I wrote back an old provision for disputed sales tax in my books. Can the officer tax it under section 41(1) as a cessation of liability?
No, not on these facts. The Supreme Court held that section 41(1) applies only if the liability has ceased finally, without the possibility of it reviving. Writing the provision back in the books is a unilateral act by the assessee and does not by itself end the liability in the eye of law. Here the purchase tax dispute with the sales tax department was still alive, so nothing had ceased in the year of the write-back. The Court affirmed the Kerala High Court and the Tribunal and dismissed the Revenue's appeal.
Decided by the Supreme Court (Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J) on 2002-03-19, reported as (2002) 254 ITR 434; 2002 (3) SCC 684; AIR 2002 SC 1473; (2002) 122 Taxman 91; 2002 (3) SCALE 48; (2002) 3 JT 181 (SC). It bears on section 41(1), section 256(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the Supreme Court's clearest statement that section 41(1) turns on the legal position of the liability, not on the entry in the ledger. It sets out the four points that must be present before the section can operate, and it fixes the standard for cessation: final, with no possibility of revival. It is the case to cite when the officer treats a book write-back, a balance sheet reclassification or a time-barred creditor as automatic income. It also shows how far a decision in someone else's case takes you. The dismissal of a special leave petition in another assessee's matter settled only one of the two conditions on which the purchase tax exemption depended, so the assessee's own dispute survived it. Note the Court's own caveat that the years in question predate Explanation 1 to section 41(1).
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The assessee dealt in tea and spices. Its liability to purchase tax on certain goods was in dispute, and it had made provisions for that tax in the years 1978 to 1981, taking the deduction against business income. In the year ending 31 March 1985 it wrote back Rs 14,65,997 of those provisions, apparently because this Court had in November 1984 rejected the Kerala State's special leave petition against the Kerala High Court's decision in Neroth Oil Mills. The assessing officer added the whole of the written-back sum as income of assessment year 1985-86 under section 41(1). The Commissioner (Appeals) deleted the amounts already brought to tax in reassessments for 1979-80 and 1980-81 but upheld Rs 3,02,758 relating to 1978-79, holding that the liability had finally ceased in 1985-86 on the rejection of that special leave petition. The Tribunal deleted that addition too. On a reference under section 256(1) the Kerala High Court agreed with the Tribunal, and the Revenue appealed.
The appeal was dismissed and the High Court's opinion affirmed. Section 41(1) can be resorted to only if the liability can be said to have ceased finally, without the possibility of reviving it. On the Tribunal's findings the purchase tax liability had not so ceased in the year in question: the decision in Neroth Oil Mills covered only one of the two conditions on which exemption depended, namely that the goods purchased and exported were the same, and left open the condition that the purchases were against firm export orders; and as late as 1993 the sales tax department was still pursuing the assessee's purchase tax liability from 1974-75 onwards. The assessee's own act in writing the liability off in its books was not conclusive; a unilateral entry does not end a statutory liability in law. The Court followed its earlier decision in Sugauli Sugar Works and held T.V. Sundaram Iyengar and Sons irrelevant on its facts.
The Court set out what section 41(1) requires, in four steps: an allowance or deduction must have been made in an earlier assessment in respect of a trading liability; a benefit must subsequently be obtained in respect of that liability by way of remission or cessation; the value of that benefit is then deemed to be business profits, which it would not otherwise be; and it is charged as income of the previous year in which the benefit was obtained. Everything therefore depends on the second step, and the Court read 'cessation' strictly, as a final end to the liability with no possibility of revival. It then declined to disturb the Tribunal's findings of fact, noting there was no material to rebut them and that the reasons given were not irrelevant. On the Revenue's main point, that the assessee's own write-back showed the liability had gone for all practical purposes, the Court held that what the assessee has done is not conclusive: a liability is created and discharged by law, and a bookkeeping entry cannot extinguish a statutory obligation that the sales tax authorities were still pressing. The Court added that the controversy related to a period before Explanation 1 to section 41(1) was introduced.
an unilateral action on the part of the assessee by way of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law
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Handle my notice → Ask a CA on WhatsAppNo, not on these facts. The Supreme Court held that section 41(1) applies only if the liability has ceased finally, without the possibility of it reviving. Writing the provision back in the books is a unilateral act by the assessee and does not by itself end the liability in the eye of law. Here the purchase tax dispute with the sales tax department was still alive, so nothing had ceased in the year of the write-back. The Court affirmed the Kerala High Court and the Tribunal and dismissed the Revenue's appeal. This was decided by the Supreme Court (Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J) and bears on section 41(1), section 256(1) of the Income Tax Act 1961. It is reported as (2002) 254 ITR 434; 2002 (3) SCC 684; AIR 2002 SC 1473; (2002) 122 Taxman 91; 2002 (3) SCALE 48; (2002) 3 JT 181 (SC). This is the Supreme Court's clearest statement that section 41(1) turns on the legal position of the liability, not on the entry in the ledger. It sets out the four points that must be present before the section can operate, and it fixes the standard for cessation: final, with no possibility of revival. It is the case to cite when the officer treats a book write-back, a balance sheet reclassification or a time-barred creditor as automatic income. It also shows how far a decision in someone else's case takes you. The dismissal of a special leave petition in another assessee's matter settled only one of the two conditions on which the purchase tax exemption depended, so the assessee's own dispute survived it. Note the Court's own caveat that the years in question predate Explanation 1 to section 41(1). If it applies to you, the first step is this: Show the liability is still legally alive: pending assessments, demands, appeals or correspondence with the department concerned, and put that material on record, because the Tribunal's factual findings on it decided this case.
