1980 (4) TMI 29 - HC - Income Tax

Only remitted trading liabilities previously deducted are taxable as business income under section 10(2A) of 1922 Act

The HC held that only sums representing remission or cessation of previously allowed trading liabilities fall within section 10(2A) of the 1922 Act. It ... Trading transactions - Profits Chargeable To Tax - Whether, the Tribunal was justified in deleting a sum on the ground that the amount in question did not represent remission on account of a trading liability, within the meaning of section 10(2A) of the Indian Income-tax Act, 1922 ? - HELD THAT:- It is not in dispute that the trading transactions in the account of M/s. Janki Dass Banarsi Dass in respect of which deductions had been allowed in earlier accounting years were those in relation to the purchase of goods and interest as referred to by the Tribunal. Goods worth Rs. 5,574 had been purchased between October 31, 1948, and October 31, 1949. In the subsequent year, goods worth Rs. 23,684 had been purchased. The credit in respect of interest was to the extent of Rs. 7,389. The Tribunal was, therefore, quite correct in holding that to the extent of the above amounts there had been an allowance to the assessee in earlier years and as it was common ground that there had been a remission of liability, the amount of Rs. 36,647 attracted tax under s. 10(2A). As rightly pointed out by the Tribunal, s. 10(2A) enacts a statutory fiction. The operation of this fiction should be limited to the language of the section. It is only where the assessee has incurred a trading liability and this trading liability has been allowed in earlier years that s. 10(2A) is attracted on the occasion when the trading liability is either remitted or ceased to exist. In our opinion, the Tribunal was right in coming to the conclusion that the sum of Rs. 1,80,000 did not represent a trading liability owed by the assessee to M/s. Janki Dass Banarsi Dass, nor had this amount of liability been allowed as a deduction in earlier assessments. Thus, we agree with the view taken by the Tribunal and answer the question referred to us in the affirmative and against the applicant. Issues involved: Interpretation of section 10(2A) of the Indian Income-tax Act, 1922 regarding deletion of a sum from assessment under trading liability.Summary:The High Court of Delhi considered a reference under section 66(2) of the Indian Income-tax Act, 1922 regarding the deletion of a sum from assessment under trading liability. The case involved the firm M/s. Phool Chand Jiwan Ram engaged in the purchase and sale of cotton piece-goods. The Income Tax Officer (ITO) added a sum to the firm's income, considering it liable under section 10(2A) of the Act. The firm appealed, and the matter was remanded for further inquiries. The Appellate Assistant Commissioner (AAC) restricted the addition based on the findings. Both the assessee and the department appealed to the Tribunal, which modified the order and deleted a portion of the addition. The Commissioner of Income-tax then brought this reference before the High Court.The Tribunal found that a certain amount represented a trading liability allowed in earlier years and could be treated as income. The High Court agreed with the Tribunal's findings, noting that the goods purchased and interest credited had been allowed as deductions in previous assessments. However, a separate argument was raised regarding a payment made to another firm on behalf of the assessee. The High Court concurred with the Tribunal's view that this payment did not constitute a trading liability under section 10(2A) as it was a credit for an amount borrowed to discharge a liability to the other firm. The Court emphasized that the statutory fiction of section 10(2A) should be applied strictly to trading liabilities allowed in earlier assessments.In conclusion, the High Court upheld the Tribunal's decision, answering the reference question in the affirmative against the applicant. No costs were awarded in this matter.