INTERNATIONAL IMEX AGENTS PRIVATE LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference under S. 66(1) of the IT Act, 1922, has been made by the Tribunal (Delhi Bench "C") on being moved by the assessee which is a private limited company. The assessment year concerned is 1958 -59, the relevant financial year being 1957 -58.

(2.) THE facts leading up to this reference are that the assessee - company purchased 825 bales of staple fibres from a manufacturer in Japan during the accounting year 1952 -53 for a total sum of Rs. 10,15,894. The entire cost of this staple fibres purchased by the assessee was met by the Mercantile Bank of India, Chandni Chowk Branch, Delhi, which had opened a letter of credit in favour of the exporter in Japan. After the import of the staple fibres, since the same was hypothecated with the bank, it was kept in the bank's godowns and released for sale by the bank. In the 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 asst. 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 asst. 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 future interest on the decretal amount at the rate of 6 per cent. per annum from the date of the decree till realisation. There was, however, a proviso in the decree and that was that the whole decree would be deemed to have been satisfied by the recovery of Rs. 2,60,586 which was lying in deposit in Court, being the sale proceeds of the balance of the staple fibres which had been sold through Court by a receiver. It may be mentioned that the decree was a compromise decree. The bank took this amount of Rs. 2,60,586 -3 -0 and the decree thus stood fully satisfied. In this way the assessee received a remission of Rs. 5,64,200. The ITO sought to tax this remission under S. 10(2A) of the IT Act, 1922, for the relevant year. In the return for the asst. yr. 1958 -59, the relevant financial year being 1957 -58, the assessee had claimed a loss of Rs. 4,56,289 on the sale of staple fibres by taking the sale proceeds of the stock at Rs. 2,60,586 against the value of the opening stock taken from year to year since 1953 at Rs. 7,16,875. The accounts of the assessee were maintained in the mercantile system and the loss was claimed on the basis of the profit and loss account made by the assessee in the above fashion. The ITO allowed this loss but added back the sum of Rs. 5,64,200 unrealised by the bank treating it to be a remission of trading liability falling within the purview of S. 10(2A) of the Act. Aggrieved by the assessment, the assessee appealed to the AAC but the appeal was dismissed. A further appeal to the Tribunal was also dismissed. Thereupon, the assessee moved the Tribunal for stating a case to the High Court and the Tribunal agreeing that a question of law did arise, in the facts and circumstances of the case, has referred the following question to us :

(3.) AT this stage it will be advantageous to read certain relevant provisions of the IT Act, 1922. The first provision which may be noticed is S. 4 of the Act, which is the charging section, and provides as under :