Ajay Kumar Mittal, J. - (1.) THIS appeal is filed by the assessee under Section 260A of the Income Tax Act, 1961 (for short "the Act") against the order of the Income Tax Appellate Tribunal, Chandigarh Bench "B", Chandigarh (hereinafter referred to as "the Tribunal") passed in ITA No. 1231/Chandi/2005 on 31.7.2006 for the assessment year 2001 -02. According to the learned counsel for the assessee, the following substantial questions of law arise for consideration of this Court: 1. Whether, on the facts and circumstances of the case, the ITAT was justified in confirming the action of CIT (A) in not allowing legal deduction as claimed by the appellant u/s 80HHC of the Income Tax Act, 1961 by completely ignoring the established principles of law regarding deeming provisions which provide for applicability of all the enabling provisions once an income is held to be business income either on the basis of its accrual, arising on receipt and/or under deeming provisions.
(2.) WHETHER , on the facts and circumstances of the case, the ITAT was justified in confirming the action of CIT (A) in not allowing legal deduction as claimed by the appellant u/s 80HHC of the Income Tax Act, 1961 by completely ignoring the established principles of law regarding deeming provisions though applying the provisions of section 41 (1)(a) of the Income Tax Act, 1961 while on the other hand completely ignoring the true nature of the impugned amount of cessation of liabilities which had resulted in the reduction of purchase price of the raw material and thereby resulting into more Export Profits and thus cannot be denied the impugned deduction u/s 80HHC of the Income Tax Act, 1961. Whether, on the facts and circumstances of the case, the findings of ITAT are perverse and against the evidence on record and, thus, unsustainable in law. Briefly noticed the facts are that the assessee is a partnership firm dealing in Export of thread bar and it filed its income tax return for the assessment year 2001 -02 on 30.10.2001 declaring its income as Rs. 5,28,855/ -. The assessee claimed deduction under Section 80HHC of the Act amounting to Rs.19,65,168/ -. The details of export sales as well as other incentives including Duty Draw Back are given as under: (i) Total Turnover Rs.1,45,91,215/ - (ii) Export Sales Rs.1,43,82,742/ - (iii) Export Incentives (a) DEPB Licence Rs.40,78,885/ - (b) Duty Draw Back Rs. 8,42,516/ - Total Rs.49,21,401/ - (iv) Profit on DEPB licence premium included in the amount of DEPB incentive of Rs. 40,78,885/ - = Rs.2,85,278/ -. 2. The Assessing Officer declined to include an amount of Rs.3,52,581/ -arising out of "cessation of trading liability" and held that the assessee was not eligible for the benefit under Section 80HHC of the Act on the said amount. The assessee took the matter in appeal before CIT (A) who vide order dated 23.9.2004 affirmed the action of the Assessing Officer. He did not allow the claim of the assessee for deduction under Section 80HHC of the Act with respect to the addition of Rs. 3,52,581/ -. Feeling aggrieved by the orders passed by the Assessing Officer and the CIT (A), the assessee filed an appeal before the Tribunal and the Tribunal vide its order dated 31.7.2007 partly allowed the appeal. Against the orders passed by the authorities below, the assessee has now approached this Court by way of present appeal. 3. The point that arises for consideration of this Court in the present appeal is whether income which is chargeable to tax under Section 41 (1) of the Act on cessation of liabilities of trade creditors is to be excluded or not from profits of business while calculating the deduction under Section 80HHC of the Act.
(3.) SECTION 41 (1) of the Act deals with profits which are chargeable to tax arising on remission or cessation of trading liabilities. Under the provisions of sub -section (1) of Section 41 of the Act, an assessee who had been allowed any deduction on account of any loss, expenditure or trading liability in any year which ceases to be effective and as a result the assessee receives any amount in respect thereof, the amount so obtained by him or the value of benefit accruing to him is exigible to tax as income of the year in which such remission or cessation has taken place. By introducing fiction, the said receipt is chargeable under the head "income from business or profession.;