Advocate Akhilesh Kumar Sah
Section 41(1) of the Income Tax Act, 1961, subject to its Explanations makes chargeable an amount/value of benefit as profits and gains of business and, therefore, chargeable to income-tax as the income of the concerned previous year if the following conditions (in short) are fulfilled :
(i) Where an allowance or deduction has been made in the previous assessments in respect of loss, expenditure or trading liability incurred by the assessee, and
(ii) Subsequently the assessee/ the successor in business has obtained, whether in cash or in any other manner what so ever, 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.
Once conditions mentioned here-in-above are established, then during the relevant assessment year, the question whether business of the assessee is actually in existence or not would pale into insignificance and the amount in question would be treated to be profit or gain of business and accordingly chargeable to income-tax as the income of that previous year, evende horsthe fact that business during that relevant previous year would be non-existent [SeeCIT v. Pranlal P. Doshi (1992) 106 CTR (Guj) 130 : (1993) 201 ITR 756 (Guj)]. Where assessee has never claimed any deduction in respect of sums credited to Profit & Loss Account provisions of section 41(1) cannot be applied [SeeCIT v. A. Tosh & Sons (P) Ltd. (1992) 107 CTR (Cal) 233]. [See also CIT v. Minerals & Metal Trading Corporation of India Ltd. (1986) 157 ITR 371 (Del)].But where an assessee has obtained refund of amount in respect of expenditure incurred by it and also it had got a deduction in respect of the amount in the earlier year, the refunded amount shall be deemed to be profits and gains of business or profession and the same shall be chargeable to income-tax under section 41(1) an income of the previous year [SeeCIT v. Taj Gas Service (1980)122 ITR 1034 (All)].
The scope of section 41(1) has been enhanced by substituting it to present one by the Finance Act, 1992, w. e. f. 1-4-1993. The Supreme Court inSaraswati Industrial Syndicate Ltd. v. CIT (1990) 186 ITR 278 (SC)had observed that there can be no doubt that when two companies amalgamate and merge into one, the transferor company loses its entity as it ceases to have its business. Their respective rights or liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective. But now, where there has been an amalgamation of a company with another company, the amalgamated company with also be taken as “successor in business” as per the Explanation (which was inserted in section 41(1). the words “obtained, whether in case or in any other manner whatsoever, any amount in respect of such loss or expenditure” (incurred in any previous year) in section 41 clearly refer to the actual receiving of that amount. The cash may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual cash which is contemplated by the legislature when it used the words “has obtained, whether in case or in any other manner whatsoever, any amount in respect of such loss or expenditure” [CIT v. Rashmi Trading (1976) 103 ITR 312 (Guj)].Section 41(1) introduces a statutory fiction which is an indivisible one. The operation of this fiction should be limited to the language of the section. It (fiction) cannot be enlarged by importing another fiction, namely, that if the amount was obtainable or receivable during the previous year, it must be deemed to have been obtained or received during that year [CIT v. Phoolchand Jiwan Ram (1981) 131 ITR 37 (Del) and CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj) (DB)].Unless the Income Tax Department is able to identify any particular item as having been already allowed as a deduction in an earlier assessment conclusively, section 10(2A), (which corresponds to section 41(1) of Income Tax Act, 1961), is not available for recoupment. [Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT. (1970) 78 ITR 55 (SC)].
Section 41 enables the revenue to take back what it has already allowed if certain conditions are satisfied and the assessee recouped something for which an allowance had already been made and deducted from his business income [CIT v. Agarpara Co. Ltd. (1986) 158 ITR 78 (Cal)].In order that an amount may be deemed to be income under section 10 (2A) of the 1922 Act (corresponding to section 41(1) of the 1961 Act) there must be a remission or cessation of the liability in respect of that amount. The remission of the liability arises when the creditor voluntarily gives up the claim. The cessation of such liability arises only when it ceases to exist in the eye of law for all intents and purposes. When a debt becomes barred by time the creditor would not be able to recover the amount by enforcing his right in a court. But the right will not come to an end nor does the liability cease. A mere entry of credit in the accounts in respect of the amount would also not bring about a remission or cessation of the liability [J. K. Chemicals Ltd. v. CIT (1966) 62 ITR 34(Bom): (1978)114 ITR 853 (Karn)].Unless the liability is finally extinguished and there is no possibility of its revival in future, there will neither be a remission nor a cessation of the liability [Rameshwar Prasad Kishan Gopal v. V. K. Arora, ITO (1983) 141 ITR 763 (All)].The principle that statute of limitation only bars the remedy but does not extinguish the debt may not strictly apply in the income-tax proceedings in deciding whether there has been cessation or remission of a statutory liability. When the assessee claims statutory liability as a deduction on ‘due basis’ such deduction is allowed in computing its total income even though such liability was not actually paid. This benefit is given to the assessee only because of the provisions of the Income Tax Act [CIT v. Agarpara Co. Ltd. (1987) 167 ITR 866 (Cal)].Also whether there is cessation of liability, it will depend on the facts of each case [CIT v. Bennett Coleman & Co. Ltd. (1993) 201 ITR 1021 (Bom)].
