Case Law Details
RELEVANT PARAGRAPH
8. We have the rival contentions and gone through the facts and circumstances of the case. We have also perused the case records including the assessment order, the order of CIT(A) and the assessee’s paper book. We have also gone through the case laws relied on. We find that the assessee has received an amount of Rs. 2.93 crores from Soumya Construction Pvt. Ltd. and shown the same as liability in balance-sheet for assessment year 1997- 98. The assessee has not shown the same as trading liability and nor claimed any deduction or expense in that assessment year. During the relevant assessment year 2005- 06, the liability standing in assessee’s books was written off towards the compensation/ damages for relinquishment of right to sue in the court of law and the liability was credited as capital receipt in the assessee’s capital a/c. Now, first of all, we have to ascertain whether the transaction falls under the provisions of Section 41(1) or not. We find that the Assessing Officer has treated this receipt as income falling under provisions of Section 41(1) of the Act. The CIT(A) has deleted the addition on this count by stating that Section 41(1) is not applicable because under this Section only that liability can be added or taxed which has seized but which has been allowed as a deduction in any earlier year, which is not the case here. According to the CIT(A), the Assessing Officer after mentioning Section 41(1) has proceeded to tax u/s.68 of the Act stating this to be unexplained credit. According to the CIT(A), even Section 68 of the Act cannot be applied because the identity of the payer, i.e. Somuya Construction Pvt. Ltd. is not doubted and the PAN No. has been given and it is assessed to tax. Even these payments are received in the year 1996, as the dates narrated above, hence, at no point of time addition can be made u/s. 68 of the Act. We find that these findings of CIT(A) are not challenged by the Revenue in appeal as informed by Ld. Sr. DR. Accordingly, the findings of CIT(A) on these two provisions, i.e. Section 41(1) and Section 68 of the Act have become final. Even otherwise Subsection (1) of section 41 deals with profits chargeable to tax and Clause (a) of this sub-section provides that where an allowance or a deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained or the value of benefit accruing to him shall be deemed to be the profits, and accordingly chargeable to income-tax as income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Clause (b) of this sub-section makes similar provision in the case of successor in business in regard to any amount in respect of which loss or expenditure, etc., was incurred by the predecessor. Further, it was found that a number of assessee were escaping tax liability under this sub-section in regard to the credit of trading liabilities to profit and loss account, even when the recovery of the debt had become barred by limitation or when there was no likelihood of the liability being enforced against them and this was on account of the fact that some courts held that the liability can remit or cease only by a bilateral or a multilateral act between the creditor(s) on the one side and the debtor on the other and not by a unilateral act. By an amendment the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof”, occurring in this sub-section, has been defined to include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of this sub-section by way of writing off such liability in his accounts. We further find that Section 41(1) concerns a trading liability and not other types of liability. Section 41(1), in a way, enacts statutory fictions. Therefore, the operation of such fictions should be limited to the language of the section. It is, inter alia, where the assessee has incurred a trading liability, and this trading liability has been allowed deduction in an earlier year, and something has, later on, been recovered in respect of such liability or such liability has either been remitted or has ceased to exist, that section 41(1) comes into operation. Furthermore, whether or not a liability is a trading liability depends on the facts and circumstances of a particular case. A liability created for purchase of stock-in-trade on credit is certainly a trading liability. Where A purchases his stock-in-trade from B on credit, the liability of A to B is a trading liability. But if A borrows money from C in order to pay off his liability to B, A’s liability to C on such borrowing is not a trading liability. It is thus clear that section 41(1) cannot be invoked if C remits a part or whole of his loan to A. Where the assessee had not claimed nor obtained a deduction in respect of a security deposit treating it as a trading liability, section 41 (1) cannot be invoked when such security deposit is refunded to the assessee. In the present case, none of the above probabilities existed and this is a case of amount received from assessee-firm shown as a liability in the shape of cash credit in assessment year 1997-98. The assessee has not claimed the same as deduction or expenses in any of the years till date. The assessee has written off the same as compensation/ damages for relinquishment of right to sue in court of law and credited the same in the capital a/c as capital receipt. In view of the above, we are of the considered view that the provisions of Section 41(1) or Section 68 of the Act will not apply to the writing off this liability in the capital a/c and the liability has not been credited in the profit and loss a/c but the same has been taken as capital basis in the capital a/c in the books of account of the assessee.
