Delhi High Court
International Imex (Agents) P. Ltd. vs Commissioner Of Income-Tax on 4 May, 1970
Equivalent citations: [1971]79ITR11(DELHI)
Author: H.R. Khanna
Bench: H.R. Khanna
JUDGMENT Prakash Narain, J.
1. This reference under Section 66(1) of the Income-tax Act, 1922, has been made by the Income-tax Appellate Tribunal (Delhi Bench " C ") on being moved by the assessed which is a private limited company. The assessment year concerned is 1958-59, the relevant financial year being 1957-58.
2. The facts leading up to this reference are that the assessed-company purchased 825 bales of staple fibres from a manufacturer in Japan during the accounting year 1952-53 for a total-sum of Rs. 10,15,894. The entire cost of this staple fibres purchased by the assessed was met by the Mercantile Bank of India, Chandni Chowk Branch, Delhi, which had opened a letter of credit in favor of the exporter in Japan. After the import of the staple fibres, since the same was hypothecated with the bank, it was kept in the bank's godowns and released for sale by the bank. In the accounting year 1952-53, the assessed sold 50 bales of staple fibres for a total consideration of Rs. 61,320. At the close of the financial year the stock remaining in the godowns of the bank was valued at Rs. 7,16,875. Fer the assessment year 1953-54, the assessed claimed a loss of Rs. 2,37,699 in its business allegedly on account of the fall in the market price of the staple fibres lying in stock with the bank and which had been valued on the basis of the sale price that the assessed had received in selling 50 bales of these goods. The loss, as claimed by the assessed, was allowed for the assessment year 1953-54. There were further sales in subsequent years and part of the bank's dues were paid off by the assessed. As, however, the assessed could not pay the balance of the money remaining due to the bank in spite of being pressed to do so, the bank brought a suit for the recovery of its dues which was decreed in its favor on March 12, 1958. According to the decree, copy of which has been placed on record and forms part of the documents annexed to the statement of the case, the claim of the bank was decreed for a sum of Rs. 7,91,906-2-6 with costs amounting to Rs. 8,137-12-0 and future interest on the decretal amount at the rate of 6 per cent. per annum from the date of the decree till realisation. There was, however, a proviso in the decree and that was that the whole decree would be deemed to have been satisfied by the recovery of Rs. 2,60,586 which was lying in deposit in court, being the sale proceeds of the balance of the staple fibres which had been sold through court by a receiver. It may be mentioned that the decree was a compromise decree. The bank took this amount of Rs. 2,60,586-3-0 and the decree thus stood fully satisfied. In this way the assessed received a remission of Rs. 5,64,200. The Income-tax Officer sought to tax this remission under Section 10(2A) of the Income-tax Act, 1922, for the relevant year. In the return for the assessment year 1958-59, the relevant financial year being 1957-58, the assessed had claimed a loss of Rs. 4,56,289 on the sale of staple fibres by taking the sale proceeds of the stock at Rs. 2,60,586 against the value of the opening stock taken from year to year since 1953 at Rs. 7,16,875. The accounts of the assessed were maintained in the mercantile system and the loss was claimed on the basis of the profit and loss account made by the assessed in the above fashion. The Income-tax Officer allowed this loss but added back the sum of Rs. 5,64,200 unrealised by the bank treating it to be a remission of trading liability falling within the purview of Section 10(2A) of the Act. Aggrieved by the assessment, the assessed, appealed to the Appellate Assistant Commissioner of Income-tax but the appeal was dismissed. A further appeal to the Tribunal was also dismissed. Thereupon, the assessed moved the Tribunal for stating a case to the High Court and the Tribunal agreeing that a question of law did arise, in the facts and circumstances of the case, has referred the following question to us :
" Whether on the facts and in the circumstances of the case, the remission by the bank arising out of the compromise was a remission of a trading liability liable to tax under Section 10(2A) of the Income-tax Act, 1922 ? "
3. The learned counsel for the assessed has urged that a distinction must be kept between the transaction with the bank in which the assessed took a loan of Rs. 10/15,894 from the bank and in which transaction the debt that the assessed owed to the bank was settled by means of the compromise decree and the trading loss that the assessed suffered in the sale of staple fibres. In other words, the loss allowed to the assessed in the accounting year 1952-53 or for the accounting year 1957-58 would have no relevance, vis-a-vis, the settlement arrived at in the capital account where the liability of the assessed towards the bank for the loan or under the decree stood discharged by payment of a lesser amount than the amount of the loan or the amount for which a decree had been granted in favor of the bank. The case of the revenue on the other hand is that there was no investment by the assessed as the entire investment was done by the bank and so it was not a remission of capital liability but of trading liability.
4. At this stage it will be advantageous to read certain relevant provisions of the Income-tax Act, 1922. The first provision which may be noticed is Section 4 of the Act, which is the charging section, and provides as under:
" Application of Act.--(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-
(a) are received of are deemed to be received in the taxable territories in such year by or on behalf of such person, or
(b) if such person is resident in the taxable territories during such year,--
(i) accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or
(ii) accrue or arise to him without the taxable territories during such year, or
(iii) having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year, or
(c) if such person is not resident in the taxable territories during such year, accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year : . . . .
(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them....
(vii) Any receipts not being capital gains chargeable according to the provisions of Section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee ....
10. Business.--(1) The tax shall be payable by an assessed under, the head ' Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him ....
(2A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessed and, subsequently during any previous year, the assessed has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year. "
5. Before we proceed to examine the facts of the case, it may be mentioned that Sub-section (2A) of Section 10 was enacted to form part of the Indian Income-tax Act, 1922, by virtue of Section 8 of the Finance Act, 1955, and became law with effect from April 1, 1955.
