Section 41(1) taxability requires legal remission or cessation; unilateral write-back of contingent liability is not enough.

Section 41(1) applies only when a trading liability, for which a deduction was earlier allowed, is remitted or ceases in law during the relevant year. A mere unilateral write-back of a contingent excise duty liability in the books does not, by itself, establish remission or cessation where the liability remains legally subsisting and the excise proceedings are not finalised. The assessee had reaffirmed that the liability would be taxed only when finally determined, and the later final assessment by the excise authorities showed that the matter had not concluded in the year under appeal. The write-back was therefore not taxable under section 41(1).

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Issues: Whether the assessee's unilateral write-back of a contingent contractual liability for excise duty created income under section 41(1) of the Income-tax Act, 1961, and whether there was any remission or cessation of liability during the relevant previous year.

Analysis: Section 41(1) applies only where an allowance or deduction in respect of a trading liability has earlier been granted and the assessee subsequently obtains a benefit by way of remission or cessation of that liability. Mere transfer of the amount from the balance sheet to the profit and loss account does not, by itself, establish cessation where the liability is still legally subsisting and is not barred by limitation. The assessee had expressly reaffirmed its contractual obligation to meet the ultimate excise liability and had noted in the return that the amount would be taxed, if at all, only when the statutory liability was finally determined. The excise proceedings had not reached finality in the relevant year, since the appellate order had remanded the matter and the final assessment by the excise authorities came later. Book entries were therefore not decisive of taxability under the statute.

Conclusion: The addition under section 41(1) was not sustainable, as neither remission nor cessation of liability had occurred in the assessment year under appeal.

Final Conclusion: The disputed amount could not be brought to tax in the year of write-back, and the assessee succeeded on the core issue of section 41(1) taxability.

Ratio Decidendi: A unilateral write-back in the books does not amount to remission or cessation of a trading liability for section 41(1) unless the liability has legally ceased or been finally discharged in the relevant year.

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