2002 (3) TMI 1 - SC - Income Tax

Rs.3,02,758 addition deleted as purchase-tax liability not finally ceased; section 41(1) inapplicable, assumed benefit not income

Chief Commissioner of Income-Tax Versus Kesaria Tea Co. Ltd.

The SC dismissed the Revenue's appeal and affirmed the HC and Tribunal: the Rs.3,02,758 addition was correctly deleted because the purchase-tax liability ... Tax liability reversal in the assessment year 1985-86 - business of tea and spices - Whether, the Tribunal is right in law and fact in holding that Rs.3,02,758 cannot be brought to tax and in deleting the addition of Rs.3,02,758 sustained by the Commissioner of Income-tax (Appeals) - HELD THAT:- It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on March 31, 1985, for whatever reason it be. In order to apply section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view: (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of the benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of the benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mill's case [1981 (8) TMI 209 - KERALA HIGH COURT], the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the Sales Tax Department was still going on. There is no material on record to rebut these factual observations made by the Tribunal. Nor can it be said that the reasons given by the Tribunal are irrelevant. We affirm the opinion expressed by the High Court and dismiss the appeal filed by the Revenue. Issues:Dispute over tax liability reversal in the assessment year 1985-86.Analysis:The case involved a dispute regarding the reversal of a tax liability by an assessee in the assessment year 1985-86. The assessee, engaged in the business of tea and spices, had reversed a sum of Rs.14,65,997 in its accounts, representing a provision made in earlier years towards purchase tax liability. The Assessing Officer added this sum to the income of the relevant year. The Commissioner of Income-tax (Appeals) upheld the addition of Rs.3,02,758 pertaining to the assessment year 1978-79, but not the sums included in reassessments for the years 1979-80 and 1980-81. The Tribunal later set aside the addition of Rs.3,02,758, disagreeing with the view that the liability ceased due to the dismissal of a related case. The High Court approved the Tribunal's decision, stating that section 41(1) could not be invoked in this case.The key issue was whether the circumstances under section 41(1) existed to allow the Revenue to include the reversed amount in the income of the relevant assessment year. Section 41(1) applies when a trading liability deduction has been made, and later a benefit is obtained due to remission or cessation of the liability. The High Court and Tribunal found that the purchase tax liability had not ceased finally during the relevant year, despite the finality of a related judgment. The unilateral action of the assessee in reversing the provision did not legally extinguish the liability, as held in previous court decisions.The court dismissed the Revenue's appeal, affirming the High Court's decision. The court rejected the argument that the liability ceased due to the assessee's actions, emphasizing that legal cessation required more than mere accounting adjustments. The court also clarified that the case was not impacted by the introduction of Explanation 1 to section 41(1). The decision cited in support of the appeal was deemed irrelevant to the present case. Ultimately, the court upheld the view that the liability had not ceased finally, and the reversed amount could not be included in the income for the assessment year 1985-86.