Onus on Income Tax Department:
The burden of proving that an allowance or deduction has been given in the earlier assessment year lies upon the department [Steel And General Mills Co. Ltd. v. CIT (1974) 96 ITR 438 (Del)].
If an allowance or deduction is in respect of an expenditure and it is a case of reimbursement subsequently received, then it will be deemed to be in come under the head “Business or Profession” in the year or receipt. If it is an allowanceor deduction in respect of a trading liability and, subsequently, the assessee has been benefited by the remission or cessation of the trading liability then the amount of the liability which is extinguished will be deemed to be the income chargeable as business profits of that previous year. [Rameshwar Prasad Kishan Gopal v. V. K. Arora, ITO (1983) 141 ITR 763 (All)].Sub section (2A) of the section 10 of Income Tax Act, 1922 (corresponding to section 41(1) of the Income Tax Act, 1961) was inserted in the Act on 1-4-1955 and it does not introduce any new principle of law but is only a declaratory provision so far as refunds are concerned [CIT v. Lakshmamma (1964)52 ITR 789 (Mys)].Also the corresponding section 10 (2A) of the Income Tax Act, 1922, does not cover a mistaken payment or mistake in calculation. It deals with a case where the assessee is able to reimburse himself any allowance which had been granted to him in any earlier year and has nothing to do with a case where the assessee had paid or expended any money which is not for the purpose of the business [CIT v. India Cements Ltd. (1975) 98 ITR 69 (Mad)].Only itemised losses which are incurred by an assessee and which are allowed or deducted by the income Tax Department in any given assessment year, would properly enter into a consideration for the purpose of the application of section 41(1) of the Income Tax Act, 1961, in any subsequent year if the assessee derives same benefit or remission with respect to that very item of lossCIT v. N. Rudrappan (1984) 147 ITR 355 (Mad)].If the liability for which an amount was set apart still exists and no reverse entries have been made by the assessee in his account books relating to the said amount then in such circumstances section 41(1) has absolutely no application [SeeElgin Mills Co. Ltd. v. IAC (1991) 198 ITR 81 (All)].Also there can be a “cessation” of liability only when the liability has finally ceased without there being a chance of its revival [CIT v. Combined Transport Co. Pvt. Ltd. (1988) 174 ITR 528 (MP)].Also liability of an assessee does not cease merely because the liability has become barred by limitation [CIT v. Chase Bright Steel Ltd. (1989) 177 ITR 128 (Bom)].
Further, many Court rulings have provided that taxpayers would not be liable to tax on the amount of trading liability written off unilaterally credited to the profit and loss account. The recovery of debt in such cases may have been barred by limitation and also where there is no likelihood of the liability being enforced. The courts decisions revolve on the view that a debtor by his unilateral action cannot bring about remission or cessation of his liability. By inserting an Explanation to section 41(1) with effect from the assessment year 1997-98 it has been provided by the Finance Act, 1996 to tax the remission or cessation of liability in the hands of the taxpayer and for this purpose the expression “all or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall defined to include the remission or cessation of any liability by any unilateral act of the assessee by way of writing off such liability in his accounts.
Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision of section 41(1) comes into play and it is not necessary that the Revenue should await the verdict of higher court or Tribunal (Polyflex (India) (P) Ltd. vs. CIT (2002) 21 SITC 441 (SC).
The Supreme Court in CCIT vs. Kesaria Tea Co. Ltd. (2002) 20 SITC 172 (SC) has laid down that the resort to section 41(1) can be taken only if the liability of the assessee can be said to have ceased finally and there is no possibility or reviving it. Also, it has held that an unilateral action on the part of the assessee by way of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law.