Section - 41

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the firstmentioned person) and subsequently during any previous year, - (a) The first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) The successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. Explanation 1 : For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts. Explanation : For the purposes of this sub-section, "successor in business" means, - (i) Where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) Where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) Where a firm carrying on a business or profession is succeeded by another firm, the other firm; (iv) Where there has been a demerger, the resulting company. "(2) Where any building, machinery, plant or furniture, - (a) Which is owned by the assessee; (b) In respect of which depreciation is claimed under clause (i) of sub-section (1) of section 32; and (c) Which was or has been used for the purposes of business, is sold, discarded, demolished or distroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due. Explanation : Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year. (3) Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause (iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35 read with clause (4) of section 43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under clause (i) or, as the case may be, the amount of the deductions under clause (ia) of sub-section (2), or clause (c) of sub-section (2B), of section 35 exceed the

amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place. Explanation : Where the moneys payable in respect of any asset referred to in this sub-section become due in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. (4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not. Explanation : For the purposes of sub-section (3), - (1) "Moneys payable" in respect of any building, machinery, plant or furniture includes - (a) Any insurance, salvage or compensation moneys payable in respect thereof; (b) Where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso;

(2) "Sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company. (4A) Where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn. Explanation : Where any amount is withdrawn from the special reserve in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. (5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1), sub-section (3) sub-section (4) or sub-section (4A) in respect of that business or profession, any loss, not being a loss sustained in speculation business which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid. (6) References in sub-section (3) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made. Case law and Prob: Court

Brief

Citation

Judgement [2009] 30 SOT 31 (MUM.) IN THE ITAT MUMBAI BENCH D DSA Engineers (Bombay) v. Income-tax Officer, Ward 19(1)-3, Mumbai K.C. SINGHAL, VICE PRESIDENT AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER IT APPEAL NO. 5354 (MUM.) OF 2007 [ASSESSMENT YEAR 2003-04] MARCH 12, 2009 Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability - Assessment year 2003-04 - Whether limitation of time is not a determining factor in matters relating to remission

or cessation of liabilities - Held, yes - Assessee-fire fighting contractor, filed its return of income for relevant assessment year During assessment proceedings, Assessing Officer noticed outstanding sundry creditor balances appearing in books of account of assessee for a period longer than three years - Assessing Officer, accordingly, invoked provisions of section 41(1) and deemed liabilities of creditors as profits and gains of business or profession and charged them to income-tax - Whether since assessee continued to reflect or record liabilities as still payable to creditors and had not written them off unilaterally in books of account and moreover, there was no evidence to indicate that said liabilities had ceased to exist, question of taking such outstanding liabilities as deemed profits of year did not arise - Held, yes - Whether therefore, Assessing Officer was not justified in invoking provisions of section 41(1) - Held, yes FACTS The assessee, fire fighting contractor, filed its return of income for relevant assessment year. During the assessment proceedings, the Assessing Officer noticed certain outstanding sundry creditor balances appearing in the books of account of the assessee for a period of more than three years. The assessee replied that said balances involved various parties and those balances were not only reflected in the accounts as pending for payment but also the liability of the assessee did not cease. The Assessing Officer found that there was neither a pending litigation in existence nor any correspondence from the parties demanding for clearing the liabilities and held that the assessee had not proved that it was yet to make the payment of the said outstanding balances to the creditors; that it had the intention to make the said payment, and that the liability had not ceased. He, accordingly, invoked the provisions of section 41(1) and deemed the liabilities of the creditors as the profits and gains of business or profession and charged them

to income-tax as the income of the year. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal : HELD From the rival positions of both the parties as well as the provisions of section 41(1) and the legal propositions of various judicial fora, the following issues had emerged. They were : (a) the issue of limitation of period of three years; (b) the issue of discharge of onus, when the assessee had not unilaterally written them off; (c) the issue of unilateral write off for the assessments of the post amendment period, i.e., 1-4-1997. Regarding the issue of limitation of three years, it was noticed that there is no such limitation provided in section 41(1) or in its Explanation 1. Most probably, the revenue had considered the period of three years as reasonable duration for deciding the cessation of liabilities on ad hoc basis. Otherwise the revenues order did not contain any rationale in support of such period. In the case of Dy. CIT v. Himalaya Refrigeration & Air Conditioning Co. (P.) Ltd. [2003] 91 TTJ (Delhi) 296, the Tribunal held that in the absence of any evidence of cessation of liabilities, mere fact that the liabilities were outstanding for more than three years and were time barred, was not sufficient ground for addition under section 41(1). Thus, in the light of the above, if the revenues proposal was favoured, it would effectively amount to supporting a proposition that all the unclaimed liabilities, which are reflected in the books for the period longer than three years case, shall be the deemed profits of the assessee under section 41(1) and that view does not have the support of the Act. As such the limitation of time is not a

