Section 41(1)

Section 41(1) — the law in short

What the courts have decided on section 41(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Mahindra and Mahindra Ltd Supreme CourtHelps taxpayer
  The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
  No. Section 28(iv) reaches only a benefit in a form other than money, and a waiver puts cash in the debtor's hands. Section 41(1) needs an earlier allowance or deduction in respect of a trading liability; here only depreciation on the assets had been claimed, never a deduction for the loan.
• Nectar Beverages Pvt Ltd v DCIT Supreme CourtHelps taxpayer
  I wrote off my bottles and crates at 100% under the old proviso to section 32(1)(ii). Years later I sold them as scrap - is the sale money taxable under section 41(1)?
  No, for the years when section 41(2) was off the statute book. The Supreme Court held that the balancing charge in section 41(2) cannot be read into section 41(1). Depreciation is by its nature neither a loss nor an expenditure nor a trading liability, which is all section 41(1) reaches. Section 41(2), which taxed the balancing charge, was deleted from assessment year 1988-89 when the block of assets concept came in, so between then and its restoration the profit on sale of such assets was not taxable. Items costing under Rs.5,000 bought before 31 March 1995 also stayed outside the block, so section 50 did not catch them either.
• Polyflex (India) P Ltd v CIT Supreme CourtHelps department
  The excise department refunded duty I had paid and claimed as expenditure, but its appeal against the refund is still pending. Is the refund taxable now under section 41(1)?
  Yes. The Supreme Court held that section 41(1) has two limbs and only the second one asks about remission or cessation of a trading liability. Where duty was actually paid, allowed as expenditure, and later refunded, the case falls under the first limb, obtaining any amount in respect of such expenditure. The refund is chargeable in the year it is received, and the possibility that a higher court may later restore the levy is irrelevant. If the levy is upheld later, the assessee has his remedy then. The appeal was dismissed.
• CIT v Kesaria Tea Co Ltd Supreme CourtHelps taxpayer
  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.
• CIT v Sugauli Sugar Works (P) Ltd Supreme CourtHelps taxpayer
  Old creditor balances have been sitting in my books for twenty years and nobody has sued. If I move them to reserves, does section 41(1) tax them?
  No, on the law as it stood for assessment year 1965-66. The Supreme Court held that section 41(1) requires the assessee to have obtained an amount, in cash or otherwise, or a benefit by way of remission or cessation of the liability, and that obtaining is the condition on which the section works. A debtor cannot bring about remission or cessation by his own unilateral act; remission must come from the creditor. Expiry of limitation bars the creditor's remedy but does not extinguish the debt, and whether limitation has in fact run cannot be decided without the creditor before the authority.
• CIT v T.V. Sundaram Iyengar & Sons Ltd Supreme CourtHelps department
  Old unclaimed credit balances of my customers have gone time-barred and I have written them back to my profit and loss account. Is that taxable even though they were capital receipts when I got them?
  Yes. The Supreme Court held that money received in the course of trade, though a deposit and of capital character when received, changes character when it becomes the assessee's own money by limitation or by some other statutory or contractual right. The deposits here were taken in the course of trade, adjustments were made against them in the course of trade, the customers' claims had become time-barred, and the assessee itself carried the surplus to its profit and loss account with no explanation for doing so if the money was somebody else's. On a common sense view the trader had become richer by the amount, and it is his income.
• Saraswati Industrial Syndicate Ltd v. Commissioner of Income-tax (Supreme Court, 4 September 1990) — on amalgamation the transferor company loses its entity and its corporate existence ceases from the date the amalgamation is made effective Supreme CourtHelps taxpayer
  After our amalgamation the Assessing Officer has taxed us under section 41(1) on a trading liability that had been allowed as a deduction to the company we absorbed. Can the allowance given to a company that no longer exists be taxed in our hands?
