TaxTMI 
TaxTMI 
1986 (2) TMI 20
X X X X Extracts X X X X
X X X X Extracts X X X X
....e accounting year 1963-64 was Rs. 4,74,918 oat of which a sum of Rs. 2,64,926 had been paid. The last payment was made on April 24, 1964, in the sum of Rs. 30,000. Subsequent to the accounting year 1963-64, no royalty was payable by the assessee, as there was no manufacture of cones which was the product for which royalty was to be paid. The foreign company had also neither asked nor taken any steps to recover the balance of royalty which was shown as due to the foreign company. The Income-tax Officer taking the view that the outstanding liability had, for all intents and purposes, ceased, added this amount and completed the assessment. On appeal, the Appellate Assistant Commissioner took the view that the royalty was payable to the fore....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f both the questions depends on whether the sum of Rs. 2,09,993 could be treated as an amount in respect of which the liability had ceased within the meaning of section 4l(1) of the Income-tax Act. Both the questions can, therefore, be dealt with together. Learned counsel appearing on behalf of the Revenue has relied on decision of the Gujarat High Court in CIT v. Hides & Leather Products Pvt. Ltd. [1975] 101 ITR 61, in support of the proposition that no steps having been taken by the foreign company for the recovery of the amount, which was shown as due on account of the royalty, the liability shown in the balance-sheet must be treated as having ceased. Learned counsel contended that once there is a cessation of liability and this cessa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any amount is obtained in respect of such loss or expenditure or any benefit is obtained in respect of such trading liability by way of remission or cessation thereof ; (3) the amount or benefit must be obtained by the assessee; and (4) the amount or benefit is obtained in a subsequent year. The principal condition which has to be satisfied before section 41 (1) of the Act is invoked by the Revenue, in so far as the instant case is concerned, is that it must be established that the assessee has obtained benefit in respect of the trading liability of Rs. 2,09,993 by way of remission or cessation of a trading liability. It is not the case of the Revenue that there is any remission by the foreign company in respect of the trading lia....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... only basis for the inference of cessation of the liability is that between the last payment made on April 24, 1964, and the end of the relevant accounting year, that is, March 31, 1970, either the amount has not been paid or no payment has been made to the foreign company. It is difficult to see how on this circumstance alone, an inference of cessation of liability can be drawn. The assessee has been treating the royalty amount as a liability outstanding against it and this is reflected in the balance-sheet. Merely because the period of limitation of three years provided under the Indian law for the recovery of an amount due has passed, the indebtedness does not cease as pointed out by the Supreme Court in Bombay Dyeing & Manufacturing Co.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be drawn. We have, however, to remember that the question relevant in that case was with reference to the actual cost of machinery for the purpose of a claim for depreciation. The assessee had purchased machinery from a foreign firm in 1955. The assessee maintained its accounts on the mercantile system and though the price was not paid to the foreign firm, because according to the assessee, there was some defect in the machinery, the liability of the foreign supplier was shown in the books of account and the balance-sheet till the year 1960. In 1960, however, the assessee, by making appropriate entries in the account books, wrote back the said amount, debited the amount in the account of the foreign supplier and credited the amount in the ....