1992 (10) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the remission of trading liability (kasar) obtained by the assessee can be taxed only under section 41(1) of the Income-tax Act, 1961.
2. Whether the remission amount could be considered for computing business income under other relevant provisions of the Income-tax Act, 1961, including section 28.

Issue-wise Detailed Analysis:

Issue 1: Applicability of Section 41(1) of the Income-tax Act, 1961
The primary issue was whether the remission of trading liability, known as kasar, obtained by the assessee could be taxed solely under the provisions of section 41(1) of the Income-tax Act, 1961. The Tribunal had determined that the kasar allowed by eight creditors, totaling Rs. 53,803, partially attracted section 41(1). Specifically, Rs. 17,565 was retained under section 41(1), while the remaining amount was deleted. The Tribunal concluded that section 41(1) presupposes a loss or trading liability for which deduction or allowance has been granted in an earlier assessment. Since the kasar was allowed in the same year the liability was incurred, the Tribunal opined that section 41(1) could not apply to the entire amount.

Issue 2: Consideration Under Other Provisions of the Income-tax Act, 1961
The court examined whether the remission amount could be considered for computing business income under other relevant provisions of the Income-tax Act, 1961, including section 28. The Tribunal had taken a restrictive view, stating that the kasar amount could only be dealt with under section 41(1). However, the court noted that the question referred did not require expressing an opinion on the exact relevant provisions under which the kasar amount could be taxed. The court emphasized that a debt forgone does not become the income of the debtor, referring to various precedents like British Mexican Petroleum Co. Ltd. v. CIR and CIT v. P. Ganesa Chettiar, which established that a forgone debt cannot constitute taxable income.

The court criticized the Tribunal's broad view that the kasar amount could only be considered under section 41(1). It held that the remission amount might need to be considered while computing business income under other relevant provisions of the Act, including section 28. Therefore, the court concluded that the Tribunal was not justified in restricting the consideration of the kasar amount to section 41(1) alone.

Conclusion:
The court answered the question in the negative, in favor of the Revenue and against the assessee, stating that the remission amount could be considered for the purpose of taxing the income of the assessee under the relevant provisions of the Income-tax Act, 1961, including section 28. There was no order as to costs.