SUDHINDRA MOHAN GUHA, J.

( 1 ) THE instant reference relates to the assessment year 1965-66, for which the previous year ended on 30th June, 1964. Herein the question posed before us is as follows:"whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the amount of Rs. 2,56,529 could not be included in the total incomeof the assessee under Section 41 (1) of the Income-tax Act, 1961?"

( 2 ) DURING the accounting year, the assessee transferred Rs. 3,45,000 out of the suspense account running from 1946-47 to 1948-49 to its capital reserve account. The ITO found that out of the above sum, an amount of Rs. 2,56,529 represented liabilities for expenses which had been allowed in the earlier years. By applying Section 41 of the Act, he included this amount in the total income of the assessee.

( 3 ) WHEN the assessee went up in appeal before the AAC, he confirmed the view taken by the ITO.

( 4 ) THE assessee came in further appeal to the Tribunal and contended that factually the amount included was not correct because the assessee paid back the liabilities with regard to unsecured loans of Rs. 36,000, commission on sugar sales amounting to Rs. 37,895 and interest on unsecured loans to the extent of Rs. 4,142 and that the amount of Rs. 15,000 was paid off with reference to Amina Khatoon on 22nd February, 1951, the amount of Rs. 10,000 with regard to Iqbal Ahmad on 16th January, 1964, and the amount of Rs. 5,000 with reference to Begum Barunnessa on 17th January, 1964. The assessee, however, did not give the date with reference to the loan paid off with regard to Dureswar.

( 5 ) THE Tribunal, having regard to the contentions of both parties, was of opinion that the liabilities for expenses arose for 1948-49 and these amounts became barred by limitation. With reference to certain decisions, to which we would make reference later on, the Tribunal was of the view that the amounts could not be brought to tax because Section 41 stipulates that as regards the trading liabilities, it is only upon remission or cessation that Section 41 (1) of the Act applies. When the liability becomes barred by the law of limitation, there is neither a remission nor a cessation of the liabilities. The liabilities are not extinguished. It is accordingly held that the amounts in question cannot be taxed under Section 41 (1) of the Act as the income of the year even if the assessee credited these amounts to the profit and loss accounts.

( 6 ) ON this background, the question mentioned before was referred. In order to deal with the question, reference is to be made to the provisions of Section 41 (1) of the I. T. Act, 1961, which 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 or the value of benefit accruing to him, shall be deemed to be profits and gains 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 is in existence in that year or not. "

( 7 ) THIS sub-section applies : (i) to sums deceived in cash or in any other manner whatsoever in respect of loss or expenditure which had once been allowed or deducted in the computed profits in any previous year, (ii) to the benefits obtained by a remission of debts or a cessation of liability, if the debt or liability has once been allowed or deducted. Such conditions for the application of Section 41 were also laid down in the case of Bhagwat Prasad and Co. v. CIT. In that case it was held that Section 41

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