Trading liability cessation under section 41(1) not triggered by creditor's unilateral write-off where assessee retained the liability in its books.

Section 41(1) could not be invoked where the creditor had unilaterally written off the debt but the assessee continued to show the liability in its books. The provision applies to a benefit arising from remission or cessation of a trading liability in the assessee's hands, and the explanation extends it to the assessee's own unilateral write-off. As the liability had not ceased for the assessee and there was no corresponding write-off in its accounts, the mere fact that the creditor no longer treated the amount as recoverable did not trigger taxation under section 41(1). The addition was therefore unsustainable and was deleted.

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Issues: Whether an addition could be sustained under section 41(1) of the Income-tax Act, 1961, where the creditor had written off the debt but the assessee had not written off the corresponding liability in its own books.

Analysis: Section 41(1) taxes a benefit arising from remission or cessation of a trading liability in the hands of the first-mentioned person, and the explanation extends the provision to a unilateral act by that person by writing off the liability in its accounts. The liability continued to be shown in the assessee's books, and the creditor's unilateral write-off did not amount to a cessation of liability in the assessee's hands. The provision could not be invoked merely because the creditor no longer treated the amount as recoverable.

Conclusion: The addition under section 41(1) was unsustainable and was deleted in favour of the assessee.

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