Cessation Of Trading Liability Under Income Tax Act, 1961

Author:Mr Pradhumna Didwania
Profession:Singh & Associates
 
FREE EXCERPT

Trading Liability in general terms can be understood as an obligation of a person (Debtor) to pay another person (Creditor) for goods purchased or value received from that other person. A genuine Trading Liability incurred in the course of Business or Profession is a permissible expenditure, in the relevant financial year, under the applicable provisions of the Income Tax Act, 1961, however when some benefit is derived by the Debtor in the form of remission or cessation of such trading liability, then such benefit received by the debtor is to be considered as a Taxable Income under Section 41(1) of the Income Tax Act, 1961. Section 41(1) deals with considering ceased trading liability as deemed profits of business or profession.

SECTION 41(1) OF THE INCOME TAX ACT, 1961

1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year -

a. the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

b. the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

Explanation 1 - For the purposes of this subsection, the expression "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...

To continue reading

REQUEST YOUR FREE TRIAL