1984 (11) TMI 168 - AT - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1,20,705 should be treated as income chargeable to tax under section 41(1) of the Income Tax Act.
2. Whether the closure of accounts and transfer of balances to the Profit & Loss account by the assessee constitutes a remission or cessation of trading liabilities.

Issue-Wise Detailed Analysis:

1. Treatment of Rs. 1,20,705 as Income Chargeable to Tax under Section 41(1):

The CIT observed that the adjustments made in the Profit & Loss account by the assessee represented remission or cessation of trading liabilities, thus obtaining a benefit that should be chargeable to tax under section 41(1). The assessee argued that these adjustments were capital receipts and should not be included in the computation of income. Specifically, the balances of Rs. 10,326 and Rs. 14,207 in the accounts of Pandurang Golar and Shabbir Hussain were claimed to be unclaimed cash loans, while the balance of Rs. 1,04,514 in the account of Ganges Printing Inks, Bombay was claimed to be a trade creditor account wrongly closed.

The CIT, upon examining the accounts, found that the balances included interest credited over several years and allowed as deductions in respective assessment years. The CIT concluded that the sums represented benefits obtained by the assessee through remission or cessation of trading liabilities and were therefore chargeable under section 41(1).

2. Closure of Accounts and Transfer of Balances to Profit & Loss Account:

The assessee's representative argued that the write-back of amounts to the Profit & Loss account was a unilateral act and did not constitute a remission or cessation of liabilities. They cited several High Court decisions to support their argument that a unilateral act does not bring about cessation of liability. However, the Departmental Representative contended that the creditors were not traceable, making the write-back not merely unilateral. The Tribunal agreed with the CIT, noting that the creditors were non-existent or untraceable, and the assessee had advisedly transferred the balances to the Profit & Loss account. This action was not merely unilateral but indicated a cessation of liability, thus chargeable under section 41(1).

Specific Accounts Analysis:

Pandurang Golar Account:
The account had an old balance brought forward from the accounting year 1966-67, with periodic interest credits but no withdrawals. The CIT found that the interest credited over the years was allowed as deductions in respective assessment years. The closure of this account and transfer of balance to the Profit & Loss account constituted a benefit from cessation of liability, chargeable under section 41(1).

Shabbir Hussain Account:
Similar to the Pandurang Golar account, this account had periodic interest credits and minimal withdrawals. The interest credited was included in the balance transferred to the Profit & Loss account. The CIT concluded that this also constituted a benefit from cessation of liability, chargeable under section 41(1).

Ganges Printing Inks Account:
This account showed a running balance with trading transactions. During the relevant year, the account was debited by Rs. 1,04,514 and transferred to the Profit & Loss account as a "balance settlement." The CIT noted that no contra entry was made to reverse this debit, indicating a remission of liability. The Tribunal found that this adjustment was a bilateral transaction, not a unilateral act, and thus chargeable under section 41(1).

Conclusion:
The Tribunal upheld the CIT's order, confirming that the sum of Rs. 1,20,705 was chargeable to tax under section 41(1). The appeal by the assessee was dismissed, and the order of the CIT under section 263 was confirmed.