Taxability of trading liability remission where bank debt waived under compromise decree, as the waiver arose from a business transaction.

Remission obtained by an assessee from a bank under a compromise decree was treated as taxable remission of a trading liability under section 10(2A) of the Income-tax Act, 1922. The assessee followed mercantile accounting and had already claimed deduction for business losses connected with the transaction; the bank advance was made for trading purposes and the bank remained the creditor until satisfaction of the decree. Because the waiver of the balance due arose directly from that business transaction, the remission had a proximate nexus with the trading activity and fell within the provision rather than constituting a purely capital adjustment. The question was therefore answered against the assessee and in favour of the revenue.

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Issues: Whether the remission obtained by the assessee from the bank under the compromise decree was a remission of a trading liability taxable under section 10(2A) of the Income-tax Act, 1922.

Analysis: The assessee maintained mercantile accounts and had obtained deduction for losses connected with the business transaction. The bank advance was made for the purposes of trading activity, the bank remained the creditor until the decree was satisfied, and the waiver of the balance due arose directly from that business transaction. Section 10(2A), introduced by section 8 of the Finance Act, 1955, was intended to bring to tax amounts or benefits obtained by way of remission or cessation of previously allowed trading liabilities. The remission therefore had a direct and proximate connection with the trading activity and could not be treated as a purely capital adjustment outside the section.

Conclusion: The remission was a taxable remission of trading liability under section 10(2A) of the Income-tax Act, 1922, and the question was answered against the assessee and in favour of the revenue.

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