determining factor in the matters relating to remission or cessation of liabilities. Regarding the issue of discharging of the onus, it was noticed that the provisions of section 41(1) provides for charging of certain benefits, which are obtained by the assessee in an year as deemed profits. Under the circumstances, where the assessee disputes the obtaining of the benefits, the Assessing Officer is under statutory obligation to establish the same by gathering evidences in favour of such accrual of benefits. Further, when the assessee continues to reflect or record the liabilities as still payable to the creditors and decides not to write them off unilaterally, the Assessing Officer has higher levels of responsibility and, hence, he has to establish with evidence that the said book entries are wrong or not bona fide and, thus, the Assessing Officer is under the obligation to discharge the onus in this regard. Hence, the onus is on the revenue to prove that the liabilities have ceased finally and there is no possibility of their revival. Regarding the issue of unilateral write off for the assessments of the post amendment period, i.e., 1-4-1997, it was noticed that the Explanation 1 was brought into statute by the Finance (No. 2) Act, 1996, with effect from 1-4-1997. Mere unilateral transfer entry in the accounts does not confer any benefit to the assessee and, therefore, the revenue cannot invoke section 41(1). Further, the instant year, being the assessment year 2003-04, related to the post-amendment period and the said Explanation provided for including the case of obtaining of the benefit by way of remission or cessation of any liability by a unilateral act by way of writing off such liability in the accounts of the assessee, as the case of the deemed profits. In other words, the assessees case, being the one where the alleged liabilities were not unilaterally written off, the requirements of the Explanation were not met and, therefore, it could not be considered as the case of obtaining of the benefit

during the year under consideration. Although the following was inapplicable to the assessees case, the act of unilateral write off of the liabilities assumes great significance for the post amendment assessments for deciding the finality of obtaining of the benefit specified in section 41(1). It is even more significant when the Assessing Officer is unable to establish that the liabilities have ceased or ceased with no chance of revival of the claim by the creditors in future. [Para 9] In the absence of unilateral entries in books of the instant assessee, it could not be held that the Assessing Officer had correctly applied the provisions of section 41(1) and its Explanation 1. Further, the Assessing Officer had neither disproved the assessees claims relating to the impugned liabilities nor discharged its onus to prove that there was cessation of liabilities and the assessee obtained the benefits finally. Therefore, the arguments of the revenue had to be dismissed. In such circumstances, and when the assessee had not unilaterally written off the said liabilities, the question of taking such outstanding liabilities as deemed profit of the year did not arise. Therefore, the impugned order of the Commissioner (Appeals) had to be set aside in that regard. Accordingly, the appeal was to be allowed. [Para 10] CASE REVIEW Dy. CIT v. Himalaya Refrigeration & Air Conditioning Co. (P.) Ltd. [2003] 91 TTJ (Delhi) 296; New Commercial Mills Co. Ltd. v. Dy. CIT [2001] 73 TTJ (Ahd.) 893; Thomas Cook (India) Ltd. v. Dy./Jt. CIT [2006] 103 ITD 119 (Mum.); Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434/122 Taxman 91 (SC); Shri Vardhman Overseas Ltd. v. Asstt. CIT [2008] 24 SOT 293 (Delhi); Uttam Air Products (P.) Ltd. v. Dy. CIT [2006] 99 TTJ (Delhi) 718; CIT v. Chougule & Co. (P.) Ltd. [1991] 189 ITR 473/54 Taxman 131 (Bom.) (para 9); CIT v. Chaise Bright Steel Ltd. [1989] 177 ITR 128/42 Taxman 146 (Bom.);

