Law:

Section:

Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability - Assessment year 1971-72 - Assessee, who was partner in certain firm, retired from said firm - As per dissolution deed, it was agreed between partners that firm would not insist on recovery of amount standing to debit of assessee as due and payable to firm, in consideration of assessee not claming any share in assets of firm - Assessee had never claimed any deduction on account of trading liability in his personal assessment - Whether on facts, it could be said that nothing had been paid to assessee in consideration of his forgoing of his share in capital assets of firm and as such section 41(1) had no application - Held, yes Section 45 of the Income-tax Act, 1961 - Capital Gains - Chargeable as - Assessment year 1971-72 - Whether in view of facts stated under head "Remission or cessation of trading liability" provisions of section 45 were not attracted in case of assessee - Held, yes FACTS The assessee who was a partner in the firm, retired from the said firm on 30-6-1970. At that point of time, in his personal account in the books of the firm, there was a certain debit balance which was built up on account of earlier years' losses and cash withdrawals by the assessee. By a writing which was described as retirement and dissolution deed, the firm had forgone its right to recover the amount from the assessee with the result that the assessee had not to pay any amount to the firm on account of the amount standing to his debit in the books of the firm. The ITO held that this was a case of retirement of the assessee from the firm and the decision of the firm not to enforce recovery from the assessee brought the case of the assessee within the purview of section 41(1). In the alternative, the ITO held that in any case this was a capital gain under section 45. The ITO, therefore, added back certain amount under section 41(1). The AAC held that section 41(1) had no application and section 45 was never attracted and, therefore, disallowed the addition. The Tribunal upheld the decision of the AAC. On reference: HELD In the dissolution deed, it was clearly agreed between the partners…

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