off by the sister concern of the assessee should be treated as income in the hands of the assessee, thus being liable to be taxed under section 41(1) of the Income-tax Act. The court examined the records and previous orders of the income-tax authorities, all of which ruled against the assessee on this matter. It was crucial to determine if the amount in question could be added as income under section 41(1) of the Income-tax Act. The court emphasized that the Revenue can only add a sum to the assessee's income under this section if it can demonstrate that an allowance or deduction was made in the assessment of the previous year regarding the loss, expenditure, or trading liability.

The court referred to various precedents, including the Supreme Court's decision in Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT [1970] 78 ITR 55, highlighting that without proof of an allowed deduction of liability in the earlier assessment, adding the amount as deemed profits under section 41(1) would not be permissible. The court also cited similar views expressed in other cases such as CIT v. Thakurdas [1984] 147 ITR 549 (MP) and CIT v. Western Rolling Mills Ltd. [1994] 72 Taxman 155 (Bom). The appellant's counsel argued that there was no deduction or allowance made in any assessment year, with no supporting finding to that effect.

The Department's counsel contended that the assessee did not raise this issue before the Income-tax Tribunal, as evidenced by the grounds of appeal. The court observed that although the specific ground was not raised before the Tribunal, the general ground challenged the determination of profit under section 41(1) of the Act. The court emphasized that for any addition under section 41(1), an allowance or deduction must have been made in the previous year's computation of profit or gains, as per established legal principles.

Consequently, the court set aside the Tribunal's order and remanded the matter for a fresh decision after ensuring a clear finding on whether any deduction had been allowed in the assessment of the assessee in an earlier year to comply with section 41(1) of the Income-tax Act. The court stressed that section 41(1) creates a legal fiction that must be strictly adhered to for any income addition by the Revenue. The appeal was allowed, the Tribunal's order was overturned, and the case was sent back to the Tribunal for a fresh decision in accordance with the law.