Kohinoor Mill Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) and Ganon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 (Bom.) (para 10) followed. CASES REFERRED TO CIT v. Chaise Bright Steel Ltd. [1989] 177 ITR 128/42 Taxman 146 (Bom.) (para 4), Goetze India Ltd. v. CIT [2006] 284 ITR 323/157 Taxman 1 (SC) (para 4), Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434/122 Taxman 91 (SC) (para 5), Kohinoor Mill Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) (para 5), Ganon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 (Bom.) (para 5), ITO v. Ahuja Graphic Machinery (P.) Ltd. [2007] 109 ITD 71 (Mum.) (TM) (para 5), Dy. CIT v. Himalaya Refrigeration & Air Conditioning Co. (P.) Ltd. [2003] 91 TTJ (Delhi) 296 (para 9), New Commercial Mills Co. Ltd. v. Dy. CIT [2001] 73 TTJ (Ahd.) 893 (para 9), Thomas Cook (India) Ltd. v. Dy./Jt. CIT [2006] 103 ITD 119 (Mum.) (para 9), CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 (SC) (para 9), CIT v. T.V. Sundaram Iyangar & Sons Ltd. [1996] 222 ITR 344/88 Taxman 429 (SC) (para 9), Shri Vardhman Overseas Ltd. v. Asstt. CIT [2008] 24 SOT 293 (Delhi) (para 9), Uttam Air Products (P.) Ltd. v. Dy. CIT [2006] 99 TTJ (Delhi) 718 (para 9) and CIT v. Chougule & Co. (P.) Ltd. [1991] 189 ITR 473/54 Taxman 131 (Bom.) (para 9). Dinesh R. Shah for the Appellant. Sanjay Agarwal for the Respondent.

SECTION 41(1) REMISSION/CESSATION OF TRADING LIABILITY Applicability of provision General - In order to apply section 41(1), 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; (4) such value of the benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained - Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434/122 Taxman 91 (SC). It must be proved that allowance or deduction was given in an earlier year - Unless it is proved that an allowance or deduction has been made in the assessment in any previous year in respect of loss, expenditure or trading liability, it is not open to the revenue to refer to section 41(1) for charging the tax on the receipt by the assessee by refund or otherwise of such expenditure in a subsequent year Tirunelveli Motor Bus Service Co. (P.) Ltd. v. CIT [1970] 78 ITR 55 (SC). Refund of statutory levies paid will fall under the first limb of section 41(1) - In a case where the statutory levy in respect of goods dealt in by the assessee is discharged and subsequently the amount paid is refunded, it is the first clause in section 41(1) that more appropriately applies, viz. obtained any amount in respect of such loss or expenditure. It will not be a case of benefit accruing to him on account of cessation of remission of trading liability. In other words, where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance has been given in the assessment for earlier period, the assessee is liable to disgorge that benefit as and when he obtains refund of the amount paid. The consideration whether there is a possibility of the refund being set at naught on a future date will not be a relevant consideration. Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in section 41(1) comes into play and it is not necessary that the Revenue should await the verdict of higher court or Tribunal. If the court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief. True, expenditure and trading liability may be overlapping concepts; but the law-makers apparently intended to deal with allied concepts

separately and specifically so as to make the provision as comprehensive as possible in order to effectuate the objective underlying the provision. The anatomy of the section and the collocation of the words employed therein would suggest that the test of cessation or remission of liability has to be applied vis-avis trading liability and it cannot be projected into the previous clause - Polyflex (India) (P.) Ltd. v. CIT [2002] 124 Taxman 373/257 ITR 343 (SC). Fiction introduced is indivisible and cannot be enlarged - Section 41(1) introduces a fiction. The fiction is an indivisible one. It cannot be enlarged by importing another fiction, namely, that if the amount was obtainable or receivable during the previous year, it must be deemed to have been obtained or received during that year. The only meaning that can be attached to the words obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure incurred in any previous year, clearly refers to the actual receiving of the cash of that amount. The amount may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or the equivalent of the cash can be said to have been received by the assessee. But it must be obtaining the actual amount which is contemplated by the Legislature when it used the words has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past CIT v. Bharat Iron & Steel Industries [1993] 199 ITR 67 (Guj.) (FB). Revenue need not wait till final verdict of Court - Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in section 41(1) comes into play and it is not necessary that the revenue should await the verdict of higher Court or the Tribunal. If the Court or the Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief - Polyflex (India) (P.) Ltd. v. CIT [2002] 124 Taxman 373/257 ITR 343 (SC). Provisions of Income-tax Act and relevant statute must be applied The question whether a trading liability that was once incurred ceases to exist for the purpose of section 41(1) has to be decided in the light of the provisions of the Income-tax Act and the statute if any governing such liability - CIT v. Agarpara Co. Ltd. [1986] 158 ITR 78 (Cal.).

