1970 (5) TMI 10 - HC - Income Tax

Bank loan used for purchase of goods was not repaid to bank - compromise decree for amount realised by sale of stock hypothicated - amount owed by the assessee to the bank was a trading liability and a remission in that received by the assessee would attract the provisions of sub-section (2A) of section 10 of the Act inasmuch as the assessee had received deduction for losses in a previous year of assessment.

Issues Involved:
1. Whether the remission by the bank arising out of the compromise was a remission of a trading liability liable to tax under section 10(2A) of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Remission of Trading Liability:
The primary issue in this case was whether the remission of Rs. 5,64,200 by the bank, following a compromise decree, constituted a remission of a trading liability and was thus taxable under section 10(2A) of the Income-tax Act, 1922.

The assessee, a private limited company, had initially purchased 825 bales of staple fibers from Japan, financed entirely by a loan from the Mercantile Bank of India. Over subsequent years, the assessee sold part of the stock and claimed losses due to a fall in market prices, which were allowed in earlier assessments. However, the assessee could not repay the entire loan, leading to a suit by the bank. The suit was settled by a compromise decree, under which the bank accepted a partial payment of Rs. 2,60,586, thereby remitting the remaining Rs. 5,64,200.

The Income-tax Officer added this remitted amount to the assessee's taxable income under section 10(2A), which was contested by the assessee. The assessee argued that the remission pertained to a capital liability (the loan) and not a trading liability, hence it should not be taxed. The revenue, however, contended that the entire investment was made by the bank, making it a trading liability.

Legal Provisions and Interpretations:
Section 4 of the Income-tax Act, 1922, outlines the scope of total income, while section 10(2A) specifically addresses the treatment of remissions of trading liabilities. Section 10(2A) was introduced to tax any benefit received by an assessee in respect of a trading liability that had previously been allowed as a deduction.

Prior to the enactment of section 10(2A), courts had held that such remissions were not taxable, as seen in precedents like Mohsin Rehman Penkar v. Commissioner of Income-tax. However, section 10(2A) changed this by deeming such remissions as profits or gains from business.

Court's Analysis:
The court emphasized that the assessee maintained accounts on a mercantile basis, carrying over profits and losses to the balance sheet. The loan from the bank was for trading purposes, and the remission of this loan was directly linked to the trading activity. Therefore, the remission was considered a trading liability.

The court referenced the Supreme Court's decision in Rajputana Trading Co. Ltd. v. Commissioner of Income-tax, which held that remission of a debt related to trading activities is taxable under section 10(2A). The court found a direct and proximate relationship between the loan, the remission, and the trading activity, thereby falling within the purview of section 10(2A).

Conclusion:
The court concluded that the remission of Rs. 5,64,200 by the bank was indeed a remission of a trading liability and thus taxable under section 10(2A) of the Income-tax Act, 1922. The court answered the question in the affirmative, ruling against the assessee and in favor of the revenue. No order as to costs was made.

Final Judgment:
Question answered in the affirmative.

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