Final cessation of liability governs section 41(1) taxability, while a corresponding refundable contractual liability remains deductible.

Sales tax refund was not taxable under section 41(1) because the earlier appellate sales tax order had not resulted in a final and irrevocable cessation of liability; it remained open to statutory revision, so the alleged remission was not complete during the year. On the alternative computation point, the amount payable to the DGSD was allowable as a corresponding deduction because the contract made sales tax recoverable only if legally leviable, and once it was found not leviable the amount became refundable under restitution principles. Under mercantile accounting, the related liability was recognised in the year.

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Issues: (i) Whether the sales tax refund received by the assessee was chargeable to tax under section 41(1) of the Income-tax Act, 1961 on the footing that the trading liability had finally ceased. (ii) Whether, even on the assumption that the amount was taxable, the assessee was entitled to deduct the amount payable to the DGSD in computing its income.

Issue (i): Whether the sales tax refund received by the assessee was chargeable to tax under section 41(1) of the Income-tax Act, 1961 on the footing that the trading liability had finally ceased.

Analysis: Section 41(1) applies only where an earlier deduction has been allowed and the assessee subsequently obtains a benefit by way of remission or cessation of the same liability. The refund arose from an appellate sales tax order, but that order remained open to revision under section 57(1)(a) of the Bombay Sales Tax Act, 1959 within the prescribed period. The liability was therefore not finally and irrevocably extinguished during the year, and a revivable liability does not amount to the kind of cessation required by section 41(1).

Conclusion: The amount was not taxable under section 41(1) in the year under consideration and the assessee succeeded on this issue.

Issue (ii): Whether, even on the assumption that the amount was taxable, the assessee was entitled to deduct the amount payable to the DGSD in computing its income.

Analysis: The contract with the DGSD provided that sales tax was payable extra only if legally leviable. Once the sales tax was held not legally leviable, the amount received by the assessee became refundable to the DGSD. Under section 72 of the Indian Contract Act, 1872, money paid under mistake is recoverable, and the assessee, following the mercantile system, incurred the corresponding liability in the year under consideration.

Conclusion: The assessee was entitled to the deduction of the refundable amount in computing its income, and the revenue's challenge failed.

Final Conclusion: The sales tax refund could not be brought to tax as a deemed business benefit on the facts of the year, and the corresponding refundable liability to the DGSD was allowable in computation, leaving the assessee with partial relief and the revenue without relief.

Ratio Decidendi: A liability is not regarded as ceased for the purpose of section 41(1) unless the cessation is final and irrevocable; where the liability remains open to statutory revision, and the amount is independently refundable under contract and restitution principles, the corresponding deduction may also be allowed in mercantile accounting.

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