1995 (4) TMI 116 - AT - Income Tax

Issues Involved:
1. Addition under section 41(1) of the Income-tax Act (Rs. 2,33,357).

Detailed Analysis:

Issue No. 4: Addition under section 41(1) of the Act (Rs. 2,33,357)

During the relevant previous year, the assessee wrote back a sum of Rs. 2,33,357 to the credit of the Profit & Loss Account (P&L A/c). This amount was initially debited in 1977 when M/s. G.K. Williams, Bombay supplied goods to the assessee. The goods were found to be defective, and no payment was made towards this liability. The Bombay concern did not pursue the matter further. The assessee argued that this unilateral write-back did not constitute a cessation of liability under section 41(1) of the Act. The Assessing Officer and CIT(A) rejected this claim, citing that the write-back related to a trading liability and there was constructive remission or cessation of the liability by the conduct of inaction.

Before the Tribunal, the assessee's counsel relied on several cases, including CIT v. Sadabhakti Prakashan Printing Press P. Ltd., CIT v. Pre-stressed Concrete Co. (SI) P. Ltd., and CIT v. Chase Bright Steel Ltd. The Departmental Representative supported the CIT(A)'s order and alternatively argued that the case could also fall under section 28 of the Act, referring to Protos Engineer Co. P. Ltd. v. CIT.

The Tribunal reviewed the facts and the legal precedents. It noted that a debt subsists notwithstanding that its recovery is barred by limitation and that a unilateral act cannot bring about a cessation or remission of liability. However, it highlighted that each case must be decided based on its specific facts and circumstances.

The Tribunal examined several cases, including:
1. Kohinoor Mills Co. Ltd. v. CIT: The Bombay High Court held that a debt subsists even if its recovery is barred by limitation and that a unilateral act by the debtor cannot bring about cessation or remission of liability.
2. Ambica Mills Ltd. v. CIT: The Gujarat High Court held that a liability shown in the balance sheet as an acknowledgment does not become time-barred.
3. J.K. Chemicals Ltd. v. CIT: The Bombay High Court held that a unilateral act of writing back unclaimed wages to the P&L A/c does not bring about cessation of liability.
4. CIT v. Sugauli Sugar Works P. Ltd.: The Calcutta High Court held that unilateral writing off of liability does not amount to cessation or remission of liability.
5. Chase Bright Steel Ltd. (No. 2): The Bombay High Court held that the liability does not cease merely because it has become barred by limitation, and the intention of the debtor not to honor the liability must be unequivocal.
6. Pioneer Consolidated Co. of India Ltd. v. CIT: The Allahabad High Court held that sums written back to the P&L A/c constitute income.
7. CIT v. Hides & Leather Products P. Ltd.: The Gujarat High Court held that the cessation of liability must be inferred from the circumstances, including the debtor's intention not to pay the debt.
8. Bennet Coleman & Co. Ltd.: The Bombay High Court held that the cessation of liability can occur through a unilateral act if the debtor's intention not to pay is unequivocal.

The Tribunal concluded that in the present case, the assessee's act of writing back the amount to the P&L A/c, coupled with the fact that the creditor did not pursue the claim and the recovery was barred by limitation, constituted a cessation of liability under section 41(1) of the Act. The Tribunal dismissed the related grounds and upheld the addition of Rs. 2,33,357.

Conclusion:
The Tribunal held that the lower authorities were justified in invoking section 41(1) of the Act and bringing to charge the sum of Rs. 2,33,357. The assessee's appeal was partly allowed for statistical purposes.

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