Remission of trading liability is not taxable income where no receipt arises under the mercantile system

Remission of an accrued trading liability under the mercantile system does not by itself create taxable income where no money or trading receipt is received. The assessee had earlier obtained deductions for interest payable on the liability, and the creditor later accepted a reduced settlement and waived the balance. Because the release was merely a compromise of an existing debt and did not produce a fresh receipt or trading profit, the remission was not chargeable to tax. The reference was answered in favour of the assessee.

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Issues: Whether the remission of a trading liability, in respect of which interest had earlier been allowed as a deduction on the mercantile system of accounting, constituted taxable income notwithstanding the exclusion for casual and non-recurring receipts.

Analysis: The assessee maintained accounts on the mercantile basis and had been allowed deductions for interest payable on the mortgage debt in earlier years. In the year in question, the creditor accepted a reduced sum in full settlement and remitted the balance of the liability. The remission did not involve any receipt by the assessee, nor did it create any new trading profit. Once the department had accepted the accrual basis and allowed the earlier deductions, it could not treat the subsequent release of the debt as income merely because the liability was discharged by compromise rather than by payment.

Conclusion: The remission amount was not taxable income and the answer to the reference was in the negative, in favour of the assessee.

Final Conclusion: A mere forgiveness or remission of an existing liability, where no money or trading receipt is received and the assessee is assessed on the mercantile basis, does not by itself constitute income chargeable to tax.

Ratio Decidendi: Under the mercantile system, remission of an accrued liability is not a trading receipt or income unless it results in an actual receipt or a taxable gain in the hands of the assessee.

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