1994 (11) TMI 151 - AT - Income Tax

Summary

Issues:
1. Whether the original assessment under section 143(3) for the assessment year 1985-86 was erroneous and prejudicial to the interests of Revenue.
2. Whether the provisions of section 263 of the Income Tax Act, 1961 can be invoked by the Commissioner of Income Tax (CIT) in the given circumstances.
3. Whether there was a cessation of liability under section 41(1) of the Act in the case of the assessee.

Analysis:

1. The Central Board of Direct Taxes (CBDT) noticed that the original assessment completed on 25th Dec., 1987, for the assessment year 1985-86 was erroneous. The CIT observed that a sum of Rs. 22,59,075, which was written back as credit to the Profit & Loss (P&L) account, should have been assessed as income under section 41(1) of the Act. The CIT issued a notice to the assessee to explain why the assessment should not be revised under section 263. The assessee's brief reply did not address the merits, leading the CIT to set aside the original assessment and add the sum to the total income declared.

2. The assessee's counsel argued that there was no remission or cessation of liability under section 41(1) to warrant invoking section 263. The Departmental Representative supported the CIT's reasoning. After considering both sides' submissions and case laws, the Tribunal agreed with the CIT. It noted that the loans in question were not repaid since 1976, and the amount written back by the assessee indicated a cessation of liability. The Tribunal found the original assessment erroneous and prejudicial to Revenue's interests.

3. The Tribunal observed that the assessee's act of crediting the interest amount to the P&L account signified a cessation of liability. The Tribunal emphasized that the admission by the assessee itself was strong evidence. Despite the principal amounts still shown as liabilities, the Tribunal concluded that there was a cessation of liability under section 41(1). As the Assessing Officer failed to tax the amount, the CIT's intervention under section 263 was deemed appropriate. The Tribunal dismissed the appeal, affirming the CIT's decision and highlighting the unique circumstances of the case.

In conclusion, the Tribunal upheld the CIT's decision under section 263, emphasizing the cessation of liability and the erroneous nature of the original assessment. The judgment highlighted the importance of assessing income correctly and ensuring compliance with the provisions of the Income Tax Act, 1961.