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 found that liabilities relating to purchases and interest aggregating Rs. 36,647 had been allowed as deductions in earlier years and were subsequently remitted; consequently, this amount was taxable as business income under section 10(2A). However, the larger amount of Rs. 1,80,000 did not constitute a trading liability owed to the creditor, nor had it been allowed as a deduction in prior assessments. Therefore, section 10(2A) was inapplicable to that sum. The HC affirmed the Tribunal's view and decided against the applicant.

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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.

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