Unilateral transfer of liabilities to reserve does not create taxable remission; interest on cane cess and purchase tax arrears is deductible.

Mere transfer of liabilities from separate accounts to a general reserve account does not, by itself, establish remission or cessation of liability or justify an income addition. Remission requires facts showing a clear waiver or other legally effective extinguishment, and a unilateral accounting entry by the debtor is insufficient. Interest paid on arrears of cane cess and sugarcane purchase tax was treated as deductible revenue expenditure, following the settled principle applied to such statutory arrears. On those grounds, the disputed additions and disallowances were not sustained.

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Issues: (i) Whether transferring liabilities from separate accounts to the general reserve account amounted to remission or cessation of liability so as to justify addition as income. (ii) Whether interest paid on arrears of cane cess and sugarcane purchase tax was deductible.

Issue (i): Whether transferring liabilities from separate accounts to the general reserve account amounted to remission or cessation of liability so as to justify addition as income.

Analysis: Mere transfer of liabilities to a general reserve account did not by itself establish remission. Remission or cessation must be shown from the totality of facts, and cannot be brought about by a unilateral act of the debtor alone. There was no material showing that the creditors had agreed to waive the liabilities or that the assessee had treated the amount as its profit.

Conclusion: The addition was not sustainable and was liable to be deleted in favour of the assessee.

Issue (ii): Whether interest paid on arrears of cane cess and sugarcane purchase tax was deductible.

Analysis: Interest on arrears of cane cess was covered by the settled principle that such interest is allowable as revenue expenditure. Interest on arrears of sugarcane purchase tax was likewise held to be an allowable deduction.

Conclusion: The interest paid on arrears of cane cess and sugarcane purchase tax was allowable as a deduction in favour of the assessee.

Final Conclusion: Both reference questions were decided for the assessee, and the additions/disallowances in dispute were not upheld.

Ratio Decidendi: Liability does not cease, and income does not arise by mere unilateral transfer of an outstanding liability to reserve; remission or cessation requires a clear waiver or other legally effective extinguishment, and interest on arrears of cane cess and similar statutory purchase tax is deductible as revenue expenditure where so held by binding precedent.

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