1986 (3) TMI 104 - AT - Income Tax

Summary

Issues:
1. Whether the amount written back to the profit and loss account by the assessee should be taxed under section 41(1) of the Income-tax Act, 1961.

Comprehensive Analysis:
The judgment by the Appellate Tribunal ITAT BOMBAY-A involved a departmental appeal regarding the taxation of an amount written back to the profit and loss account by an assessee engaged in the manufacturing of dairy products. The Income Tax Officer (ITO) added the amount under section 41(1) of the Income-tax Act, 1961, citing a cessation of liability due to the write-back. The Commissioner (Appeals) referred to precedents like Gannon Dunkerley & Co. Ltd. v. CIT and CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd., emphasizing that mere write-backs do not extinguish liabilities. Consequently, the Commissioner deleted the addition made by the ITO.

The department, dissatisfied with the decision, appealed to the Tribunal. The department argued that the write-back indicated a cessation of liability, contrasting it with the cases cited by the Commissioner. The department highlighted that the facts of the case differed from previous judgments and contended that the liability had ceased. The assessee, on the other hand, argued that the write-back should not be considered a cessation of liability based on unilateral action, citing relevant case law.

The Tribunal considered two approaches to the issue: treating the written-back amount as a trading receipt or as a ceased liability. Referring to the case of Batliboi & Co. (P.) Ltd., the Tribunal analyzed the nature of the excess deposits transferred to the profit and loss account, drawing parallels to the case at hand involving advances for purchases. The Tribunal noted that the nature of the write-back was not clarified by the assessee before the lower authorities, leading to a lack of factual clarity. Consequently, the Tribunal upheld the ITO's order based on a cessation of liability.

Moreover, the Tribunal distinguished previous cases where write-backs were not taxed, such as Kohinoor Mills Co. Ltd. v. CIT and J. K. Chemicals Ltd., as they involved unclaimed balances protected by other legislations. The Tribunal also differentiated the present case from Gannon Dunkerley & Co. (P.) Ltd. and Sadabhakti Prakashan Printing Press (P.) Ltd., where the write-backs did not alter the legal position. Ultimately, the Tribunal concluded that the ITO's order should be upheld, allowing the departmental appeal and taxing the written-back amount.

In summary, the judgment delved into the intricacies of tax treatment concerning write-backs to the profit and loss account, emphasizing the distinction between trading receipts and ceased liabilities, and ultimately upholding the taxation of the amount in question under section 41(1) of the Income-tax Act, 1961.