Remission of business liability is not taxable income where an allowed deduction is later waived by the creditor.

Remission of a business liability earlier allowed as a deduction under the mercantile system does not, by itself, create taxable income or a trading receipt in the assessee's hands. The later waiver by the creditor was treated as a remission of liability, not a receipt of income, so it could not be included in total income. The exemption for casual and non-recurring receipts was not the governing basis because the amount was not income at all. The reference was answered against taxation, in favour of the assessee.

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Issues: Whether the amount remitted by the creditor on settlement of an assessee's business liability constituted taxable income and could be included in total income notwithstanding the exemption for casual and non-recurring receipts.

Analysis: The liability had earlier been treated as a permissible deduction under the mercantile system of accounting. The later remission by the creditor did not amount to a receipt of income by the assessee. The decisive principle applied was that a mere remission of an allowed business liability does not, by itself, become a trading receipt or revenue receipt in the hands of the assessee. The exemption provision for casual and non-recurring receipts was therefore not the governing basis, because the amount was not income at all.

Conclusion: The amount of Rs. 16,544 was not the assessee's income and was not liable to be included in total income. The answer to the reference was in the negative, in favour of the assessee.

Final Conclusion: Remission of an earlier allowed business liability does not create taxable income merely because the assessee maintained accounts on the mercantile basis.

Ratio Decidendi: Where a liability allowed as a business deduction is later remitted by the creditor, the remission does not constitute income or a trading receipt of the assessee and cannot be brought to tax as such.

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