PETITIONER: RAMESH NARAIN SAXENA & ORS. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX,NEW DELHI DATE OF JUDGMENT: 22/04/1996 BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) AHMAD SAGHIR S. (J) CITATION: 1996 AIR 1824 JT 1996 (5) 529 1996 SCALE (3)693 ACT: HEADNOTE: JUDGMENT:
J U D G M E N T
B.P. JEEVAN REDDY,J.
This appeal is preferred against the judgment of the
Delhi High Court answering the question referred at the
instance of the assessee against him. The question stated
under Section 256(1) of Indian Income Tax Act, 1922 was
“whether on the facts and circumstances of the case, the
Tribunal was right in law in adding Rs.1,13,092/- to the
total income of assessee in the accounting year ending 31-3-
1961 “. The relevant assessment year is 1961-62.
The appellant- assessee was exporter of hides and
skins. During the accounting year relevant to the Assessment
Year 1957-58, he had pledged certain quantity of goat skins
with the National Grindlay Bank. The value of the goat skins
was Rs. 2,14,808/-. He had taken an over-draft against the
said pledge in sum of more than Rupees tow lakhs. The Bank
officers gave inspection of the said goods to third party
but thereafter did not store them properly. On account of
heavy monsoon, the goat skins got damaged for which the
appellant claimed damages. The Bank authorities were not
prepared to pay him the damages. On the contrary they called
upon the assessee to replace the goat skins. The damaged The
goat skins were removed by the Bank authorities to Delhi.
Thereupon, the Bank. the Bank officials took the stand that
by virtue of the hypothecation letter dated July 18, 1985
they were entitled to remove the goods. The learned
Magistrate, however, framed the appropriate charges against
the officers of the Bank. The Bank officials filed a
criminal revision against the framing or charges which was
dismissed by the learned Additional Sessions Judge on 19th
May, 1960. At this stage, it appears that negotiation took
place between the assessee and the Bank towards a
settlement. On December 31,1960, the assessee wrote to the
Manager of the Bank stating, “I have been maintaining an
Overdraft Account with your Bank and according to you,
certain amounts are due form me on the basis of the same. On
the other hand, may contention is that I have claim against
the Bank, which exceeds the amount of your claim against me.
I am prepared to forego and give up my claim against the
Bank, if the Bank is ready to write off the amount
outstanding against me”. This was agreed to by the Bank.
Thereupon, both the parties moved the Delhi High Court where
the criminal case was pending at the time, for permission to
withdraw the prosecution. a learned Single Judge of the
Punjab High Court sitting at Delhi allowed the prosecution
to be withdrawn and formally acquitted the accused vide his
order dated January 5, 1961 pursuant to the said compromise
the Bank waived the sum of Rs. 1,93,159/- which was the
balance due to the Bank on the date of the High Court’s
order. The assessee transferred the credit balance due to
the Bank to the trading account deeming it to be towards the
loss sustained by him earlier as a result of the stock which
were in Bombay in the custody of the Bank and offered this
amount for taxation spread over the three Assessment Years
1957-58 [Rs.39,940/-], 1958-59 [Rs.73,152/-] and 1959-60
[Rs.80,940/-], The Income Tax Officer accepted the said
additions and made assessment for the said three assessment
years. While completing the assessment for the Assessment
Years 1961-62, however, the Income Tax Officer took the view
that the entire sum of Rs.1,93,159/- aforesaid should be
included in that assessment year. Accordingly, he included
the same. He then took rectification proceedings with
respect to the earlier assessment years. He deleted the
aforesaid amounts which were included in the assessments
relating to Assessment Years 1957-58 and 1958-59 but did not
delete the addition i the Assessment Year 1959-60. On
Appeal, the Appellate Assistant Commissioner uphel the
assessee’s contention that the said amount of Rs.193,159/-
cannot be treated as income under Section 41 (1) of the
Income Tax Act, 1961 and accordingly deleted the said
amount. The Income Tax Officer preferred an appeal to the
tribunal. The tribunal found, after discussing the relevant
facts that ‘undoubtedly and admittedly the amount was a
revenue receipt because the assessee admitted before the
Income-tax Officer that compensation was paid for loss of
goods lying at the bank’s godown at Bombay………..From a
perusal of the facts we are of the opinion that amount
realized is a part of the consideration for wiping off the
assessee’s trading liability as assessee took the
opportunity for wiping off liabilities by filing a criminal
case against the bank. The criminal case against the bank
employees would not alter the real character of the goods
which were nothing but the stock of goods of assessee. We
find that a sum of Rs.2,13,092/- out of the provisions of
section 41(1) of the Act, this amount could be brought to
tax during the accounting year”. Accordingly, Revenue’s
appeal was allowed. Thereupon, the assessee applied for and
obtained reference of the aforesaid question for the opinion
of the High Court under Section 256(1) of the Act.
When matter came up before the High Court, the High
Court agreed with the assessee, in the first instance that
Section 41(1) was not attracted to the facts of the case.
Then it proceeded to observe:
“……..It is clear that the
payment received by the assessee
(by way of adjustment) was by way
of compensation for loss or damage
to the assessee’s stock-in-trade
viz., hides and skins. The accounts
of the assessee for these years are
not before us but it is clear from
the narration that the balance due
to the banker were adjusted against
the write off the stokes damaged
and hence returned for assessment
in earlier years. The loss and
damage had taken place in the
earlier years and payment which was
received in accounting year ending
31.3.1961 was assessable in
assessment year 1961-62…..The
resultant position, therefore, is
that the losses to the exxtent of
Rs. 1,13,052/- had been allowed of
accounting year 1960-61 was liable
to tax under Section 41(1) ……..
Even otherwise the compensation
received being in respect of stock-
in-trade would be a trading receipt
and so assessable to tax
irrespective of whether the
assessee had claimed or omitted to
claim the loss or damage to the
stock-in-trade as and when it
occurred, as he should have done.”
On the above reasoning, the High Court answered the
question referred to it in favour of the Revenue and against
the assessee.
Sri Mistry learned counsel for the appellant, submitted
that the High Court having rightly held, in the first
instance, that Section 41(1) is not attracted in the facts
and circumstances of the case, erred in bringing in Section
41(1) later to justify the inclusion of the said amount
[Rs.1,13,052/-]. Counsel submitted that the said amount
cannot be treated as the income of the assessee under any
provision of the Act. We have set out hereinbefore the
relevant portion from the judjment of the High Court. We are
of opinion that the decision of the High Court is not really
based upon Secton 41(1), the said amount is liable to be
included in the assessment relating to Assessment Year 1961-
62 for the reason that the amount so received represented
compensation in respect of his stock-in-trade and,
therefore, it constitutes a trading receipt and is
accordingly assessable to tax irrespective of the fact
whether the assessee had or had not claimed the loss of
damage to stock-in-trade, as and when it occurred. The main
basis of the judgment of the High Court is that is was
compensation for loss or damage to the assessee’s stock-in-
trade – and not Section 41(1). Indeed, this was also the
finding of the Tribunal, as would be evident form the
relevant extracts form its judgment set out hereinabove. Sri
Ministry did not dispute the fact that if the said amount is
treated as compensation received in respect of stock-in-
trade it would be a trading receipt and accordingly
assessable to tax.
We see no reason to interfere with the answer given by
the High Court to the question stated. The appeal is
dismissed but there shall be no order to costs.