Section 41(1) - Recovery of expenditure & Remission and cessation of trading liability - Income Tax - Ready Reckoner - Income Tax

Section 41(1)(a) : RECOVERY OF EXPENDITURE REMISSION AND CESSATION OF TRADING LIABILITY Where any loss or expenditure has been allowed as deduction and subsequently any amount is received in respect of such loss or expenditure, then the amount so received shall be deemed to be the income under the head PGBP of the previous year in which such amount is received. This shall apply even if the business is not in existence. Where any deduction has been allowed in respect of a trading liability and subsequently there is a remission or cessation of the trading liability, then the amount of trading liability so ceased shall be deemed to be the income under the head PGBP of the previous year in which such remission or cessation took place. This shall apply even if the business is not in existence. Writing of the liability unilaterally will also bring about a remission or cessation of the trading liability. Triggers of Section 41(1) The following indicators can be considered as triggers for Section 41(1): Cessation of liability/waiver of liability or recovery of loss or expenditure Liability must be trading/revenue in nature A deduction/allowance has been claimed against the same in the earlier years. Section 41(1)(b): RECOVERY BY SUCCESSOR IN BUSINESS Where the assessee to whom the Trading liability may have been allowed is succeeded in his business either because of amalgamation or demerger of two companies or on account of the constitution of the new firm or the business is continued by some other persons when the assessee ceases to carry on the business, then the person succeeding will be chargeable to tax on any amount received in relation to which deduction or allowance has been made. UNILATERAL WRITING OFF OF TRADING LIABILITY It is taxable even if it is a unilateral act and the other party has not discharged liability of the taxpayer or the other party has filed the suit against the assessee. NOTE:- For applicability of Section 41(1), the pre-requisite condition is that an allowance or deduction has been made in the assessment for any of the years in respect of an expenditure, loss or trading liability incurred by the assessee and subsequently during any previous year the assessee has received remission or obtained refund of the said amount. Section 41(1) does not cover a mistaken payment or mistake in calculation. The allowance, which was legally made, to the extent the assessee was able to reimburse himself, was added on to the assessee s income in the year in which the assessee was able to reimburse himself. Wavier of loan does not amount to cessation of trading liability. [ THE COMMISSIONER V MAHINDRA AND MAHINDRA LTD 2018 (5) TMI 358 - SC ]