Phrase in respect of must be construed in a broad sense - The phrase in respect of has to be understood in a broader sense as conveying the idea of purporting to be or considered as. If so understood, section 41(1) would effectuate the purpose for which it was enacted. Therefore, if there has been any deduction or allowance purporting to be or considered as a loss, expenditure or trading liability, the initial test to apply section 41(1) will be satisfied - K.G. Subramanyam v. CIT [1992] 195 ITR 199 (Kar.). Only itemised losses are covered - What section 41(1) deals with are itemised losses, and not computed losses which are not incurred. CIT v. N. Rudrappan [1984] 147 ITR 355 (Mad.). Detailed enquiry is not called for - Section 41(1) does not warrant a detailed enquiry whereby an assessee can be called upon to produce his books of account and other documents to establish his case, as in the case of a regular assessment; the allowance or deduction made in the assessment for any year can be ascertained from the order of assessment for that year - CIT v. Ancherry Pavoo Kakku [1986] 160 ITR 88 (Ker.). System of accounting is not relevant - For considering the taxability of an amount coming within the mischief of section 41(1), the system of accounting followed by the assessee is of no relevance or consequence. - CIT v. Bharat Iron & Steel Industries [1993] 199 ITR 67 (Guj.) (FB). The word obtained in section 41(1) cannot be interpreted to mean capable of being obtained. While considering the provisions of section 41(1), the system of account followed by the assessee is of no relevance or consequence. Thus, where the assessee became entitled to refund of electricity charges under a Supreme Court decision of November 1975, but the quantification of the refund was not done simultaneously but was done only in August 1978, the refund could not be brought to tax in the assessment year 1977-78 on the ground that under the system of accounting followed by the assessee the amount had accrued to the assessee on the date of Supreme Court judgment - Travancore Chemicals Manufacturing Co. Ltd. v. CIT [1999] 237 ITR 821/[1998] 101 Taxman 639 (Ker.). Liability subsisting but not legally enforceable cannot amount to cessation of liability - For the purpose of adding any amount under section 41(1), there should be either remission of the liability by the

concerned creditor so that the liability with regard to making payment comes to an end, or there should be cessation of liability. Where the creditors (workmen) who were to be paid bonus for the earlier years had not executed anything in writing for remission of the liability, and there was nothing on record to show that the workmen had waived their right to get the bonus from the business or that the liability had come to an end otherwise, there would be no cessation of liability. Simply because the period of limitation had come to and end for the purpose of filing a suit for recovery of the said amount or for taking appropriate action against the assessee, it could not be said that there was a cessation of liability. The liability still remained, though it might not be enforceable at law on account of the provisions of the law of limitation - CIT v. Silver Cotton Mills Co. Ltd. [2002] 125 Taxman 741 (Guj.). Burden of proof Burden is on department to prove that allowance/deduction has been given earlier - A refund obtained by the assessee will attract section 41(1) only if an allowance or deduction had been given for this amount in the earlier assessment years. The burden lies upon the department to prove that an allowance or deduction had been given for this amount to the assessee in the earlier assessment years. Steel & General Mills Co. Ltd. v. CIT [1974] 96 ITR 438 (Delhi). Burden is on assessee to prove that liability subsists - Whether the liability of the assessee has been fully discharged is within the special knowledge of the assessee. He has to prove that in fact the liability subsists. Where the conduct and surrounding circumstances demonstrate that the amount has been remitted or forgone or the sum has ceased to be claimable against the assessee, it would be a clear case of remission or cessation of the liability of the assessee. - Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal.). Cessation of liability Unilateral entries in accounts will not amount to cessation of liability - Section 41(1) contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua

non for the application of this section. The mere fact that the assessee has made an entry of transfer in its accounts unilaterally will not enable the department to say that section 41(1) would apply and the amount should be included in the total income of the assessee - CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 (SC). Time-barred debts Time-barred debts are not covered - When a debt becomes barred by time, the creditor would not be able to recover the amount by enforcing his right in Court. But the right will not come to an end nor will the liability cease. Section 41(1) is not attracted in such a case - Liquidator, Mysore Agencies (P.) Ltd. v. CIT [1978] 114 ITR 853 (Kar.). The liability of an assessee does not cease merely because the liability has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded. - CIT v. Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128 (Bom.). Excise Duty Provision will apply even if separate accounts are maintained Provisions of section 41(1) could be invoked to tax excise duty refunds received in the relevant assessment year even when the part of excise duty was not claimed as expenditure in the profit and loss account of earlier years and the assessee had kept a separate account in respect of collection and payment of excise duty - Mysore Thermo Electric (P.) Ltd. v. CIT [1996] 221 ITR 504/89 Taxman 558 (Kar.). Provision will not apply if claim is pending in appeal - Where an assessee was allowed deduction for provision for excise duty in an earlier year, but when the High Court in a later year held that the assessee was not liable to pay duty, the department went in appeal to the Supreme Court, the deduction already allowed could not be brought to tax under section 41(1), since the appeal by the department had destroyed the finality of the High Courts decision J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 (All.), approved by the Supreme Court in Union of India v. J.K. Synthetics Ltd.[1993] 199 ITR 14.

