RAMESH NARAIN SAXENA AND ORS. vs. COMMISSIONER OF INCOME TAX, NEW DELHI

A RAMESH NARAIN SAXENA AND ORS. v. COMMISSIONER OF INCOME TAX, NEW DELHI APRIL 22, 1996 B [B.P. JEEVAN REDDY ANDS. SAGHIR AHMAD, JJ.] Income Tax Act, 1961: Sections 28 anq 41(1). Income Tax-Assessee-f'ledge of goat skins with bank and over.iraft C obtained against pledge-Damage to pledged goods--Assessee initiated criminal prosecution against bank officials-Compromise between par- ties-Assessee withdrawing prosecution-Bank waiving amount due to it-Held compensation received by assessee for loss of damage to goods was a trading receipt and accordingly assessable to tax. D E The appellant-assessee, an exporter of hides and skins, pledged certain quantity of goat skins with the National Grindlays Bank during the accounting year relevant to the Assessment Year 1957-58 and obtained over-draft against the said pledge. As_ the pledged goat skins were not stored properly by the Bank they got damaged. On bank's refusal to pay damages the assessee filed a criminal complaint against the officers of the bank. Pursuant to a compromise between the parties during the account- ing year relevant to assessment year 1961-62 the assessee had withdrawn prosecution against the bank officials and the bank waived a sum of Rs. 1,93,159 which was the balance due to it from the assessee. The assessee F transferred the credit balance due to the Bank to the trading account deeming it to be towards the loss sustained by him and offered this amount for taxation spread over the three Assessment years 1957-58 (Rs39,940), 1958-59 (Rs.73,152) and 1959-60 (Rs. 80,067). The Inco111e Tax Officer accepted the said additions and made assessment for the said three G assessment years. However, he held that the entire sum of Rs. 1,93,159 was to be included in the assessment year 1961-62. 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 in the assessment year 1959-60. On appeal, the Appellate Commissioner H upheld the assessee's contention that the said amount of Rs. 1,93,159 610

R.N.SEXENAv. C.I.T. 611 cannot be treated as income under Section 41(i) of the Income Tax Act, A 1961 and accordingly delted the said amount. The Tribunal held that the amount realised was a part of consideration for wiping off the assessee's trading liability and that a sum of Rs. 1,13,092 out of the amount received by the assessee from the bank had not been brought to tax. Accordingly, it added the said amount to the total income of the assessee in the B accounting year ending 31.3.1961, relevant to the assessment year 1961-62. A reference obtained by assessee was answered by High Court in favour of Revenue and against the assessee. In appeal to this Court it was contended for the assessee that the High Court having rightly held in the first instance that Section 41 (i) was C not attracted in the facts and circumstances of the case, erred iu bringing in Section 41(i) later to justify the inclusion of the said amount. Dismissing the appea~ this Court HELD : The decision of the High Court is not really based npon D Section 41(i). It has clearly held that even apart from Section 41(i), 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 com· pensation in respect of his stock-in-trade and, therefore, it constitutes a trading receipt and is accordingly assessable to tax irrespective of the fact E 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 Jndgment of the High Conrt is that it was a 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. Assessee 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. Therefore, there is no reason to interfere with the decision of the High Court. F [614-G-H; 615-ACJ CIVIL APPELLATE JURI ICTION: Civil Appeal No. 5508 of G 1985. From the Judgment and Order dated 18.2.80 of the Delhi High Court in I.T.R. No. 54 of 1972. J ahangir Mistry and Mrs. A.K. Verma for the Appellants. H

612 SUPREME COURT REPORTS [1996] SUPP. 1 S.C.R. A Dr. V. Gaurishankar, S.N. Terdol and S. Rajappa for the Respon- B c dent. The Judgment of the Court was delivered by : B.P. JEEVAN REDDY, J. This appeal is preferred against the judg- ment 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 the 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 the assessee in the accounting year ending 31-3-1961". The relevant assessment year is 1961-62. The appellant-assessee was an 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 Grindlays Bank. The value of the goat skins was Rs. 2,14,808. He had taken an over-draft D against the said pledge in a sum of more than Rupees two lakhs. The Bank officers gave inspection of the said goods to a 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, E they called upon the assessee to replace the goat skins. The damaged goat skins were removed by the Bank authorities to Delhi. Thereupon, the assessee filed a criminal complaint against the officers of the Bank. The Bank officials took the stand that by virtue of the hypothecation letter dated July 18, 1955, they were entitled to remove the goods. The learned F Magistrate, however, framed the appropriate charges against the officers of the Bank. The Bank Officials filed a criminal revision against the framing of charges which was dismissed by the learned Additional Sessions Judge on 19th May, 1960. At this stage, it appears that negotiations took place between the assessee and the Bank towards a settlement. On December 31, 1%0, the assessee wrote to the Manager of the Bank stating, "I have G been maintaining an Overdraft Account with ypur 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 forego and give up mY claim against the Bank, if the Bank is ready to write off the H amount outstanding against me". This was agreed to by the Bank. There-

R.N. SEXENA v. C.i.T. [B.P. JEEV AN REDDY, J.] 613 upon, both the parties moved the Delhi High Court, where the criminal A case was pending at that 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 B 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 stocks 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. C 73,152) and 1959-60 (Rs. 80,067). The Income Tax Officer accepted the said additions and made assessment for the said three assessment years. While completing the assessment for the Assessment Year 1961-62, how- ever, the Income Tax Officer fook"the view that the entire sum of Rs. 1,93,159 aforesaid should be included in that assessment year. Accordingly, D 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 addition in the Assessment Year 1959-60. On Appea~ the Appellate Assistant Commissioner upheld the assessee's con- tention that the said amount of Rs.1,93,159 cannot be treated as income E under Section 41(1) of the Income Tax Act, 1961 and accordingly deleied 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 F paid for loss of goods lying at the bank's godo\vn 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 G alter the real character of the goods which were nothing but the stock of goods of 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 Section 41(1) of the Act, this amount could be brought to tax during the accounting year". H Acc~rdingly, Revenue's appeal was allowed. Thereupon, the assessee

614 SUPREME COURT REPORTS [1996] SUPP. 1 S.C.R. A applied for and obtained reference of the aforesaid question for the opinion of the High Court under Section 256(1) of the Act. B c D E F When the 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 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 31.3.1961 was assessable in assessment year 1961-62 ....... 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 that receipt 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 of 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 G of the assessee under any provision of the Act. We have set out herein- before the relevant portions from the judgment of the High Court. We are of the opinion that the decision of the High Court is not really based upon Section 41(1). The High Court has clearly held that even apart from Section 41(1), the said amount is liable to be included in the assessment H relating to Assessment Year 1%1-62 for the reason that the amount so R.N. SEXENA v. C.l.T. [B.P. JEEV AN REDDY, J.] 615 received represented compensation in respect of his stock-in-trade and, A therefore, it constitutes a trading receipt and is accordingly asse.~sable 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 it was a 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 from the relevant extracts from its judgment set out hereinabove. Sri Mistry 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 as to costs. T.N.A. Appeal dismissed. B c