  No. The Supreme Court held that section 41(1) applies only to the assessee to whom the allowance or deduction was made, and that in order to attract it the identity of the assessee in the previous year and the subsequent year must be the same; if there is any change in the identity of the assessee there is no liability under section 41. On amalgamation the transferor company loses its entity and its corporate existence ceases with effect from the date the amalgamation is made effective, so the amalgamated company is a separate entity and a different assessee, and the allowance made to the transferor cannot be treated as its income.
• Saraswati Industrial Syndicate Ltd v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  A company we absorbed by amalgamation had been allowed a trading liability as a deduction. When that liability ceased in our hands, can section 41(1) tax us on it?
  No, on the section as it then stood. The Supreme Court held that section 41(1) taxes the assessee to whom the allowance or deduction was made, so the identity of the assessee in the earlier year and in the later year must be the same. On amalgamation the transferor company loses its entity and ceases to exist in the eye of law from the date the amalgamation takes effect; the amalgamated company acquires a new status. The High Court's view that the two corporate personalities continue in a blended form was held unsustainable, and the allowance made to the transferor could not be taxed in the transferee's hands.
• Commissioner of Income Tax v SPL Infrastructure Pvt Ltd High CourtHelps taxpayer
  The officer disallowed all my sub-contract payments because the sub-contractors did not turn up to summons. Can the whole payment be added back when the work was plainly done?
  No. The Madras High Court held that where the contractor's books are not accepted, profit is to be estimated on the history of the gross and net profit rates of the assessee or of comparable contractors, and once that comparison is made, additions for non-production of sub-contractors are totally irrelevant and cannot be made. Here the sub-contractors had confirmed the transactions, payments were by cheque and subject to tax deducted at source, and measurement books signed by them recorded the work. The Commissioner (Appeals) had restricted the disallowance to 10 per cent, on the assessee's own offer, which produced a better result than earlier years. The Revenue's appeal was dismissed with a strong deprecation of routine appeals against findings of fact.
• CIT v Vardhman Overseas Ltd High CourtHelps taxpayerNo later treatment found
  Old sundry creditors are still in my balance sheet. Can the AO tax them as ceased liabilities?
  No. Section 41(1) needs the assessee to obtain a benefit by remission or cessation, and mere non-payment for several years is neither. Carrying the balance in the audited accounts acknowledges the debt under s.18 of the Limitation Act, so the liability remains enforceable.
• Commissioner of Income-tax v. Justice R.M. Datta (Calcutta High Court, 4 July 1989) — section 176(4) deems the receipt to be income but creates no further fiction bringing it under 'Profits and gains of business, profession or vocation', so arrears received after the profession ceased escape the charge High CourtHelps taxpayer
  I was an advocate on cash basis and stopped practising when I was appointed to the Bench. Fees for old work are still coming in. The Assessing Officer says section 176(4) makes them taxable. Is there an answer?
  There is, and this is it. The Calcutta High Court held that section 176(4) creates only two fictions — that the sum received after discontinuance is deemed to be the income of the recipient, and that it is charged to tax in the year of receipt — and does not create a third fiction deeming the receipt to be income of a business or profession carried on by the assessee in that year. Because the receipt is the fruit of professional activity it falls under the head 'Profits and gains of business, profession or vocation' and cannot be taken to the residuary head; and because the assessee carried on no profession in any part of the relevant previous year, it cannot be computed under sections 28 to 43A. The question referred was answered in the affirmative and in favour of the assessee.
• Statutory position — s.59: the s.41(1) deemed-income rule applied to income from other sources CBDT Circulars & InstructionsCuts both ways
  I was allowed a deduction under s.57 in an earlier year for a liability that has now been written back. Is the write-back taxable, and under which head?
  Yes, and under the head income from other sources. Section 59(1) provides that s.41(1) applies, so far as may be, in computing the income of an assessee under s.56 as it applies in computing income under the head profits and gains of business or profession. Sub-sections (2) and (3) of s.59 stand omitted.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.