6. A reading of Section 4(3)(vii) of the Act would suggest that if a certain liability is allowed by the revenue as a permissible deduction and if subsequently that liability is discharged not by actual payment by the assessed but by remission of liability by a creditor then the remission of liability cannot be considered as an income which would be liable to tax. In fact prior to the enactment of Sub-section (2A) of Section 10 this was the state of law as was held by the Bombay High Court in Mohsin Rehman Penkar v.
Commissioner of Income-tax, [1948] 16 I.T.R. 183 (Bom.) and Orient Corporation v. Commissioner of Income-tax, [1950) 18 I.T.R. 28 (Bom.) . The effect of this was that an assessed maintaining his accounts in the mercantile system if allowed to deduct a loss, expenditure or a trading liability could not be taxed in future years irrespective of that loss, or expenditure being recouped or the trading liability being discharged by remission of the liability by a creditor. The enactment of Sub-section (2A) of Section 10 of the Act did away with this benefit which an assessed could get and created liability to assessment on the fictional or notional income in case the previously allowed loss or expenditure or trading liability was either received in cash or in any other manner or some benefit was obtained in respect of the trading liability by way of remission or the trading liability ceased to exist in future years by treating the amount received by the assessed or the value of the benefit accruing to him to be a deemed profit or gain of business, profession or vocation and as having accrued during the year in which the amount was received or the benefit accrued. The learned counsel for the assessed urged that the amount sought to be taxed in the present case did not fall within the mischief of Sub-section (2A) of Section 10 of the Act, inasmuch as the loss allowed in the previous assessment was not received in cash and according to him the loss allowed was not an expenditure or a trading liability. It was urged that expenditure is something which is incurred and paid off while trading liability must be construed to be an expenditure incurred but not paid off and in the present case the loss previously allowed could not fall under these two heads, the value of the remission of which could be added to the income for the assessment year. The whole crux of the argument really is that the remission allowed by the bank was on capital account and not on trading account while the loss allowed in the previous assessment was on trading account and so remission on capital account could not be taken into account for being offset against the loss in the trading account. To our mind the argument does not have much force. It is correct that the loss allowed for the financial year 1952-53 was in the trading account. What has to be kept in mind is that the assessed maintains the account according to mercantile system, and profits or losses are carried over to the balance-sheet in accordance with the profit and loss accounts made by him. It is manifest from the transaction as it took place, that initially in the balance-sheet Rs. 10,15,894 had to be shown as a liability of the assessed being the loan from the bank and in the trading account the value of the goods in stock were shown at the market price. The bank was a creditor of the assessed throughout till the compromise decree stood satisfied. The loan was taken for the purposes of trading activity and when the creditor waived his right to recover the amount due to him on receipt of part payment the balance amount of which the remission was given by the creditor would amount to giving remission of a trading liability. There is a direct and proximate relationship between the loan advanced by the bank, the remission given by it and the business for which the loan had been advanced by the bank. Once this is established the remission must be held to be covered by Section 10(2A). We are fortified in coming to this conclusion by the recent decision of the Supreme Court in Rajputana Trading Co. Ltd. v. Commissioner of Income-tax, . In that case a loss or liability arising out of speculative business of the assessed was allowed as a deduction. Later on, the creditor waived his right to recover the amount or the debt, and this amount was held to be the deemed income of the assessed in the speculative business and liable to tax on the ground of the deemed income and the business having fairly direct and proximate relationship. As was observed by Grover J. in this case:
" It is apparent that one of the main purposes of the above provision which has been now re-enacted with some changes in Section 41 of the Income-tax Act, 1961, was to catch cases of remission of debt by creditors in respect of earlier trading items which were allowed as deduction ... In cases of the present kind there is a fairly direct and proximate relationship between the income as deemed to be arising under Section 10(2A) and the speculative business which the assessed was carrying on. This income could not and would not have arisen but for the fact that in the speculative business the assessed had claimed deductions on account of liabilities for speculation differences."
7. There is one other aspect which may be noticed and which is the total investment made by the assessed by taking a loan of Rs. 10,15,894 but this investment was not really made by the assessed himself as money for the purchase of staple fibres was paid by the bank. The bank ultimately restricted its claim to only Rs. 7,91,906-2-6. After receiving the amount of money lying in deposit in court by sale of the staple fibres in stock, the bank gave the assessed a remission of Rs. 5,64,200. Thus, the total investment of the assessed, even if it could be regarded as its investment, did not ultimately come to more than Rs. 4,51,694. The assessed was allowed a loss of Rs. 2,37,699 in the assessment year 1953-54 and a loss of Rs. 4,56,289 in the assessment year 1957-58. Thus, the total loss allowed to the assessed was of Rs. 6,93,788 which came to much more than its supposed investment. In this view of the matter also, we feel that it was such contingencies which were in the contemplation of the legislature when it enacted Sub-section (2A) of Section 10 of the Act; otherwise an assessed could really make profit on getting remission from his creditor after having been allowed losses in the previous years.
8. Thus, on the facts and circumstances of the case, it is manifest that the amount owed by the assessed to the bank was a trading liability and a remission in that received by the assessed would attract the provisions of Sub-section (2A) of Section 10 of the Act inasmuch as the assessed had received deduction for losses in a previous year of assessment.
9. Our answer, therefore, to the question posed must be in the affirmative and so against the assessed and in favor of the revenue.
10. In the circumstances, we make no order as to costs.
Question answered in the affirmative.