The assessee dealt in tea and spices. Its liability to purchase tax on certain goods was in dispute, and it had made provisions for that tax in the years 1978 to 1981, taking the deduction against business income. In the year ending 31 March 1985 it wrote back Rs 14,65,997 of those provisions, apparently because this Court had in November 1984 rejected the Kerala State's special leave petition against the Kerala High Court's decision in Neroth Oil Mills. The assessing officer added the whole of the written-back sum as income of assessment year 1985-86 under section 41(1). The Commissioner (Appeals) deleted the amounts already brought to tax in reassessments for 1979-80 and 1980-81 but upheld Rs 3,02,758 relating to 1978-79, holding that the liability had finally ceased in 1985-86 on the rejection of that special leave petition. The Tribunal deleted that addition too. On a reference under section 256(1) the Kerala High Court agreed with the Tribunal, and the Revenue appealed. The matter was decided on 2002-03-19 by the Supreme Court (Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J). On those facts the Supreme Court held as follows. The appeal was dismissed and the High Court's opinion affirmed. Section 41(1) can be resorted to only if the liability can be said to have ceased finally, without the possibility of reviving it. On the Tribunal's findings the purchase tax liability had not so ceased in the year in question: the decision in Neroth Oil Mills covered only one of the two conditions on which exemption depended, namely that the goods purchased and exported were the same, and left open the condition that the purchases were against firm export orders; and as late as 1993 the sales tax department was still pursuing the assessee's purchase tax liability from 1974-75 onwards. The assessee's own act in writing the liability off in its books was not conclusive; a unilateral entry does not end a statutory liability in law. The Court followed its earlier decision in Sugauli Sugar Works and held T.V. Sundaram Iyengar and Sons irrelevant on its facts.
The Court set out what section 41(1) requires, in four steps: an allowance or deduction must have been made in an earlier assessment in respect of a trading liability; a benefit must subsequently be obtained in respect of that liability by way of remission or cessation; the value of that benefit is then deemed to be business profits, which it would not otherwise be; and it is charged as income of the previous year in which the benefit was obtained. Everything therefore depends on the second step, and the Court read 'cessation' strictly, as a final end to the liability with no possibility of revival. It then declined to disturb the Tribunal's findings of fact, noting there was no material to rebut them and that the reasons given were not irrelevant. On the Revenue's main point, that the assessee's own write-back showed the liability had gone for all practical purposes, the Court held that what the assessee has done is not conclusive: a liability is created and discharged by law, and a bookkeeping entry cannot extinguish a statutory obligation that the sales tax authorities were still pressing. The Court added that the controversy related to a period before Explanation 1 to section 41(1) was introduced. In the words reproduced by the source cited on this page: "an unilateral action on the part of the assessee by way of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law"
It was decided by the Supreme Court on 2002-03-19 and is reported as (2002) 254 ITR 434; 2002 (3) SCC 684; AIR 2002 SC 1473; (2002) 122 Taxman 91; 2002 (3) SCALE 48; (2002) 3 JT 181 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 41(1), section 256(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed and the High Court's opinion affirmed. Section 41(1) can be resorted to only if the liability can be said to have ceased finally, without the possibility of reviving it. On the Tribunal's findings the purchase tax liability had not so ceased in the year in question: the decision in Neroth Oil Mills covered only one of the two conditions on which exemption depended, namely that the goods purchased and exported were the same, and left open the condition that the purchases were against firm export orders; and as late as 1993 the sales tax department was still pursuing the assessee's purchase tax liability from 1974-75 onwards. The assessee's own act in writing the liability off in its books was not conclusive; a unilateral entry does not end a statutory liability in law. The Court followed its earlier decision in Sugauli Sugar Works and held T.V. Sundaram Iyengar and Sons irrelevant on its facts. It arises in Deductions & Disallowances matters, on section 41(1), section 256(1) of the Income Tax Act 1961, and was decided by Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not treat your own write-back entry as an admission. Say plainly that a unilateral entry does not extinguish a statutory liability. Check the year you are in. Explanation 1 to section 41(1) now deems a unilateral write-off in the accounts to be a remission or cessation, so this case answers the cessation question but not that deeming. If the Revenue relies on a judgment in another assessee's case, identify precisely which of the conditions in dispute that judgment actually settled and which it left open.
Still good law. The test of final cessation without possibility of revival is settled and the source page records the decision as widely followed. But the Court itself said the years before it predate Explanation 1 to section 41(1), which deems a unilateral write-off of a liability in the accounts to be a remission or cessation; for years after that Explanation applies, this case decides the cessation question but not the deeming. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment does not set out the terms of Explanation 1 or decide anything under it, so its exact reach was not established from this source. The figure appears once as Rs 3,20,758 and elsewhere as Rs 3,02,758; the latter is used, being the figure in the referred question. The earlier decision is printed in the source as 'Suguli Sugar Works', which appears to be a slip for Sugauli Sugar Works. The Commissioner (Appeals) made observations about assessment years 1980-81 and 1981-82 that the Court expressly did not go into. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and the High Court's opinion affirmed. Section 41(1) can be resorted to only if the liability can be said to have ceased finally, without the possibility of reviving it. On the Tribunal's findings the purchase tax liability had not so ceased in the year in question: the decision in Neroth Oil Mills covered only one of the two conditions on which exemption depended, namely that the goods purchased and exported were the same, and left open the condition that the purchases were against firm export orders; and as late as 1993 the sales tax department was still pursuing the assessee's purchase tax liability from 1974-75 onwards. The assessee's own act in writing the liability off in its books was not conclusive; a unilateral entry does not end a statutory liability in law. The Court followed its earlier decision in Sugauli Sugar Works and held T.V. Sundaram Iyengar and Sons irrelevant on its facts.
TaxSphere, “CIT v Kesaria Tea Co Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-kesaria-tea-co-cessation-of-liability-41-1/ (validity last checked 2026-08-29)
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