1990 (3) TMI 109 - AT - Income Tax

Issues Involved:

1. Inclusion of Rs. 1,42,404 as income under Section 41(1) of the Income Tax Act, 1961.
2. Treatment of interest paid to partners as a deduction under Section 40(b).
3. Onus of proof regarding the allowance of deductions in earlier years.
4. Unilateral write-off of loans and its implications under Section 41(1).
5. Addition of unexplained bank deposit of Rs. 9,935.

Issue-wise Detailed Analysis:

1. Inclusion of Rs. 1,42,404 as income under Section 41(1) of the Income Tax Act, 1961:

The assessee wrote off Rs. 1,42,404 and included it in the profit and loss account. The Income Tax Officer (ITO) included this amount in the income assessed at Rs. 1,71,000. The ITO's report indicated that part of this amount was previously allowed as expenditure and thus should be treated as income under Section 41(1). The Commissioner of Income Tax (Appeals) [CIT(A)] held that Rs. 88,455 should be included as income, presuming that the amounts for which no details were furnished might represent expenses incurred on behalf of the firm. The Tribunal, however, concluded that the interest paid to partners, although previously allowed as a deduction, should not be treated as income under Section 41(1) due to the express provisions of Section 40(b).

2. Treatment of interest paid to partners as a deduction under Section 40(b):

The CIT(A) and the Tribunal examined whether the interest paid to partners was deductible under Section 40(b). The CIT(A) concluded that the interest paid was allowed as a deduction in earlier years and thus fell within the ambit of Section 41(1). However, the Tribunal upheld the assessee's contention that Section 41(1) does not apply to deductions wrongly allowed in violation of law, and thus, the interest paid to partners should not be treated as deemed income.

3. Onus of proof regarding the allowance of deductions in earlier years:

The Tribunal emphasized that the onus to prove that deductions were allowed in earlier years lies with the assessing officer. Citing decisions from the Delhi High Court and the Kerala High Court, the Tribunal held that the ITO failed to bring material evidence to show that the amount of Rs. 30,849 was allowed as a deduction in earlier years. Consequently, this amount could not be treated as income under Section 41(1).

4. Unilateral write-off of loans and its implications under Section 41(1):

The Tribunal considered the unilateral write-off of Rs. 13,659 advanced by Shri Bharat Ram, who was not a partner. It was held that unilateral action by the assessee does not amount to remission or cessation of liability under Section 41(1). The Tribunal cited the Calcutta High Court's decision in CIT v. B.N. Elias & Co. (P.) Ltd., which held that amounts written off without remission or cessation of liability cannot be included in total income under Section 41(1).

5. Addition of unexplained bank deposit of Rs. 9,935:

The ITO added Rs. 9,935 as unexplained deposit in the bank account. The CIT(A) confirmed this addition due to lack of evidence. However, the Tribunal found that the bank statement showed deposits from Bengal Potteries Ltd., explaining the source of the deposit. Thus, the addition of Rs. 9,935 was deleted by the Tribunal.

Conclusion:

The appeal was partly allowed. The Tribunal excluded the amounts of Rs. 20,650 (interest paid to partners), Rs. 30,849 (brought forward item), Rs. 10,356 (comprising Rs. 5,818 and Rs. 4,537), and Rs. 13,659 (loan from Shri Bharat Ram) from the income under Section 41(1). The addition of Rs. 9,935 as unexplained bank deposit was also deleted.

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