1973 (2) TMI 35 - HC - Income Tax

Debts due by the firm to various creditors was barred by limitation were credited to the partners account - 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the amounts of ₹ 16,513 is not assessable under section 41(1) of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, there is any material for the Tribunal to hold that there was no remission or cessation of liability in respect of the sum of ₹ 6,725 ? - we answer both the questions referred to us in the affirmative, that is, in favour of the assessee and against the department

Summary

Issues:
1. Interpretation of section 41(1) of the Income-tax Act, 1961 regarding assessability of specific amounts.
2. Determination of cessation of liability in relation to a sum of money.

Analysis:

The first issue revolves around the interpretation of section 41(1) of the Income-tax Act, 1961, concerning the assessability of specific amounts. The Tribunal referred questions regarding the assessability of Rs. 16,513 and Rs. 6,725. The Tribunal held that Rs. 9,788 out of the total Rs. 16,513 cannot be treated as income under section 41(1) as it was not allowed as a deduction to the assessee. Additionally, the Tribunal found that there was no cessation of liability in relation to the sum of Rs. 6,725, making section 41 inapplicable. The sum of Rs. 16,513 was part of unclaimed credit balances in the accounts of 30 creditors of the firm. During previous assessment years, a portion of this amount was taxed under section 41(1), and the balance was sought to be assessed for the relevant year.

Regarding the sum of Rs. 9,788, the deductions were permitted to a Hindu undivided family, not to the assessee-firm. Therefore, section 41(1) was deemed inapplicable as it applies only when deductions are made in the income computation of the same assessee being taxed. The Tribunal's decision on this matter was deemed unassailable. Concerning the sum of Rs. 6,725, the issue was whether there was a cessation of liability. The Court analyzed various factors, including the debts becoming irrecoverable due to limitations, the assessee's treatment of the debts, and the division of amounts among partners. The Court rejected the argument that the assessee's actions constituted an admission of liability cessation, emphasizing that the right to recover a debt continues even if the remedy is barred by limitations. The Court referenced relevant case law to support its conclusion that there was no cessation of liability.

In conclusion, the Court answered both questions in favor of the assessee, directing each party to bear their respective costs. The judgment will be communicated to the Appellate Tribunal as required by law.