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TMI Blog1970 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pressed to do so, the bank brought a suit for the recovery of its dues which was decreed in its favour 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecree 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. 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 or are deemed to be received in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 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 assessee could get and created liability to assessment on the fictional or notional income in case the previously allowed loss or expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 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 trad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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