1966 (4) TMI 14 - HC - Income Tax

Assessee agreed to pay office allowance to managing agents - amount shown in balance-sheet as trading liability the money due to agents in previous year - later agents agreed to forego the amount - this amount was shown in assessee s books as miscellaneous receipts - remission of previous liability is not a trading receipt and cannot be included in total income

Summary

Issues:
Interpretation of remission of liability as income for assessment year 1951-52.

Analysis:
The High Court of Patna dealt with a reference under section 66(1) of the Indian Income-tax Act for the assessment year 1951-52. The case involved Messrs. Dalmia Jain & Co. Ltd., the managing agents of the assessee-company, who were entitled to an office allowance of Rs. 7,500 per month. During the previous year, the managing agents informed the assessee that they would forgo the office allowance due to them, amounting to Rs. 1,80,000. The dispute arose when the Income-tax Officer included this amount as a miscellaneous receipt in the assessee's income. The assessee appealed against this inclusion and succeeded at the Income-tax Appellate Tribunal level. The department then sought a reference on two questions, one of which concerned the treatment of the forgone amount as the assessee's income for the assessment year in question.

The primary issue revolved around whether the forgone amount should be considered as income for the assessee. The revenue contended that the amount should be treated as a refund made by the managing agents. However, the High Court analyzed the nature of the remission within the context of the mercantile system of accounting followed by the assessee. In the mercantile system, all receipts and liabilities are accounted for as they accrue, irrespective of actual receipt or payment. The court emphasized that the remission was not a cash refund but a remission of a liability previously charged to the profit and loss account. The court distinguished between accounting on cash system and mercantile system, highlighting that under the mercantile system, remission of a liability does not constitute income.

The court referred to precedents and distinguished cases where remissions were treated as income based on the accounting system followed by the assessee. It cited a case where a similar remission of liability was not considered as income for the purpose of assessable income. Ultimately, the court held that the forgone amount by the managing agents should not be treated as the assessee's income for the assessment year 1951-52. The judgment favored the assessee, and the reference was disposed of accordingly, with costs awarded to the assessee.

In conclusion, the judgment clarified the treatment of remission of liability in the context of the mercantile system of accounting, emphasizing that such remissions do not constitute income under this system. The court's analysis relied on established principles and precedents to determine that the forgone amount should not be included in the assessee's total assessable income for the relevant assessment year.