Law:

Section:

Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability - Assessment years 1999-2000 and 2000-01 - Assessee had been crediting interest and even making cash payment of interests in respect of certain credit entries shown in names of relatives - Payments so made had been regularly claimed as deductions and same were being allowed - During relevant assessment years, assessee transferred credit entries to partners' capital accounts, thereby neutralizing liability towards creditors - Whether on such transfer, assessee had ceased to be liable for interest payments which were claimed as deductions in previous years - Held, yes - Whether, therefore, there was cessation of liability in respect of interest credited to account of creditors and so much so, it was rightly found by Tribunal to be income assessable under section 41(1) - Held, yes FACTS The assessee had been crediting interests and even making cash payments of interests in respect of certain credit entries shown in the names of relatives. Interest credits and payments had been regularly claimed as deductions and the same were being allowed. However, during the assessment years 1999-2000 and 2000-01, the assessee transferred the credit entries to the partners' capital accounts, thereby neutralizing the liability towards creditors. The assessee's explanation was that the creditors, who were relatives, had gifted these amounts to the partners. Even though the Assessing Officer assessed the interest portion of the credit entry as income by applying section 41(1), the Commissioner (Appeals), in the course of hearing the appeal, enhanced the assessment by treating the entire credit entries as incomes assessable under section 41(1). However, the Tribunal, on second appeal, granted relief to the assessee by limiting the addition under section 41(1) to the interest credited to the account of the creditors. Against said order, the assessee filed instant appeal contending that mere unilateral transfer entries in the accounts of the assessee would not entitle the department to make assessment under section 41(1). HELD The contention of the assessee, that what was done was mere transfer of…

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