Where refund of excise duty was paid to an assessee pursuant to an order of the High Court as a measure of interim relief, but the department filed an appeal to the Supreme Court, the refund cannot be brought to tax under section 41(1) in the year of receipt till the matter is finally decided by the Supreme Court. Even if the refund was received during the pendency of proceedings, section 41(1) cannot be invoked as there is no final decision on the question whether or not the assessee is entitled to claim the refund of duty. The fact that the assessee was maintaining cash system of accounting would be of no relevance - Visnagar Taluka Audyogik Sahakari Mandli Ltd. v. CIT [2000] 242 ITR 627 (Guj.). Sales Tax General - Sales tax refund received by assessee which is not refunded by it to customers would be revenue receipt liable to tax under express provision of section 41(1). The assessee in the course of sale of its products collected sales tax from the purchasers and deposited same with the Government. The provisions of Sales Tax Act under which the assessee deposited amount collected were under challenge and ultimately were struck down by the High Court. Consequently, the assessee received refund of certain amount but he did not refund same to customers. The Assessing Officer treated it as income under section 41(1), and made addition. The Tribunal, however, deleted the addition. The High Court upheld the Tribunal's order - CIT v. Thirumalaiswamy Naidu & Sons [1998] 98 Taxman 57 (SC). Unilateral write back of purchase tax liability by assessee while Sales-tax Department was still pursuing claim, could not amount to remission or cessation of liability - Chief CIT v. Kesaria Tea Co. Ltd.[2002] 254 ITR 434/122 Taxman 91 (SC). Initial payment must have come out of the coffers of the assessee Section 41(1) can be invoked to assess sales tax refunds only in cases where the subject-matter of the refund relates to a payment of sales tax in an earlier year which has come out of the coffers of the assessee itself and not from out of the collections made by the assessee in that regard from its customers CIT v. Thirumalaiswamy Naidu & Sons [1984] 147 ITR 657 (Mad.). Note : Leave to appeal to the Supreme Court has been granted. In CIT v. Motipur Sugar Factory (P.) Ltd. [1985] 154 ITR 259, the

Patna High Court observed that the above decision cannot be said to have been correctly decided. Even if sales tax transactions are accounted for separately, refund is taxable - Where the assessee had never been accounting for the sales tax collections and payments in its profit and loss account but accounted for them in a separate account styled as Deposit against contingent liability, and later received a refund of sales tax, the said refund was, despite the peculiar accounting followed by the assessee, taxable as the income of the assessee under section 41(1). - CIT v. Marikar (Motors) Ltd. [1981] 129 ITR 1 (Ker.). Refund need not necessarily be in the form of sales tax - In order to tax refund of sales tax as income under section 41(1), it is not necessary that the refund must have been obtained by the assessee in the form of sales tax only and not in any other form. CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39 (AP). Provision will not apply if assessees liability to refund to customers subsists - Where sales tax collected in excess by the assessee is refunded to the assessee, and the assessees liability to pass it on to the customers continued even though it had not been so passed on, the amount of refund could not be taxed under section 41(1) CIT v. East Asiatic Co. India (P.) Ltd. [1996] 217 ITR 347 (Mad.). Others Refund of electricity charges is taxable - Where, in pursuance of Governments policy to grant concession in power rates, the assessee received refund of electricity charges paid in earlier years, the refund so received, being related to the carrying on of the assessees business, was taxable under section 41(1) - Panyam Cements & Mineral Industries Ltd. v. Addl. CIT [1979] 117 ITR 770 (AP). Unpaid wages cannot automatically be treated as income - Where the assessee, who was maintaining accounts under the mercantile system, used to debit liability towards wages, salary etc., to employees as and when it was incurred, and after a few years, it credited the unclaimed wages to the profit and loss account, the mere credit entry would not automatically convert the amount into the income of the assessee; even assuming that the said amount was distributed by the assessee to its shareholders, it could not get rid of its liability when called upon to meet it either by the

employees under the Industrial Disputes Act or by the Government under the Bombay Labour Welfare Funds Act, and the liability would not cease even in such a case - J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 (Bom.). Unclaimed bonus is taxable - Where provision towards bonus made by the assessee remained unclaimed by the employees for about 5 to 7 years, pursuant to which the assessee wrote back the amounts in its accounts, it could not be said that there had been no remission or cessation of liability. - CIT v. Agarpara Co. Ltd. [1986] 158 ITR 78 (Cal.).