H.N. Seth, J. - (1.) AT the instance of the assessee and under the directions of this court, the Income-tax Appellate Tribunal, Allahabad, has stated the case and referred the following question for the opinion of this court : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the sum of Rs. 5,408 and Rs. 1,071 as income of the assessee earned in the previous year relevant to the assessment year 1963-64 ? "
(2.) THE assessee, Messrs. Bhagwat Prasad and Co., is a registered firm carrying on business of dealing in cloth on wholesale basis at Kanpur. THE Income-tax Officer found the following two amounts in the balance-sheet of the assessee for the relevant accounting year ending on Asarh Badi 2, Sambat 2019, i.e., sometime in June/July, 1962 : JUDGEMENT_111_ITR99_1975Html1.htm Investigation into the account books of the assessee revealed that a sum of Rs. 5,400 was received by it in the year 1951-52 from two of its customers as advance for supplying goods to them. The assessee neither supplied the goods nor returned the advance received by it to its customers. The Income-tax Officer held that as the limitation for claiming refund of the aforesaid amount had expired, it had to be treated as the assessee's income under Section 41 of the Income-tax Act, 1961, earned in the accounting year relevant to the assessment year 1963-64. So far as the sum of Rs. 1,071 was concerned, it was an old balance brought forward in respect of interest charged from one Messrs. Bhagwan Prasad Kashi Prasad of Kanpur. The corresponding credit of the said amount was not given in the profit and loss account but was taken directly to the balance-sheet under the head "reserve byajkhata". The Income-tax Officer treated this amount also as the assessee's taxable income on the ground that it was a fictitious liability. In the result, he treated both items as income of the assessee for the assessment year 1963-64. Being aggrieved by the decision of the Income-tax Officer, the assessee went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the amount of Rs. 5,408 could not be taxed under Section 41 of the Act as no allowance or deduction in respect of the same had been made in any earlier assessment year. As regards the second item of Rs. 1,071, the Appellate Assistant Commissioner observed that the Income-tax Officer had not stated the facts correctly. The correct facts were that the assessee had trade relations with Messrs. Bhagwan Das Kashi Prasad of Kanpur. In the books of the assessee an account of the above named party appeared in different accounting years, viz., 2014, 2015, 2016, 2016-2017 and 2017-2018. In the beginning of the accounting year there was already a debit balance of Rs. 4,215.48 in the account of Bhagwan Prasad Kashi Prasad. Before the end of the accounting year, which was relevant to the assessment year 1962-63, the account of the debtor had been debited with a sum of Rs. 1,071 on account of interest. This amount of interest had not been taken by the assessee to its profit and loss account, but, instead, in the balance-sheet the assessee showed it under the head "reserve interest account". The Appellate Assistant Commissioner therefore, opined that at the most what the Income-tax Officer could have done was to treat this amount as the assessee's income earned in the previous year relevant to the assessment year 1962-63 and to tax it accordingly. But then he was not justified in adding it in the assessee's income earned during the previous year relevant to the assessment year 1963-64. Accordingly, he modified the assessment made by the Income-tax Officer and directed deletion of the aforementioned two amounts.
(3.) BEING aggrieved by the decision of the Appellate Assistant Commissioner, the Income-tax Officer filed an appeal before the Appellate Tribunal. The Tribunal found that as the assessee's liability to refund the advance of Rs. 5,408 received by it from its customers had ceased to exist, it was at liberty to appropriate that amount to its revenues. This amount was, therefore, to be treated as the assessee's income as provided in Section 41 of the Income-tax Act, 1961. It was immaterial that, instead of appropriating the amount, the assessee continued to keep it in its reserve khata. Regarding Rs. 1,071 the Tribunal found that in the year subsequent to that relevant for the assessment year in question, the assessee entered into a compromise with Messrs. Bhagwan Das Kashi Prasad by virtue of which it received one-fourth of the amount outstanding on the date of the compromise in full and final satisfaction of its claim. Notwithstanding the aforesaid compromise, and the fact that the assessee did not realise this amount in the subsequent year it represented the assessee's income liable to be taxed. In the result, the Tribunal reversed the decision of the Appellate Assistant Commissioner and restored the assessment order made by the Income-tax Officer. We will first deal with the question whether the Tribunal was justified, in treating the sum of Rs. 5,408 as the assessee's income. As stated earlier, this sum represented the amount of advance received by the assessee for supplying goods to its customers. The assessee neither supplied these goods nor returned the advance received by him to its customers and by passage of time the right of the customers to claim it back from the assessee became barred by time. According to the revenue, when the assessee received this amount as advance, it became its trading liability which continued till such time as the goods covered by this amount were supplied to the customers or, in case they could not be supplied, the amount was returned to the customers. When the right of the customers to claim the aforesaid amount back from the assessee became barred by time the trading liability ceased and as provided in Section 41 of the Income-tax Act, 1961, it would be deemed to be the assessee's profits or gains of the business.;