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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,

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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

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    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.