Unilateral write-back of trading liability is not taxable income without real remission or cessation in law.

For assessment year 1996-97, a unilateral write-back of trading liability in the assessee's books did not amount to remission or cessation of liability for tax under section 41(1) of the Income-tax Act, because actual legal cessation is required. The Supreme Court principles in Sugauli Sugar Works and Kesaria Tea Co. were applied, and Explanation 1, effective from 1 April 1997, was treated as prospective and not applicable to earlier years. Section 28(iv) was also found inapplicable on the stated facts.

---

---

Issues: Whether a liability written back unilaterally by the assessee could be brought to tax as income under section 41(1) of the Income-tax Act, 1961 for assessment year 1996-97, and whether Explanation 1 inserted with effect from 1 April 1997 applied to that year.

Analysis: Section 41(1), as it stood for assessment year 1996-97, required an actual benefit by way of remission or cessation of the liability. A unilateral book entry by the assessee did not, by itself, amount to remission or cessation in law. The reasoning adopted by the Supreme Court in Sugauli Sugar Works and Kesaria Tea Co. was applied, and the later Explanation 1 was noted to be effective only from 1 April 1997, thus governing assessment year 1997-98 onwards and not earlier years. Section 28(iv) was also found inapplicable on the facts.

Conclusion: The write-back could not be treated as income under section 41(1) for assessment year 1996-97, and Explanation 1 did not apply retrospectively. The assessee succeeded.

Ratio Decidendi: For assessment years prior to the commencement of Explanation 1 to section 41(1), a unilateral entry in the assessee's books does not by itself create taxable income unless there is a real remission or cessation of the trading liability in law.

---