Important Point
In order to attract application of Section 41 of the Income-tax Act, the obtaining by the assessee of a benefit by virtue of remission or cessation is a sine qua non; mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that Section 41 would apply.

Headnote:Income Tax Act, 1961-Section 41-Remission or cessation of liability-Liability to tax on that account of-Condition to attract provisions-Obtaining by assessee of a benefit by virtue of remission or cessation is a sine qua non-Mere fact that assessee has made an entry of transfer in his accounts unilaterally will not enable Department to say Section 41 would apply.
       Held : The following words in the Section are important: “the assessee had 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 by him”. Thus, the Section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this Section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that Section 41 would apply and the amount should be included in the total income of the assessee. (Para 3)
       Just because an assessee makes an entry in his books of accounts unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. (Para 6)
       The principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied, it is clear that mere entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the Section. (Para 10)

Order

The respondent-assessee is a private limited company. In the proceedings for assessment of tax for the year ending 30.6.1964 relevant to the assessment year 1965-66, the assessee transferred a sum of Rs. 3,45,000/- out of the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The Income Tax Officer found that an amount of Rs. 1,29,000/- was with reference to the deposits and advances which had been paid back and he included a sum of Rs. 2,56,529/- under Section 41 of the Income Tax Act in the total income of the assessee. The assessee went on appeal before the Appellate Assistant Commissioner and the order of the I.T.O. was confirmed. The assessee carried the matter to the Tribunal. The Tribunal accepted the contention of the assessee and held that its unilateral entry in the accounts transferring the amount to the capital reserve account would not bring the matter within the scope of Section 41 of the Income Tax Act and consequently held in favour of the assessee. The decision of the Tribunal was challenged before the High Court. The High Court observed:

“The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilaterial act, can bring about the cessation or remission of his liability. Revision has to be granted by the creditor. It is not in dispute and it indeed can not be disputed that it is not a case of remission of liability. Similarly a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur .

either by reason of the operation of law, that is, on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour 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. Transfer of an entry is neither an agreement between the parties nor payment of the liability.”

On that reasoning, the High Court answered the question in reference in favour of the assessee. Aggrieved thereby, the Commissioner of Income Tax has preferred this appeal.

2. Learned counsel for the appellant contends that in the facts of the present case, the liability has come to an end as a period of more than 20 years had elapsed and the creditor had not taken any step to recover the amount. Consequently, according to him, there is a cessation of the debt and the matter would fall within the scope of Section 41 of the Act. Section 41 reads as follows :

“Where an allowance or 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 by him, shall be deemed to be profits and gain of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made in existence in that year or not.”

3. It will be seen that the following words in the Section are important: “the assessee had 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 by him”. Thus, the Section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine

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1999 Supreme(SC) 131

Cases Referred (3)