Gulati, J. - (1.) THIS is a reference under Section 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, Kanpur.
(2.) THE assessee is a registered dealer and deals in sugar. THE assessment year involved is 1957-58 with the previous year ending on 12th April, 1957. During the previous year it purchased 5,200 shares of Rohtas Industries at their face value of Rs. 52,000. THEse shares were sold for Rs. 1,16,909 during the previous year on August 23, 1956. THEre was thus a surplus of Rs. 64,909, which the assessee claimed to be a capital gain. THE Income-tax Officer held that the surplus earned by the assessee was profit arising from the business. THE Appellate Assistant Commissioner of Income-tax agreed with this finding of the Income-tax Officer. On second appeal the Income-tax Appellate Tribunal accepted the assessee's contention and held that the surplus arising from the sale of shares was capital gain. Another controversy that arose relates to the forfeiture" of security deposit of Rs. 77,290 by the Duputy Director (Food), Hyderabad. The assessee had entered into a contract with the Deputy Director (Food) for the purchase of rice and had deposited Rs. 77,290 as security for the due performance of the contract. The assessee was unable to perform the contract and the security was forfeited by the Deputy Director (Food). The assessee then started litigation for the recovery of the forfeited security. The matter finally went up to the Supreme Court which referred the matter to the arbitration of the Regional Director (Food), who by his award dated September 6, 1965, upheld the forfeiture of the security. The assessee claimed a sum of Rs. 77,290 as a business loss in the assessment year in question. The claim was disallowed by the Income-tax Officer as also by the Appellate Assistant Commissioner of Income-tax on appeal. The Income-tax Tribunal, however, on second appeal accepted the assessee's claim and held that the loss was properly allowable in the assessment year in question. The Commissioner is aggrieved and at his instance the following two questions have been referred to us for opinion : " (1) Whether, on the facts and in the circumstances of the case, the forfeiture of security deposit of Rs. 77,290 was correctly treated as an allowable loss in the hands of the assessee for the assessment year 1957-58 ?" (2) Whether, on the facts and in the circumstances of the case, the surplus realised by the assessee on sale of certain shares during the previous year was rightly treated as a capital gain ? In order to answer the first question, two points have to be decided, (1) whether the loss on account of forfeiture of security was a revenue loss or a loss of capital nature and (2) whether'the loss could be allowed in the assessment year 1957-58. There is not much difficulty on the first point. The security deposit was made by the assessee in its capacity as a person carrying on business. The contract for the purchase of rice was a business contract entered into with a view to earning profits. It was not a deposit made in order to secure any capital asset or an advantage of enduring nature. As such the loss clearly could be attributed to the business carried on by the assessee. The Bombay High Court in a similar case reported as Narandas Mathuradas and Co. v. Commissioner of Income-tax, 1959 35 ITR 461 has held that forfeiture of security of a businessman deposited for properly carrying out a contract would be a trading loss and the assessee would be entitled to deduct such loss to arrive at the true profits of his business. We are in respectful agreement with this view.
(3.) THE next question to be considered is as to whether the loss could be claimed in the assessment for the year 1957-58. Here again there is no dispute that the security was forfeited by the Deputy Director (Food) by his letter dated November 1, 1956, which date is within the previous year for the assessment year 1957-58. If nothing else had happened the loss would have been allowable in the assessment year 1957-58 but it appears that the assessee did not accept the forfeiture and took legal steps to recover the amount from the Deputy Director. THE matter ultimately was finally decided on September 6, 1965, as mentioned earlier. THE contention of the department is that the loss could not be said to have accrued until the final award on September 6, 1965, by the Regional Director (Food) and, as such, the assessee could not be said to have suffered loss in the relevant previous year. Under Section 10(1) of the Indian Income-tax Act, 1922, which governs the present case, tax is payable by an assessee in respect of profits and gains of a business carried on by him. In computing such profits and gains the loss, if any, suffered in carrying on the business is to be deducted out of the profits and thereafter under Sub-section (2) other overhead expenses incurred in carrying on the business are also deducted. The computation of the net profit is to be made on the basis of the method of accounting followed by an assessee. If he follows the mercantile system, the loss becomes deductible at the point when it accrues. Its allowance need not be postponed until it is paid. In order, however, that a loss may be allowed to be deducted, two conditions have to be satisfied : (i) that the loss or the liability should have accrued in the relevant previous year; and (ii) It should be an ascertained liability. ;