SITALPUR SUGAR WORKS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case, the assessee is a public limited company called Sitalpur Sugar Works Limited which carried on the business of manufacture of sugar. The assessee follows the mercantile system of accounting. The assessment year is 1945 -46 and the accounting year of the assessee is the year ending with 30 -6 -1944. In 1936 the company bought a second hand sugar manufacturing machine from Java. After working the machinery for two years the company resolved to sell the machinery. On 30 -8 -1938 a contract was executed between the company and Lakshmiji Sugar Mills. It was agreed that the machinery would be sold for a sum of Rs. 5,15,000 and that half of the amount will be paid by 31 -3 -1939 and the other half will be paid in equal instalments on 31 -3 -1940 and on 31 -3 -1941. There was a clause in the contract that these two instalments would carry interest at the rate of 5 per cent. Lakshmiji Sugar Mills also agreed that for these two instalments they would furnish a guarantee or execute a mortgage bond. On 31 -3 -1939 Lakshmiji Sugar Mills paid half the sale price as agreed upon. For the balance of the purchase price Lakshmiji Sugar Mills executed a mortgage of the machinery and agreed to pay interest at the rate of 5 per cent. The assessee treated the amount of Rs. 2,57,500 as loan in its books of account and according to the mercantile system adjusted interest every year in its books of account. The amount of interest adjusted is shown below : Year of account. Amount of interest adjusted and assessed. 1938. -39 3,218/12/ - 1939. -40 13,035/15/3 1940. -41 12,714/ -/9 1941. -42 12,875/ -/ - 41,843/12/ -. The interest shown in the books of account was assessed to income -tax for the respective years. Lakshmiji Sugar Mills however did not pay the interest agreed upon. In 1941 the assessee filed a suit on the mortgage. The parties however entered into a compromise and Lakshmiji Sugar Mills paid Rs. 2,66,000 in full satisfaction of the claim due on the mortgage bond. The total amount claimed by the assessee was Rs. 2,99,343 and the result of the compromise was that the assessee had to remit a sum of Rs. 33,343. The compromise was effected during the accounting year and the assessee claimed that the remission of Rs. 33,343 should be treated as a bad debt or as an irrecoverable loan under S. 10(2)(xi), Income -tax Act. The claim was rejected by the Income -tax officer on the ground that the debt had not arisen in the course of the assessee's business. An appeal was taken on behalf of the assessee before the Appellate Assistant Commissioner who allowed the appeal holding that the amount of Rs. 33,343 should be allowed as a bad debt for the purpose of assessment of income -tax. The Income Tax Department preferred an appeal to the Income Tax Appellate Tribunal who set aside the order of the Appellate Assistant Commissioner and held that the assessee was not entitled to any deduction under S. 10(2)(xi) of the Act. The reason given by the Appellate Tribunal was that the transaction of the sale of machinery was not a transaction of the assessee in carrying on his trade but was in the character of an investment.

(2.) IN this state of facts the Income Tax Appellate Tribunal has referred the following question of law for the opinion of the High Court : "Whether, the department having previously taxed the interest income of Rs. 41,843/12/ - during the years 1938 -39 to 1941 -42, on mercantile basis as business income, the amount of Rs. 33,343 realised short subsequently as interest can be allowed as a deduction -

(3.) THIS view is borne out by a decision of the English Court in - 'Commissioners of Inland Revenue v. Dale Steamship Co. Ltd.', (1924) 12 Tax Cas 712 (C). In that case, the assessee company was formed inter alia, (a) to acquire steamships and other vessels, (b) to build, charter, let out on hire and trade with ships, (c) to carry on business as ship -owners, merchants, etc., and (d) to invest and deal with the moneys of the Company not immediately required as might from time to time be determined. The Company at the outbreak of the war owned and traded with five ships. Of these one was detained by the enemy at Hamburg, one was sold, and the remaining three were sunk during the war. The proceeds of sale and the insurance moneys received were all placed on deposit or invested in easily realisable investments in order to facilitate the resumption of trading or winding up. It was held by Rowlatt, J., that the Company was carrying on a trade or business. In reaching this decision Rowlatt, J., relied upon the authority of - 'Commissioner of Inland Revenue v. South Behar Railway Co.', (1924) 12 Tax Cas 657 (D).