2002 (3) TMI 1 - SC - Income Tax

Resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal the Tribunal as well as the High Court were well justified incoming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question - revenue is not allowed to take back what has been allowed earlier as business expenditure

Summary

Issues:
Dispute over tax liability reversal in the assessment year 1985-86.

Analysis:
The case involved a dispute regarding the reversal of a tax liability by an assessee in the assessment year 1985-86. The assessee, engaged in the business of tea and spices, had reversed a sum of Rs.14,65,997 in its accounts, representing a provision made in earlier years towards purchase tax liability. The Assessing Officer added this sum to the income of the relevant year. The Commissioner of Income-tax (Appeals) upheld the addition of Rs.3,02,758 pertaining to the assessment year 1978-79, but not the sums included in reassessments for the years 1979-80 and 1980-81. The Tribunal later set aside the addition of Rs.3,02,758, disagreeing with the view that the liability ceased due to the dismissal of a related case. The High Court approved the Tribunal's decision, stating that section 41(1) could not be invoked in this case.

The key issue was whether the circumstances under section 41(1) existed to allow the Revenue to include the reversed amount in the income of the relevant assessment year. Section 41(1) applies when a trading liability deduction has been made, and later a benefit is obtained due to remission or cessation of the liability. The High Court and Tribunal found that the purchase tax liability had not ceased finally during the relevant year, despite the finality of a related judgment. The unilateral action of the assessee in reversing the provision did not legally extinguish the liability, as held in previous court decisions.

The court dismissed the Revenue's appeal, affirming the High Court's decision. The court rejected the argument that the liability ceased due to the assessee's actions, emphasizing that legal cessation required more than mere accounting adjustments. The court also clarified that the case was not impacted by the introduction of Explanation 1 to section 41(1). The decision cited in support of the appeal was deemed irrelevant to the present case. Ultimately, the court upheld the view that the liability had not ceased finally, and the reversed amount could not be included in the income for the assessment year 1985-86.