1994 (1) TMI 278 - HC - Income Tax

Summary

Issues:
Interpretation of section 41(1) of the Income-tax Act, 1961 regarding assessability of commission as income.
Determining whether there was a cessation of liability for the amount payable to the Zonal Development Council.
Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the assessability of a commission amount under section 41(1) of the Act. The Tribunal referred the question of whether the commission amount of Rs. 7,77,175, treated as payable to the Zonal Development Council for certain assessment years, was assessable in the subsequent assessment year. The company had computed its liability for the commission but did not pay it as the Council had not been constituted, leading to the amount being written back to the profit and loss account. The Assessing Officer treated this amount as profit under section 41(1) of the Act, resulting in a dispute (Para 1-4).

The Appellate Authority Commissioner (AAC) found that there was no evidence of a cessation of the liability for the amount. The Tribunal also held that since the liability did not cease to exist, it could not be treated as income under section 41(1). Citing precedents, the Tribunal emphasized that only real income could be assessed to tax and that erroneous accounting treatment does not change the nature of a transaction (Para 4).

The Court analyzed the provisions of the Bihar Sugar Cane Ordinance, which mandated the payment of commission to the Zonal Council. It noted that the liability to pay the commission remained despite the company writing back the amount to the profit and loss account. The Court highlighted that a mere accounting entry reversal does not constitute a cessation of liability, emphasizing that the liability must cease to exist legally for it to be considered under section 41(1) (Para 7).

Additionally, the Court referred to a letter from the Cane Commissioner directing the deposit of commission collections, indicating that the statutory liability under the Ordinance was still in force. The Court concluded that the liability had not ceased merely because the Council was not constituted during the relevant year. It emphasized that the statutory obligation to deposit the amount remained, and the liability could not be considered to have ceased or remitted (Para 8-9).

Ultimately, the Court ruled in favor of the assessee, stating that there was no cessation of liability as required under section 41(1) for the amount to be assessed as income. It rejected the revenue's argument based on the company's accounting treatment, emphasizing that the statutory requirement was still in effect, making the commission amount non-assessable despite the accounting error (Para 10).