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2013 (2) TMI 17 - HC - Income TaxProvision for retirement gratuity written back already stood allowed - Revenue invoked provisions of section 41(1) - Held that - As decided in CIT Versus Sugauli Sugar Works Pvt. Limited 1999 (2) TMI 5 - SUPREME COURT the obtaining by the assessee of a benefit by virtue of mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that s.41 would apply and the amount should be included in the total income of the assessee. Thus unilateral act of the assessee in the present case in writing back the amount of gratuity of Rs. 32,39,929/- which was allowed as expenditure in the Assessment Year 1972-73 would not be treated as remission or cessation of the trading liability so as to attract the provisions of Section 41(1) and the principles laid in the case Sugauli Sugar Works (P.) Ltd. (supra) are squarely applicable - against revenue.
Issues:
Interpretation of Section 41(1) of the Income-tax Act, 1961 regarding taxation of provision made for retirement gratuity written back in the assessment year. Analysis: The case involved a reference made by the Income Tax Appellate Tribunal, Allahabad Bench, regarding the correct application of Section 41(1) of the Income-tax Act, 1961. The dispute arose from the addition of a sum of Rs. 32,39,929 under Section 41(1) by the Assessing Officer during the assessment year 1976-77. The amount in question was related to the provision made for retirement gratuity written back in the assessment year 1972-73. The Assessing Officer argued that since the amount was allowed in 1972-73 and written back in the subsequent year, it should be taxed. However, the Commissioner of Income Tax (Appeals) and the Tribunal held that there was no remission or cessation of liability, and thus, the provisions of Section 41(1) did not apply. The Revenue contended that the provisions of Section 41(1) should be invoked as the gratuity amount was written back during the relevant assessment year after being allowed in 1972-73. They relied on the decision in the case of Polyflex (India) (P.) Ltd. v. CIT. On the other hand, the assessee argued that Section 41(1) did not apply as there was no remission or cessation of trading liability, citing the case of CIT v. Sugauli Sugar Works (P.) Ltd. The High Court analyzed the legal provisions and previous judgments to determine the applicability of Section 41(1) in the present case. The court noted that Section 41(1) applies when there is a remission or cessation of trading liability that was allowed as an expenditure in any assessment year. In this case, the gratuity amount had been allowed as a trading liability in 1972-73. The court emphasized that mere unilateral writing back of the amount in the books of account did not constitute remission or cessation of liability as required by Section 41(1). The court distinguished the case relied upon by the Revenue, emphasizing that the circumstances were different, and the principles laid down in the Sugauli Sugar Works case were applicable. The court also highlighted the insertion of Explanation (1) to Section 41(1) by the Finance (No.2) Act, 1996, which clarified that even unilateral writing off of a trading liability would attract Section 41(1) from the Assessment Year 1997-98 onwards. However, this provision could not be applied retroactively to the assessment year in question, 1976-77. Therefore, the court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal, ruling that the sum of Rs. 32,39,929 could not be taxed under Section 41(1) for the assessment year in question. The judgment was in favor of the assessee, and no costs were awarded.
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