S. 41(1) not applies if Assessee not claimed trading liability as deduction in earlier years in computing business income

Hon’ble Delhi High Court in the case of Vardhman Overseas Ltd. (supra) has observed that section 41(1) has been incorporated in the Act to cover a particular facts situation. Section applies where a trading liability was allowed as a deduction in earlier years in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in later year by way of remission or cessation of the liability. In such a case, the section says that whatever benefit has arisen to the assessee in the later year by way of remission of the liability will be brought to tax in that year.

The principle behind the section is that a provision intended to ensure that the assessee does not get away with a double befit once by way of a deduction in an earlier assessment year and again by not being taxed on the benefit received by him in a later year with reference to the liability earlier allowed as a deduction. In this case, four years have elapsed and the Assessing Officer took a view that the liability has ceased to exist. It was held that merely elapse of four years is not sufficient to say that the liability ceased to exist unless it has been written back in the books of account. In the present case also, the assessee has not written back the liability and Assessing Officer failed to demonstrate that liability has ceased. Learned first appellate authority while deleting the addition put reliance upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Kesaria Tea Co. Ltd. Reported in 254 ITR 435 and CIT vs. Sugauli Works Ltd. Reported in 236 ITR 518. According to these judgments, unless the liabilities are written off in the books of account, provisions of section 41(1) cannot be applied. On due consideration of the order of the Learned CIT(Appeals) in the light of authoritative pronouncements of the Hon’ble Supreme Court as well as of Hon’ble Delhi High Court, we do not see any reason to interfere in the order of the Learned CIT(Appeals). In view of the above discussion, the appeal of the revenue is dismissed.

———-

INCOME TAX APPELLATE TRIBUNAL, DELHI

ITA No. 4646/Del/2010 – Assessment Year: 2002-03

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