U.P. Steels Ltd. vs Commissioner of Income Tax

We have heard Sri Shubham Agrawal, learned Counsel, for the assessee, and Sri A.N. Mahajan for the Department.

The following three questions have been referred in this case:

Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the sum of Rs. 9,38,575 was to be included in the total income of the assessee u/s 41(1) of the Income Tax Act, 1961?

Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the conduct of the assessee in crediting the liabilities to the profit and loss account showed that the liabilities of Rs. 9,38,575 had ceased to exist?

Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the liabilities of Rs. 9,38,575 had ceased to exist in the assessment year under reference and there was no possibility of reviving them?

he detailed facts have been mentioned in the statement of the case.

The bare facts are that the amount of Rs. 9,38,575 was shifted in the profit and loss account of the assessee from the debit to the credit side. Upon this, the Assessing Officer treated the same to be the income of the assessee u/s 41(1) of the Income Tax Act, 1961, on the ground that the liability had ceased or had been remitted.

All the three questions referred to above are entirely dependent upon the answer to the basic question whether this act of the assessee in making the said entry in its profit and loss account could justify the Department in treating the liability as having ceased or having been remitted so as to constitute generation of income of the corresponding amount.

It has been held by the Supreme Court in The Chief Commissioner of Income Tax, Cochin Vs. Kesaria Tea Co. Ltd., that such act of the assessee is not conclusive and the unilateral act on the part of the assessee of writing off the liability in the assessee''s accounts does not necessarily mean that the liability has ceased in the eye of law. Similar view has been taken by the Supreme Court in Commissioner of Income Tax, Calcutta Vs. Sugauli Sugar Works P. Ltd., and by the Rajasthan High Court (DB) in Commissioner of Income Tax Vs. EID Mohd. Nizammudin, No finding was recorded in any of the orders up to the Tribunal that there was anything else other than aforesaid alteration in the profit and loss account which could lead to this inference about cessation or remission of the liability without any possibility of revival. Therefore, in view of the law laid down in the aforesaid cases, it could not be held for the purposes of Section 41(1) of the Income Tax Act that actual income up to that extent had accrued so as to entitle the Income Tax Department to tax the same.

In the circumstances, the answer to all the three questions, referred to above, is in the negative. The Tribunal was not right in holding what it has held, on each of the three questions.

Reference is answered accordingly.