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Issues involved: Assessment of unpaid royalties to a foreign collaborator and whether the liability had ceased for taxation purposes.
Summary: The assessee-company, a consulting engineering firm, had an outstanding liability of Rs. 2,09,993 in unpaid royalties to a foreign company, which was shown in the balance sheet. The Income-tax Officer added this amount to the assessment, considering the liability to have ceased. However, the Appellate Assistant Commissioner and the Tribunal disagreed, stating that there was no evidence of remission or cessation of the liability. The Tribunal held that the acknowledgment of the liability in the balance sheet was sufficient to maintain it as a liability, and thus, the amount could not be added back under section 41(1) of the Income-tax Act, 1961. The key issue revolved around whether the sum of Rs. 2,09,993 could be considered as an amount in which the liability had ceased as per section 41(1) of the Income-tax Act. The Revenue argued that since the foreign company did not take steps to recover the amount, the liability should be deemed to have ceased. However, the Tribunal emphasized that there was no evidence of remission or cessation, and the liability continued to be reflected in the balance sheet. The Court analyzed the conditions under section 41(1) of the Act, emphasizing that for the Revenue to invoke this section, it must be established that the assessee obtained a benefit due to remission or cessation of the liability. The Court noted that the mere passage of the limitation period did not constitute a cessation of the trading liability. Citing precedents, the Court highlighted that the liability could not be considered ceased solely based on non-payment or the expiry of the limitation period. Referring to a Gujarat High Court decision, the Court noted that the inference of cessation of liability depended on the specific facts and circumstances of each case. Ultimately, the Court upheld the Tribunal's decision, stating that there was no cessation of liability, and the amount of Rs. 2,09,993 could not be taxed under section 41(1) of the Income-tax Act, 1961. Consequently, both questions were answered in favor of the assessee, who was awarded costs for the reference.
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