TMI Blog1970 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ire cost of this staple fibres purchased by the assessee was met by the Mercantile Bank of India, Chandni Chowk Branch, Delhi, which had opened a letter of credit in favour 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 assessee 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. For the assessment year 1953-54, the assessee 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 assessee had received in selling 50 bales of these goods. The loss, as claimed by the assessee, 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 assessee. As, however, the assessee could not pay the balance of the money remaining due to the bank in spite of being pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty liable to tax under section 10(2A) of the Income-tax-Act, 1922 ? " The learned counsel for the assessee has urged that a distinction must be kept between the transaction with the bank in which the assessee took a loan of Rs. 10,15,894 from the bank and in which transaction the debt that the assessee owed to the bank was settled by means of the compromise decree and the trading loss that the assessee suffered in the sale of staple fibres. In other words, the loss allowed to the assessee 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 assessee 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 favour of the bank. The case of the revenue on the other hand is that there was no investment by the assessee as the entire investment was done by the bank and so it was not a remission of capital liability but of trading liability. At this stage it will be advantageous to read certain relevant provisions of the Income-tax Act, 1922. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year. " 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. 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 assessee 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 and Orient Corporation v. Commissioner of Income-tax . The effect of this was that an assessee 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 ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 assessee 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 assessee 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 assessee in the speculative business and liable to tax on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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