CIT v. Chipsoft Technology (P) Ltd.

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The Tax Publishers2013 TaxPub(DT) 0338 (Del-HC) : (2013) 049 (I) ITCL 0407 : (2012) 080 DTR 0250 INCOME TAX ACT, 1961 --Business income--Profits chargeable to tax under section 41(1) Remission or cessation of trading liability--Assessing officer noticed that assessee had shown unpaid liability on the account of its employees dues which remained static for about 6-7 years, therefore, he called upon assessee to furnish details, confirmation from the employees and on failure to file the same, held that there was cessation of assessee's liability and added the same under section 41(1). Assessee contended that liability was outstanding in its books and that assessing officer could not arbitrarily treat what was liability as a profit. *Held:* Not rightly so as it would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery was time-barred and continued to enjoy the amount. Also, an Explanation was added with effect from 1-4-1997 by Finance Act, 1996 in which the expression 'include' is significant and Parliament did not use the expression 'means', therefore, even omission to pay over a period of time and the resultant benefit derived by the employer/assessee would qualify as cessation of liability albeit by operation of law. Two aspects are to be noticed. The first is that the view that liability does not cease as long as it is reflected in the books, and that mere lapse of the time given to the creditor or the workman, to recover the amounts due, does not efface the liability, though it bars the remedy. This view, with respect is an abstract and theoretical one, and does not ground itself in reality. Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assessee's contention is unacceptable is because with effect from 1-4-1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to section 41 which spells out that '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'. The expression 'include' is significant; Parliament did not use the expression 'means'. Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law. [Para 9] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0338 (Del-HC) : (2013) 049 (I) ITCL 0407 : (2012) 080 DTR 0250

INCOME TAX ACT, 1961

--Business income--Profits chargeable to tax under section 41(1) Remission or cessation of trading liability--Assessing officer noticed that assessee had shown unpaid liability on the account of its employees dues which remained static for about 6-7 years, therefore, he called upon assessee to furnish details, confirmation from the employees and on failure to file the same, held that there was cessation of assessee's liability and added the same under section 41(1). Assessee contended that liability was outstanding in its books and that assessing officer could not arbitrarily treat what was liability as a profit. Held: Not rightly so as it would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery was time-barred and continued to enjoy the amount. Also, an Explanation was added with effect from 1-4-1997 by Finance Act, 1996 in which the expression 'include' is significant and Parliament did not use the expression 'means', therefore, even omission to pay over a period of time and the resultant benefit derived by the employer/assessee would qualify as cessation of liability albeit by operation of law.

Two aspects are to be noticed. The first is that the view that liability does not cease as long as it is reflected in the books, and that mere lapse of the time given to the creditor or the workman, to recover the amounts due, does not efface the liability, though it bars the remedy. This view, with respect is an abstract and theoretical one, and does not ground itself in reality. Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assessee's contention is unacceptable is because with effect from 1-4-1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to section 41 which spells out that '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'. The expression 'include' is significant; Parliament did not use the expression 'means'. Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law. [Para 9]