1996 (4) TMI 4 - SC - Income Tax

Compensation received from bank on account of damages of stock in trade - whether Tribunal was right in law in adding Rs. 1,13,092 to the total income of the assessee in the accounting year ending March 31, 1961 - held that impugned compensation is assessable as trading receipt

Summary

Issues:
1. Interpretation of section 41(1) of the Income-tax Act, 1961.
2. Taxability of compensation received for loss or damage to stock-in-trade.
3. Inclusion of compensation amount in the assessment year 1961-62.

Detailed Analysis:
The case involved an appeal against the judgment of the Delhi High Court regarding the interpretation of section 41(1) of the Income-tax Act, 1961. The appellant, an exporter of hides and skins, had pledged goat skins with a bank, which got damaged due to negligence by the bank officials. Following a criminal case and subsequent negotiations, a settlement was reached where the bank waived a sum of Rs. 1,93,159, which was adjusted against the appellant's trading liability. The appellant offered this amount for taxation spread over three assessment years. The Income-tax Officer included the entire sum in the assessment year 1961-62, leading to a dispute. The Appellate Assistant Commissioner and the Tribunal held that the amount was a revenue receipt and should be taxed. The Revenue's appeal was allowed, prompting the appellant to seek a reference to the High Court under section 256(1) of the Act.

The High Court initially agreed with the appellant that section 41(1) was not applicable but later held that the compensation received for the loss of stock-in-trade was assessable under section 41(1) or as a trading receipt. The High Court concluded that the amount received constituted compensation for the loss or damage to the stock-in-trade and was liable to tax, even if the loss had been claimed in earlier years. The High Court ruled in favor of the Revenue, leading to the dismissal of the appellant's appeal.

The appellant argued that the High Court erred in applying section 41(1) and contended that the amount should not be treated as income under any provision of the Act. However, the Supreme Court upheld the High Court's decision, emphasizing that the compensation received for the loss of stock-in-trade was a trading receipt and assessable to tax. The Court noted that the main basis for including the amount in the assessment year 1961-62 was the compensation for the loss or damage to the stock-in-trade, rather than section 41(1). Therefore, the appeal was dismissed, and no costs were awarded.