JUDGEMENT
S.RANGANATHAN, J. -
(1.)THIS income -tax reference arises out of the assessment for 1961 - 62 (previous year being the
financial year 1960 -61) of Jagdish Narain Saxena (hereinafter referred to as "the assessee"), who
has since died. The question of law referred to this Court under S. 66(1) of the Indian IT Act, 1922,
is :
"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 the assessee in the accounting year ending 31st March, 1961 ?"
(2.)THE question arises for consideration in the following circumstances. The assessee was an exporter of hides and skins. During the financial years relevant to the asst.
yrs. 1957 -58 to 1959 -60, the relationship between the assessee and the National Grindlays Bank
Ltd. (hereinafter referred to as "the bankers") became strained. The assessee had been having an
overdraft account with the bank right from 1952. On 18th July, 1955, he executed a letter of
hypothecation in favour of the bank for an overdraft up to a limit of Rs. 1 lakh pledging therefor
the stocks in the assessee's godown at Delhi. Earlier, a deed of lien had been executed in favour of
the bankers in respect of the goods lying in Bombay with the bankers and, on this arrangement,
the assessee was entitled to overdraft to the extent of Rs. 1 -1/2 lakhs. Thus, the total overdraft
facility available to the assessee was to the extent of Rs. 2 -1/2 lakhs. According to the assessee,
however, the banker never confirmed the letter of hypothecation or insisted upon periodical
statement of stocks in the godown at Delhi because the stocks in their possession in their godown
at Bombay were more than sufficient to meet the overdrafts.
The assessee alleged that due to the carelessness of the bankers while giving inspection, the goods
lying at Bombay had been damaged. The bank sent to Delhi all the goods and returned them to the
assessee in a damaged condition, except for 1,300 pieces. The assessee claimed compensation for
loss but the bank was not prepared to accept the same. According to a letter written by the
assessee's representatives to the ITO :
"As the banker had clearly told the assessee his inability to compensate the assessee in respect of the loss of goods, the banker refused to have further transactions with the assessee. The assessee had also found that a case against the bank claiming compensation from them for the loss of goods would be unsuccessful and, therefore, had to content himself with the loss."
It was at this point of time that a fortuitous circumstance came to the help of the assessee. On
10th and 11th Dec., 1958, the employees of the bank entered the godown of the assessee and removed all the skins, ostensibly under the terms of the letter of hypothecation dt. 18th July,
1955. To quote again from the assessee's letter to the ITO : "the assessee seized this opportunity and filed a criminal complaint against the banker" on the strength of the fact that the letter of
hypothecation had not been confirmed by the bankers. On 6th Feb., 1960, a Magistrate at Delhi
framed charges, inter alia, against two employees of the bank, under S. 380 read with S. 34 of the
Indian Penal Code. The bank employees filed a revision petition before the Addl. Sessions Judge
praying that a recommendation be made to the High Court that the charge should be quashed but
this petition was dismissed on 18th May, 1960. The petitioners thereafter preferred a revision
petition before the Punjab High Court.
At this stage, the bankers, presumably finding their case to be weak, entered into negotiations with
the assessee and a compromise was arrived at between the parties on the terms of the assessee's
letter dt. 31st Dec., 1960, to the bankers wherein he offered without prejudice :
"I have been maintaining an overdraft account with your bank and according to you, certain amounts are due from me on the basis of the same. On the other hand, my contention is that I have a claim against the bank, which exceeds the amount of your claim against me. I am prepared to forgo and give up my claim against the bank, if the bank is ready to write off the amount outstanding against me."
Consequent on this compromise, the assessee applied to the High Court for permission to withdraw
the prosecution. This permission was granted by the order of Falshaw J., dt. 5th Jan., 1961, who,
since charges had been framed against the accused, also formally acquitted the accused (i.e., the
petitioners before the High Court).
The result of the above compromise was that the bank waived the sum of Rs. 1,93,159 which was
the balance of the overdraft due to it from the assessee. The assessee, again to quote the auditor's
letter, "transferred the credit balance due to the bankers to the trading account deeming it to be
towards the loss sustained by him earlier as a result of the stocks which were in Bombay in the
custody of the bank" and offered this amount for taxation spread over the three asst. yrs. 1957 -58
(Rs. 39,940), 1958 -59 (Rs. 73,152) and 1959 -60 (Rs. 80,067) and the amounts were so taxed in
the respective assessment years. While completing the assessment for 1961 -62, the ITO was of
opinion that the sum of Rs. 1,93,159 (received by way of "compensation" from the bank on
account of damages) was liable to tax in that assessment year. He, therefore, brought the amount
to tax for this assessment year. Subsequently he took action to delete the additions made in the
earlier assessment years but actually he deleted only the additions (aggregating to Rs. 1,13,092),
made in the asst. yrs. 1957 -58 and 1958 -59 but the addition of Rs. 80,067 in 1959 -60 was not
deleted.
