Income on cessation of liability arises if no consideration passes to creditor for the same

The department sought to tax the sum of share application money which was adjusted against sums due to the assessee as income from cessation of liability. The holding company had advanced share application money which was lying as a deposit with the subsidiary.

 In the previous year, the assessee (subsidiary) adjusted the sum towards dues for sale of goods to the holding company.

The department contended that since the liability to the holding company had ceased, the sum was taxable in terms of Section 41. However, the Allahabad High Court in the case of CIT v. Indo Widecom International  held that Section 41 applies to a transaction where the liability owed by the assessee is done away with without any consideration passing to the creditor.

 In the instant case, the transaction was not one of cessation of liability but discharge of liability and hence it was not taxable under Section 41.