In absence of declaration by assessee that it does not intend to honour its liabilities, provisions of S. 41(1) cannot be invoked

In the present case, there is no unilateral act of the assessee of making any entry in respect of the trading liabilities in its books of account. Therefore, a sine qua non for attracting section 41 in the present case, is that the assessee should have obtained a benefit by way of remission or cessation of a particular amount in the previous year corresponding to the assessment year in question. As noted by the Tribunal, there was no positive act on the part of either the assessee or the creditors which would amount to the assessee having gained the benefit of remission or cessation of the liabilities in question. The case of the revenue is that several years having passed the recovery of the debts in question have become time barred and hence by operation of law there is cessation of the liability, thereby attracting section 41(1).

  As regards the debt becoming time barred by operation of law, the Apex Court in CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 recorded with approval the observations made by the Bombay High Court in J.K. Chemical Ltd. v. CIT [1966] 62 ITR 34. The Bombay High Court held that the cessation of liability has to be either by reason of operation of law, i.e., on the liability becoming unenforceable at law, by the creditor and the debtor declaring unequivocally his intention not to honor his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt – the debtor making payment thereof to his creditor. In the present case, admittedly there is no declaration by the assessee that it does not intend to honor its liabilities nor is there any discharge of the debt. In the aforesaid premises, as no event had taken place in the year under consideration to indicate remission or cessation of the liabilities in question, the provisions of section 41(1) could not have been invoked. The reasoning adopted by the Tribunal while holding that section 41(1) would not be applicable to the facts of the present case is in line with the principles enunciated in the above decision. The Tribunal, therefore, committed no legal error so as to give rise to any question of law warranting interference by the High Court.

HIGH COURT OF Gujarat

Commissioner of Income-tax-IV

v.

Please become a Premium member. If you are already a Premium member, login here to access the full content.