COMMISSIONER OF INCOME TAX Vs. PHOOL CHAND JIWAN RAM

JUDGEMENT

(1.) THIS is a reference under S. 66(2) Indian IT Act, 1922. The question referred is in the following terms :

(2.) THE reference arises out of the assessment proceedings for the asst. year 1957 -58, the relevant previous year being 1956 -57, in the case of the firm, M/s Phool Chand Jiwan Ram. The firm carries on, inter alia, a business in the purchase and sale of cotton piece -goods. In the books of the firm there was an account in the name of M/s Janki Dass Banarsi Das, Delhi. According to the entries in this account, the assessee -firm owed M/s Janki Dass Banarsi Dass a sum of Rs. 1,13,828. On 1st April, 1956, the above account was squared up. The balance of Rs. 1,13,828 was transferred to the accounts of the two partners of the assessee - firm and each of the partners was credited with a sum of Rs. 56,914. The ITO was of opinion that as a result of the above transaction the sum of Rs. 1,13,828 became liable to tax under S. 10(2A) of the Indian IT Act, 1922. He, therefore, made an addition of Rs. 1,13,828 to the income of the assessee -firm. The assessee preferred an appeal to the AAC. The AAC pointed out that the provisions of S. 10(2A) could be applied only if, (1) the amount remitted represented a trading liability, and (2) the whole or part of it had been allowed as a deduction in the assessment of the assessee in an earlier year. He, therefore, remanded the matter to the ITO for making enquiries in this regard. The ITO sent a detailed remand report setting out the statement of account of M/s Janki Dass Banarsi Dass in the books of account of the assessee from the beginning. On scrutinising this account the AAC found that the assessee had purchased goods from M/s Janki Dass Banarsi Dass of the total value of Rs. 29,258. Only this amount, he found, could be said to have been allowed to the assessee in the assessment in the earlier years. The balance, the AAC found, represented loans from M/s Janki Dass Banarsi Dass which had not been paid back. But since they did not represent trading liabilities and were not allowed as deductions, they could not be added back. The AAC, therefore, restricted the addition to Rs. 29,258.

(3.) THE point that is urged on behalf of the Department before us, as was also urged before the Tribunal, was slightly different. It was pointed out that for the period from 12th Nov., 1947 to 30th Oct., 1948, the assessee -firm had purchased cloth worth Rs. 3,75,120 from a firm in Bombay styled as M/s Narsinghdass Banarsidass. On the last day of the accounting year, i.e., 30th Oct., 1948, this account had been debited with a sum of Rs. 1,80,000 representing the amount paid to that firm by M/s Janki Dass Banarsi Dass on behalf of the assessee -firm. The argument is that to the extent the account of M/s Janki Dass Banarsi Dass reflects a credit of Rs. 1,80,000 on account of this cash payment it should also be treated as a payment to M/s Janki Dass Banarsi Dass for the purchase of cloth from the Bombay firm and, therefore, is in effect representing a trading liability of the assessee -firm. We agree with the Tribunal that this construction of the transaction is far - fetched. The purchase of cloth between 12th Nov., 1947 and 30th Oct., 1948, was effected by the assessee from the Bombay firm. The debt owed by the assessee to the Bombay firm was a trading debt and that was no doubt allowed for the purpose of income -tax. However, so far as the account of M/s Janki Dass Banarsi Dass is concerned, the liability of the assessee to this party arose because the above party had paid a sum of Rs. 1,80,000 to the Bombay firm on the assessee's account. In other words, vis -a -vis the assessee and M/s Janki Dass Banarsi Dass, this was not a payment made for the purchase of stock -in - trade; it was a credit in respect of an amount borrowed by the assessee from M/s Janki Dass Banarsi Dass in order to discharge its liability to the Bombay firm. The sum of Rs. 1,80,000 which is reflected in the account of M/s Janki Dass Banarsi Dass could not, therefore, be described as a liability on trading account. As rightly pointed out by the Tribunal, S. 10(2A) enacts a statutory fiction. The operation of this fiction should be limited to the language of the section. It is only where the assessee has incurred a trading liability and this trading liability has been allowed in earlier years that S. 10(2A) is attracted on the occasion when the trading liability is either remitted or ceased to exist. In our opinion, the Tribunal was right in coming to the conclusion that the sum of Rs. 1,80,000 did not represent a trading liability owed by the assessee to M/s Janki Dass Banarsi Dass, nor had this amount of liability been allowed as a deduction in earlier assessments.