The assessee appealed to the AAC and contended that the assessee's liability to the bank was
wiped off during the accounting year not as a result of any civil case but because of the criminal
complaint and that the provisions of S. 41(1) were not attracted. The AAC accepted this contention.
He observed :
"There was no allowance of deduction in respect of the liability wiped off this year given to the appellant in any previous year. At the most we can say that the appellant suffered such losses which he made good subsequently indirectly through wiping off this liability. The losses incurred by the appellant, however, were never allowed to the appellant in any assessment year as such. Actually he has mentioned that earlier portions of this liability remitted have already been considered against the losses incurred by the appellant. Shri Annadhanam is justified in this background in contending that the benefit accruing to the appellant because of the wiping off of the liability is not covered by the provisions of S. 41(1)."
The ITO preferred an appeal to the Tribunal which was successful. The Tribunal was of the opinion
that the amount could not be held to have been received "for withdrawing the criminal case". The
auditor's letter clearly showed that the assessee wanted to wipe off the claim in view of the
inadvertence and negligence of the bankers. Referring to S. 41(1), the Tribunal held :
"From a perusal of the facts we are of the opinion that the amount realized is a part of the consideration for wiping off the assessee's trading liability as the assessee took the opportunity of 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 the assessee. We find that a sum of Rs. 1,13,092 out of the amount received by the assessee from the bank has not been brought to tax. Hence we are of the opinion that in view of the provisions of S. 41(1) of the Act, this amount could be brought to tax during the accounting year."
The balance having been already brought to tax in 1959 -60, the Tribunal held that Rs. 1,13,092
was assessable in the asst. year 1961 -62. Hence, this reference.
We are of opinion that the Tribunal was right in sustaining the addition of Rs. 1,13,092 in the asst. year 1961 -62, though on different grounds. We are unable to see how the cessation of the
assessee's liability to the bank could give rise to a charge under S. 41(1) as has been suggested by
the Tribunal, for, as rightly pointed out by the AAC, the assessee's indebtedness to the bank was
not a trading liability in respect of which any deduction was or could have been allowed in any
year. But, at the same time, 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 balances due to the banker were adjusted against the write -off of the stocks
damaged and hence returned for assessment in earlier years. The loss and damage had taken
place in the earlier years and the payment which was received in accounting year ending 31st
March, 1961, was assessable in asst. year 1961 -62. The only ground on which the AAC considered
an assessment on this footing to be unsustainable was that "the losses incurred by the appellant,
however, were never allowed to the appellant in any assessment year as such". He gave this
finding because he thought that Rs. 1,93,159 had been assessed in the three asst. yrs. 1957 -58 to
1959 -60. That is why he observed : "portions of this liability remitted have already been considered against the losses incurred by the appellant". This was clearly not correct, for the AAC
passed his order on 15th Feb., 1968, by which time already the assessments made for 1957 -58
and 1958 -59 had been set aside (on 25th March, 1967, itself). The Tribunal, in para 4 of the
statement of case, had pointed out this oversight on the part of the AAC; possibly it had not been
brought to his notice that two of the earlier assessments had been set aside. The resultant
position, therefore, is that the losses, to the extent of Rs. 1,13,052, had been allowed in 1957 - 58
and 1958 -59 and so the receipt of account year 1960 -61 was liable to tax under S. 41(1). The
AAC's conclusion was right in respect of the balance of Rs. 80,067 which stood taxed in asst. yr.
1959 -60. 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.
(3.)SHRI Dutta, appearing for the assessee, contended that the payment was received by the assessee as compensation for agreeing not to pursue the prosecution of the bank officials and
cannot be treated as compensation for loss of stock -in -trade. We cannot accept this contention. A
perusal of the letter of the auditors (portions of which have been extracted earlier), of the order of
the Magistrate framing the charges, of the revisional order of the Addl. Sessions Judge and of the
order of Falshaw J., make it clear that the dispute between the parties was of an "eminently civil
nature" and that the attempt of the assessee as well as the banker was only to reach a settlement
in respect of the loss or damage to the goods. This finding of the Tribunal was, therefore, based on
material and cannot be interfered with.