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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1482 of 1972.

Appeal by Special Leave from the Judgment and order dated 20th September 1971 of the Punjab and Haryana High Court in Income Tax Reference No. 12/71.

Hardayal Hardy, K. C. Dua and Miss A. Suhhashini for the Appellant.

G. C. Sharma, P. A. Francis, Anoop Sharma and P. K. Mukherjee for the Respondent.

The Judgment of the Court was delivered by BHAGWATI, J.- This appeal by special leave arises out of an assessment to income-tax made on M/s Groz Backert Saboo Ltd. (hereinafter referred to as the assessee) for the assessment year 1962-63 the corresponding accounting year being the financial year being 31 st March, 1962. The assessee set up in collaboration with M/s Theodor Groz & Soehne and Ernst Backert, West Germany (hereinafter referred to as the West German Collaborators) a factory for fabrication and manufacture of hosiery needles and it was not disputed on behalf of the assessee that this factory started business sometime prior to the commencement of the relevant year of account. It appears that in the early part of the relevant accounting year, the assessee received from the West German Collaborators consignment of machinery costing Rs. 9,45.545/- and along with this consignment, the West German Collaborators also sent to the assessee certain goods free of cost. These goods consisted partly of raw- materials and partly of semi-finished needles at various stages of manufacture. The invoice in respect of this consignment was dated 4th April, 1961 and it showed only the price of the machinery consigned to the assessee and did not make any mention of the raw materials and semi-finished needles supplied to the assessee along with this consignment, since these goods were supplied free of cost and no charge was made in respect of the same.

The Custom Authorities raised objection in respect of these goods and a separate invoice had, therefore, to be sent by the West German Collaborators showing Rs. 44,448.20 as the value of the raw-materials, namely, wire and strip and Rs. 30,000/- as the value of the semi-finished needles supplied to the assessee. These goods were not entered in the books of account of the business immediately on receipt by the assessee but they were brought into the books for the first time on 30th September, 1961 by making the following entries: Rs. 44,448.20 debited to the account of "Wire and Strip" and credited to the "Wire and Strip Gift Account" and Rs. 30,000/- debited to the account of "Semi-processed Needles" and credited to the "Semi-processed Needles Gift Account". The assesses utilised these goods in the manufacture of finished products and sold the same in the market and the sale proceeds received by the assessee were credited in the trading account maintained in the books of account of the business, since they represented revenue receipts arising from the sale of the finished products. On 31st March, 1962, being the last date of the accounting year, the assessee closed the "Wire and Strip Gift Account"

1. Whether on the facts and in the circumstances of the case, the sum of Rs. 74,448.20 being the actual value of raw material received from German Collaborators free of cost represented Revenue receipt ?

2. Whether on the facts and in the circumstances of the case, the amount of Rs. 74,448/- being the actual value of raw material received free of cost from German collaborators was rightly debited at that value to the revenue account ?

The High Court misapprehended the true nature and scope of the controversy between parties and seemed to proceed on the erroneous impression that what the Tribunal had held was that the raw materials and semi-finished needles received by the assessee from the West German Collaborators constituted revenue receipt and its value was, therefore, liable to be taxed as income in the hands of the assessee. The High Court held that the value of these goods could not be treated as revenue receipt because they had been received by way of gift and in any even, even if they constituted revenue receipt, they could "in no sense be income" since they were take out of the ambit of taxability by sub-section (3) of section 10 of the Income Tax Act, 1961. The High Court accordingly answered the questions referred it by the Tribunal in favour of the assessee and against the Revenue. The Revenue thereupon brought the present appeal with special leave obtained from this Court.

which would clearly show that these goods were treated by the assessee as having been introduced in the business as part of its stock at their market value represented by the sums of Rs. 44,448.20 and Rs. 30,000/-. The position was no different than what it would have been if, instead of giving these raw-materials and semi-finished needles to the assessee free of cost, the West German Collaborators had gifted the sums of Rs. 44,448.20 and Rs. 30,0000/- to the assessee and the assessee had introduced these amounts in the business and an identical quantity of raw materials and semi-finished needles had been purchased for the business with these amounts. The cost of raw-materials and semi- finished needles thus purchased would have been clearly liable to be deducted from the sale proceeds of the finished products manufactured out of them in determining the profit of the business. Would the position then be different if instead, the West German Collaborators gave these raw materials and semi-finished needles to the assessee free of cost and the assessee introduced them in the business as part of its stock. We do not sec and distinction in principle between these two types of cases and we are clearly of the view that the cost of these law-materials and semi-finished needles to the business represented by the sums of Rs. 44,448.00 and Rs. 30,000/- debited in the respective accounts of "Wire and Strip" and "Semi-Processed Needles" was liable to be deducted from the sale proceeds of the finished products in arriving at the profit of the business. It is true that initially on 30th September, 1961 the credit entries for the sums of Rs. 44,448.20 and Rs. 30,000 were made in "Wire and Strip Gift Account" and "Semi- processed Needles Gift Account" respectively and it was only on the last date of the ac count year, namely, 31st March, 1962 that these amounts were trans-