2 Section 41(1) – Business income – Deemed income A. Y. 2007-08 – Remission or cessation of trading liability – Benefit must be obtained in respect of liability – Assessee a co-operative bank – Stale demand drafts and pay orders for sums owed by assessee bank to customers – Bank not deriving benefit on account of liability and liability still subsisting – Section 41(1) not applicable

CIT vs. Raddi Sahakara Bank Niyamitha;
395 ITR 652 (Karn)

The assessee was a co-operative bank. For
the A. Y. 2007-08, the Assessing Officer made an addition in the income of the
assessee on the ground of demand drafts and pay orders payable as on the last
date of the financial year, which were not so far encashed by the customers. He
treated the said amount as representing cessation of liability u/s. 41(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the “Act”)
1961, and added back the amount to the declared income of the assessee. The
Tribunal deleted the addition.

On appeal by the Revenue, the Karnataka High
Court upheld the decision of the Tribunal and held as under:

 “i)   In order to invoke
section 41(1) of the Act, 1961, it must be first established that the assessee
had obtained some benefit in respect of a trading liability which was earlier
allowed as a deduction. It is not enough if the assessee derives some benefit
in respect of such liability, but it is essential that such benefit arises by
way of “remission” or “cessation” of liability.

 ii)   The addition could not be
made u/s. 41(1) of the Act, since the liability of the assessee bank to pay
back the amounts to the customers in respect of such stale demand drafts and
pay orders does not cease in law. The appeal is dismissed.”