1995 (12) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 41(1) of the Income-tax Act, 1961.
2. Cessation or remission of liability.
3. Year of taxability of the amount written back.

Issue-wise Detailed Analysis:

1. Applicability of Section 41(1) of the Income-tax Act, 1961:
The primary issue in this case is whether the provisions of Section 41(1) of the Income-tax Act, 1961, apply to the amount of Rs. 1,60,171 written back by the assessee in the relevant assessment year. The Revenue contended that the amount should be taxed under Section 41(1) as it represented a cessation of liability. The assessee argued that the liability for electricity duty never existed, as confirmed by a subsequent order from the Collector of Electricity Duty, and hence, Section 41(1) was not applicable.

2. Cessation or Remission of Liability:
The assessee, a Private Limited Company, had made provisions for electricity duty in the assessment years 1976-77 to 1979-80. These provisions were claimed as deductions. However, the Collector of Electricity Duty later clarified that the higher rate of electricity duty was not applicable to the assessee, as it was an industrial undertaking. The Assessing Officer held that this clarification amounted to a cessation of liability and invoked Section 41(1) to tax the amount. The CIT(A) disagreed, stating that there could be no cessation or remission of a liability that never existed. The Tribunal, however, found that the order from the Collector was not merely clarificatory but a full-fledged order that resulted in a cessation of liability. Therefore, the provisions of Section 41(1) were applicable.

3. Year of Taxability of the Amount Written Back:
The assessee contended that the amount should have been taxed in the year 1982-83, as the order from the Collector was received in 1981. The Tribunal rejected this argument, noting that the assessee made the book entries in the accounting year relevant to the assessment year 1988-89. Since the assessee followed the mercantile system of accounting, the year of assessment of the remission of liability was the year under appeal, i.e., 1988-89.

Conclusion:
The Tribunal concluded that the amount of Rs. 1,60,171 written back by the assessee in its books of account for the assessment year 1988-89 was subject to tax under Section 41(1) of the Income-tax Act, 1961. The findings of the CIT(A) were reversed, and the decision of the Assessing Officer was restored. The appeal by the Revenue was allowed.