Cessation of liability under section 41(1) requires real remission in law, not a mere accounting write-back.

Section 41(1) applies only where an earlier deduction is followed by a real remission or cessation of liability in law. A mere write-back of the commission amount in the assessee's accounts was only a unilateral accounting entry and did not itself extinguish the statutory debt. The liability to deposit the collections under the Bihar Sugar Cane (Regulation of Supply and Purchase) (Second) Ordinance, 1969 continued to subsist, and the correspondence showed only a modification in the mode of deposit, not a termination of the obligation. The commission amount was therefore not assessable as income under section 41(1) on the ground of cessation of liability.

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Issues: Whether the amount of commission payable under the Bihar Sugar Cane (Regulation of Supply and Purchase) (Second) Ordinance, 1969, which had been written back in the assessee's accounts, became assessable as income under section 41(1) of the Income-tax Act, 1961 on the ground of cessation of liability.

Analysis: Section 41(1) applies only where there is a remission or cessation of the liability in respect of the amount earlier allowed as deduction. A mere reversal of the entry in the profit and loss account is only a unilateral accounting act and does not, by itself, bring about cessation of the debt in law. The statutory obligation under the Ordinance continued to subsist, and the correspondence relied upon also showed that the liability to deposit the collections remained in force, though the mode of deposit was modified. The fact that the Zonal Council had not yet been constituted did not extinguish the liability, because the liability had accrued by force of the statute and was not shown to have been remitted or terminated by the State.

Conclusion: The commission amount did not become assessable under section 41(1) merely because it was written back in the accounts, as there was no cessation or remission of liability in law. The answer was therefore in the negative on the revenue's contention and in favour of the assessee.

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