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Issues involved: Tax liability on a sum transferred to profit and loss account after being shown as rent payable in earlier years.
Summary: The High Court of Karnataka addressed the issue of tax liability on a sum of Rs. 4,600 transferred to the profit and loss account by a company in voluntary liquidation. The Income-tax Officer treated this sum as part of taxable income under section 41(1) of the Income-tax Act, 1961. The Appellate Assistant Commissioner reduced the taxable income by Rs. 4,600, but the Income-tax Appellate Tribunal reversed this decision, holding that the amount was taxable due to cessation of liability. The Tribunal referred the question of tax treatment to the High Court. The High Court noted that the sum of Rs. 4,600 had been treated as expenditure in earlier assessments, the limitation period for the landlord to recover the amount had expired, and the company had transferred the sum to its profit and loss account due to the time-barred liability. Section 41(1) of the Act deems any amount obtained in respect of a previously allowed deduction as taxable income if there is a remission or cessation of liability. The Court clarified that a time-barred debt does not cease to exist, citing legal principles from Salmond on Jurisprudence and a Supreme Court decision. The Court emphasized that a time-barred debt remains valid for all purposes except enforcement, and held that the Tribunal erred in treating the sum as taxable under section 41(1). The Court referenced decisions from the Bombay and Allahabad High Courts to support its conclusion. Consequently, the question was answered in the negative, in favor of the assessee, who was awarded costs and advocate's fee. This judgment clarifies the distinction between a time-barred debt and a ceased liability, providing guidance on the tax treatment of amounts transferred to profit and loss accounts in cases of time-barred liabilities.
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