Income Tax Appellate Tribunal - Nagpur
Agarchand Chunnilal vs Commissioner Of Income-Tax, C. P. And ... on 16 December, 1947
Equivalent citations: [1948]16ITR430(NAG)
JUDGMENT
POLLOCK, J. - This is a reference under Section 66 (1) of the Income-tax Act. The assessee deals in gold, silver grain and cotton etc., and as a result apparently of forward contracts entered into through Messrs. Gangaram Asaram of Bombay he became heavily indebted to that firm. The debt due to Gangaram Asaram was show in the assessees accounts, and interest on the debt was credited to Gangaram Asaram in the accounts of each year. For the purposes of Income-tax assessment the interest so credited was deducted from the assessees profits. The assessment year with which we are concerned is the year 1943-44, and the assessment has to be made on the income for the year ending at Diwali 1942. In that year Rs. 1,48,242 was shown as due to Gangaram Asaram, but a settlement was arrived at between Gangaram and the assessee by which the assessee was given a remission of Rs. 54,225, the balance being partly paid in cash and adjusted by hawalas; and the debt being thus reduced to Rs. 40,000 was carried forward in the following year. The question referred to us is :-
"Whether, in the circumstances of the case, the sum of Rs. 54,225 has been rightly treated as a revenue receipt of the year of account."
The Income-tax authorities have held that this item of Rs. 54,225 is a revenue receipt and not a capital receipt. The Income-tax Appellate Tribunal remarked :-
"The fact therefore remains that a certain remission was granted by the creditor in the account which included revenue items which have been previously claimed by the assessee in his trading account and allowed by the department. It is common knowledge that traders do grant remission to each other at the time of the settlement of an account. The remission may relate to the charging of higher rate of interest than agreed upon or for some credit entries which have been wrongly entered in the account. During the preceding years assessments large sums on account of interest have been credited to the account of the creditor and allowed by the department as a revenue deduction from the appellants assessable income."
In the five years ending with 1942, Rs. 41,247 was credited to the account of Gangaram as interest. There is no finding, or apparently evidence, that the amount was inflated or bogus or did not represent the true business and was a book-keeping method to diminish their revenue or anything of that kind, in the words of Rowlatt, J., in British Mexican Petroleum Company, Ltd. v. Commissioners of Inland Revenue, and it appears to us that these two cases very similar. The British Mexican Petroleum Company Limited became heavily indebted to other firms, and a large part of the debt was written off. That debt had been set off as against the profits in the previous year and the Commissioner of Inland Revenue claimed that they were entitled to re-open the assessment of the previous year. In the alternative they claimed that the assessee company should be required to enter the sum remitted as a credit item in its accounts for the period in which it was remitted. Both those claims failed. Rowlatt, J., remarked at page 585 :-
"How on earth the forgiveness in that year of a past indebtedness can add to those profits I cannot understand."
Lord Thankerton at page 592 said :-
"The appellants alternative contention, which was no seriously pressed by the Attorney-General is equally unsound, in my opinion. I am unable to see how the release from a liability, which liability has been finally dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted."
So also Lord Macmillana at page 593 :-
"I cannot see how the extent to which a debt is forgiven can become a credit item in the trading account for the period within which the concession is made."
The case on which the Income-tax Appellate Tribunal has relied, In re Union Bank of Bijapur and Sholapur Ltd., appears to us to be clearly distinguishable, because in that case there was an actual cash receipt in the year of assessment. In our opinion, therefore, the answer to the question referred to us is "No". The applicant will be entitled to his costs in this Court and a counsels fee of Rs. 100.
Reference answered in the negative.