Sabyasachi Mukherjee, J. - (1.) In this reference under Sec. 256(1) of the I.T. Act, 1961, for the assessment year 1974 -75, the following questions have been referred to us : "(1) Whether, on the facts and in the circumstances of the case, the amount of Rs. 44,937 credited in the printed accounts as the miscellaneous income of the assessee was rightly subjected to tax as the income of the assessee during the assessment year in question ? (ii) Whether the amount of Rs. 6,077 incurred by the assessee in connection with the proposed amalgamation with another company, which never took place, was of a capital nature and could not be allowed as a revenue deduction ? (iii) Whether because of the enhancement of assessment as a result of directions issued by the Inspecting Assistant Commissioner under Sec. 144B(4) on items not covered by the draft assessment order, the assessment became altogether invalid, even though the impugned enhancement had been deleted on appeal by the Commissioner of Income Tax (Appeals) ?:"
(2.) It appears that the assessee filed a return disclosing income of Rs. 4,70,830. The ITO forwarded a draft order under Sec. 144B(1) of the I.T. Act proposing assessment on a total income of Rs. 5,75,656. On receipt of directions, the assessment was completed on an income of Rs. 6,61,561, because while the ITO proposed to allow a deduction of Rs. 3,51,105 under Sec. 80M the same was reduced to Rs. 2,65,300 under the directions of the IAC, though this matter was not the subject -matter of reference to him. We shall deal with this aspect of the matter a little later.
(3.) So far as the first question is concerned, it would be necessary to refer to certain basic facts. It appears that though the amount of Rs. 44,937 was credited in the printed accounts as miscellaneous income, it was sought to be claimed that such sum should not be considered as part of the assessee's total income, because this represented surplus of credit balance in the insurance premium account and was not part of its commission accruing on account of business in insurance agency. The assessee acted as an insurance agent for general insurance for the J. K. Group of companies. Over the years, there appeared to have been certain credits, if the account copy furnished for this year was any basis, mostly in the names of National Insurance Co. and Hindusthan Commercial Bank, which had then ceased as claims of dues by the said companies. These two were also formerly of the J. K. Group. After their integration due to nationalisation, there was hardly any doubt that these sums shown to the credit, when the return of the year came, had become the property of the assessee, according to the ITO. The assessee's explanation regarding the actual transactions providing the source of these credits was somewhat garbled and vague. The ITO was of the view that if these sums were in fact a spill -over of reimbursements received from its constituents, because the liability of such constituents to pay premia were undertaken in a timely manner by the assessee itself, such sums ought to be in every sense the income of the assessee -company. The ITO further held that the problem got somewhat complicated because strict accounting for this as well as other transactions between the assessee, its constituents and the insurance companies at best could be termed as expedient, considering that they all belonged to the same group. In the opinion of the ITO, the assessee was trying to make out a case where none existed and the amount was rightly taken in the account as income.;