Deb, J. - (1.) In this reference under Section 66(1) of the Indian Income-tax Act, 1922, we are concerned with the following question of law : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,68,545 being the balance to the credit of the Pakistan duty account can be assessed to tax as the income of the assessment year 1955-56, because of the distribution of this amount among the partners in the relevant previous year ?"
(2.) This reference relates to the assessment year 1955-56. The relevant previous year is 2011 R. N. ending on March 31, 1955. The assessee is a registered firm and follows the mercantile system of accounting. In R. N. years 2004 and 2005, relevant for the assessment years 1948-49 and 1949-50, the assessee purchased jute in Pakistan and sold them to the merchants in India and abroad. On November 14, 1947, a duty on raw jute exported from Pakistan was imposed by the Government of Pakistan: Accordingly, in those years, the assessee in terms of Section 61-A of the Indian Sale of Goods Act, realised and also paid the prices as increased by such duty on such goods and entered those sums in a separate account named "Pakistan Duty Account" in which there was a credit balance of Rs. 2,68,543-6-3 at the end of 2005 R. N. year, but the assessee did not bring those sums in its profit and loss account in those years. Some time after 2005 R. N. year the assessee closed its business in Pakistan and thereafter in 2011 R.N. year distributed the said amount among the partners due to the retirement of one of its partners.
(3.) The Income-tax Officer included the said amount as the income of the assessee in 2011 R.N. year by rejecting the plea of the assessee, namely, that those sums were not its income of that year in the following terms : "A reference to books and records shows that the assessee realised the so-called duty from foreign buyers on jute consigned to them and hence the the amount forms a part and parcel of the sale proceeds. Keeping the amount in a separate account does not alter its nature. The duty was realised after partition. Admittedly, there has been no claims from the Pakistan Government in respect of the amount till to date. Except for the general circular there was no specific order from the Pakistan Government claiming the amount from the assessee. It is apparent that the liability no longer exists. The assessee's plea that the amount was adjusted in the partners' accounts because one of the partners left the firm, does not carry much weight, because......the assessee firm has treated the amount as income of the year under consideration by transferring it to the partners' accounts.";