Law:

Section:

Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of liability - Assessment year 1975-76 - State Government levied litre fee which was under challenge - During pendency of challenge assessee had paid litre fee in various earlier years which was allowed as a deduction -After law regarding litre fee was declared as unconstitutional litre fee collected was refunded and during previous year relevant to assessment year 1975-76 assessee got refund - Whether such refunded amount was chargeable to tax under section 41(1) - Held, yes Words & Phrases - Expression 'in respect of occurring in section 41(1) of Income-tax Act, 1961 FACTS The State of Karnataka levied litre fee which was under challenge. During the pendency of the challenge the assessee had paid the litre fee during various years which was allowed as a deduction while computing the assessee's income during the assessment years 1970-71 to 1973-74. After the law was declared as unconstitutional the litre fee collected was refunded. During the year in which the refund was obtained by the assessee, the same was assessed to tax by the assessing authorities, by invoking section 41(1). The assessee's contention that section 41(1) was not applicable was rejected by the appellate authorities. On reference the assessee contended, inter alia, that when the law imposes a tax, payable in the course of a trade, it will be trading liability, but if such a law is unconstitutional, legally there is no liability at all from the very inception, and the allowance or deduction permitted in respect of such unconstitutional liability can never be called an allowance or deduction in respect of a trading liability, and, therefore, section 41(1) is not attracted. HELD In the course of a trading activity the assessee may have to pay several kinds of taxes. Such taxes are allowed as a deduction from the gross income while computing the income of the assessee, so longas the liability to the said tax arose in the course of or as incidental to the carrying out of the trading activity. Liability to tax is purely statutory. Its incidents are also statutory. The law does not compel the seller to collect the tax element…

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