IMPORTANT POINT
Resort to Section 41(1) of the Income Tax Act, 1961, could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it.

Headnote:Income Tax Act, 1961-Section 41 (1)-Business expenditure-Purchase tax liability of assessee-Assessment year 1985-86-Assessee engaged in business of tea, spices etc.-During assessment year 1985-86, assessee wrote back in its accounts a sum of Rs. 14,65,997/- representing the provision made during earlier years towards its purchase tax liability-Liability to pay purchase tax on certain goods was in dispute-Assessing Officer added the sum of Rs. 14,65,997/- treating the same as income of previous year-Whether circumstances contemplated by Section 41(1) existed so as to enable the Revenue to take back what had been allowed earlier as business expenditure-(No).
Held : It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31.3.1985 for whatever reason it be. The question is whether the circumstances contemplated by Section 41(1) exists so as to enable the Revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e. 1985-66. In order to apply Section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view : (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to Section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills case, the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the sales-tax department was still going on. There is no material on record to rebut these factual observations made by the Tribunal. Nor can it be said that the reasons given by the Tribunal are irrelevant. (Para 4)

JUDGMENT

P. Venkatarama Reddi, J.-The opinion recorded by the Kerala High Court in ITR No. 16 of 1997 has given rise to this appeal filed by the Chief Commissioner of Income-tax. The dispute relates to the assessment year 1985-86. At the instance of the Revenue the following question was referred under Section 256(1) of the Income-tax Act for the opinion of the High Court :

Whether on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that Rs. 3,02,758/- cannot be brought to tax and in deleting the addition of Rs. 3,02,758/- sustained by CIT (Appeals)?"

The High Court accepted the view of the Tribunal which partly allowed the appeal of the assessee and answered the question in favour of the assessee.

2. The facts in brief are: The respondent-assessee is engaged in the business of tea, spices etc. During the assessment year 1985-86 (previous year ending on 31.3.1985) the assessee wrote-back in its accounts a sum of Rs.14,65,997/- representing the provision made during earlier years (1978-1981) towards its purchase tax liability, it appears that the liability to pay purchase tax on certain goods was in dispute and, therefore, the provision was made. Further, it appears that the assessee, in support of its claim for purchase tax relief, inter alia, relied on the decision of the Kerala High Court in Neroth Oil Mills case . The SLP filed by the Kerala State against the decision of the High Court in the said case was rejected by this Court in November, 1984. Apparently, for that reason, the assessee thought it fit to reverse the provision made earlier towards purchase tax and therefore made the entries in the books of account during the year ending on 31.3.1985. The assessing officer added the sum of Rs.14,65,997/- which represents the provision made towards purchase tax during the assessment years 1978-79, 1979-80 and 1980-81, treating the same as the income of the previous year ending on 31.3.1985. In the first appeal, the CIT (Appeals) held that there was no justification to include the sums which were already included in the course of reassessments made for the years 1979-80 and 1980-81. However, he upheld the addition of Rs. 3,02,758 pertaining to the assessment year 1978-79. The Appellate Commissioner held that the liability of the assessee finally ceased during the year 1985-86 in view of the rejection of SLP in Neroth Oil Mills case in November 1984. Certain observations were also made as regards the includibility of the sums pertaining to assessment years 1980-81 and 1981-82 in respect of which reassessments were made. However, in this appeal, we need not go into the details thereof.

3. On further appeal by the assessee, the Tribunal set aside the addition of Rs.3,02,758 which was upheld by the Appellate Commissioner. The Tribunal did not agree with the view taken by the first Appellate Authority that there was no cessation of liability within the meaning of Section 41(1) of the Income-tax Act during the relevant year on account of dismissal of SLP in another case. The Tribunal observed that for claiming exemption from purchase tax on the ground that transaction was in the course of export, two conditions were required to be fulfilled: (1) things purchased and exported are one and the same and (2) the purchases were against firm orders for export. Neroth Oil Mills case was concerned only with the first aspect and not the second aspect. Therefore, the Tribunal observed that the judgment in Neroth Oil Mills case, even if it had attained finality does not put an end to the disputed issue involved in the respondent-assessee s case. The Tribunal further noticed that as late as 1993, the sales tax department was pursuing the issue relating to purchase tax liability of the assessee from the assessment year 1974-75 onwards and the cases were still pending decision before the Sales Tax Authorities. The Tribunal pointed out that the unilateral action on the part of the assessee in w

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2002 Supreme(SC) 377

IMPORTANT POINTResort to Section 41(1) of the Income Tax Act, 1961, could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it.

IMPORTANT POINT
Resort to Section 41(1) of the Income Tax Act, 1961, could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it.