Section 41(1) income tax applies only after an actual prior allowance or deduction; a mere return claim is not enough.

Interest waived by a bank could not be taxed as deemed income under Section 41(1) unless an allowance or deduction had actually been made in an earlier assessment in respect of the same liability. A mere claim in a return, or self-assessment payment under Section 140A, does not satisfy that statutory condition where the return is treated as non est under Section 139(9). The provision operates only when remission or cessation follows a prior assessed allowance or deduction, and that prior benefit must be identifiable from the assessment record itself. On that basis, the waiver was not taxable under Section 41(1).

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Issues: Whether interest waived by the bank could be assessed as income under Section 41(1) of the Income-tax Act, 1961, when the relevant returns had been treated as non est and no allowance or deduction had been made in regular assessment for the earlier years.

Analysis: Section 41(1) applies only when an allowance or deduction has in fact been made in the assessment for an earlier year in respect of a loss, expenditure, or trading liability, and thereafter the assessee obtains remission or cessation of that liability. The expression cannot be expanded to cover a mere claim in a return or a self-assessment payment when the return itself is treated as non est under Section 139(9). Self-assessment under Section 140A is only a mode of tax payment and does not replace the requirement of a regular assessment in which the allowance or deduction must actually have been made. The analogous principle under Section 10(2A) of the Indian Income Tax Act, 1922 also supports the view that the earlier allowance must be identifiable from the assessment order itself.

Conclusion: The waiver could not be brought to tax under Section 41(1) because the statutory precondition of an actual allowance or deduction in assessment was not satisfied.

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