Remission of trading liability is taxable where earlier best judgment assessment treated deductions as part of net income.

A later remission of an earlier trading liability is chargeable as business income under section 10(2-A) where the liability had been debited in mercantile accounts and later settled for a lower amount. An assessment made under section 23(4) on a best judgment basis is treated as an assessment of net income, so admissible business deductions are taken to have been allowed in arriving at that figure. The fact that the earlier assessment was estimated did not prevent taxation of the benefit arising on cessation of the liability, and the reference was answered in favour of the revenue.

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Issues: Whether a sum credited to profit and loss account, representing the difference between an earlier provision for bonus and the lesser amount actually paid later, was taxable under section 10(2-A) of the Income-tax Act, 1922 where the original assessment had been made under section 23(4) on a best judgment basis.

Analysis: The relevant provision deems as business profits the amount obtained by remission or cessation of a trading liability previously incurred and allowed in the computation of profits. An assessment made to the best of judgment under section 23(4) is an assessment of net income, and the logical consequence is that the admissible business outgoings and allowances are taken to have been considered in arriving at that net figure. The assessee maintained mercantile accounts and had debited the bonus liability in the earlier year, so the later settlement at a lower figure disclosed a benefit in respect of a trading liability previously brought into account. The fact that the earlier assessment was estimated did not prevent the application of section 10(2-A).

Conclusion: The amount of Rs. 54,479 was assessable in the year 1957-58 under section 10(2-A) and the answer was against the assessee.

Final Conclusion: The reference was answered in favour of the revenue, holding that a later remission of an earlier trading liability is taxable even where the earlier assessment was completed on a best judgment basis.

Ratio Decidendi: Where an earlier assessment under section 23(4) is made on a best judgment basis of net income, admissible deductions are treated as having been taken into account, and any later remission or cessation of the related trading liability is chargeable as business income under section 10(2-A).

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