1973 (2) TMI 34 - HC - Income Tax

Assessee then claimed that a sum of Rs. 33,747.09 was payable towards interest on a loan of Rs. 4 lakhs taken by them from M/s. Associated Planters Ltd. - Whether this sum of Rs. 33,747.09 credited towards interest in the relevant previous year could be assessed in the year 1964-65 - Whether the interest given up by the creditor which was already allowed as deduction can be treated as assessee s income and whether it depends on the method of accounting followed by the assessee - Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 33,747.09 is not agricultural income for the assessment year 1964-65

Summary

Issues Involved:
1. Whether the amount of Rs. 33,747.09 is agricultural income for the assessment year 1964-65.

Detailed Analysis:

1. Nature of the Amount in Question:
The primary issue is whether the sum of Rs. 33,747.09, which was waived by M/s. Associated Planters Ltd. and credited to the assessees' revenue accounts, constitutes agricultural income for the assessment year 1964-65. The assessees, who are tenants-in-common, had initially deducted this amount as interest payable on a loan in the previous assessment year (1963-64). The Tribunal had to determine if this credited amount should be considered agricultural income for the subsequent year.

2. Tribunal's Majority Decision:
The Tribunal, by a majority, concluded that the amount was not agricultural income. The dissenting departmental member, however, believed that the amount should be treated as agricultural income, referencing the Bombay High Court decision in "In re Union Bank of Bijapur and Sholapur Ltd."

3. Reference to Precedents:
The judgment discusses various precedents to address the apparent conflict between different classes of decisions. The Mysore High Court in "Commissioner of Income-tax v. Lakshmamma" distinguished between cases involving actual or constructive receipts and those involving remissions. The Patna High Court in "Commissioner of Income-tax v. Rohtas Industries Ltd." supported the view that remissions do not constitute taxable income under the mercantile system of accounting.

4. System of Accounting:
The court noted that the system of accounting (mercantile or cash) should not determine the taxability of remissions. Even under the mercantile system, deductions and entries must correspond to actual accruals or liabilities. The distinction between constructive receipt and remission was deemed non-existent in such contexts.

5. Principle from House of Lords Decision:
The court referred to the House of Lords decision in "British Mexican Petroleum Co. Ltd. v. Jackson," which held that a release from liability does not constitute a trading receipt and thus does not result in taxable income. This principle was echoed by Viscount Dunedin, Lord Atkin, and Lord Macmillan, emphasizing that forgiven debts do not transform into income.

6. Analysis of Specific Cases:
The court differentiated the present case from the Bombay High Court's decision in "In re Union Bank of Bijapur and Sholapur Ltd." and Finlay J.'s decision in "Gray v. Lord Penrhyn," which dealt with embezzlement and misappropriation, respectively. These cases involved peculiar circumstances where the recovered amounts retained their character as income.

7. Nature of Remitted Amount:
The court emphasized that the remitted amount, being a waiver by the creditor, is akin to a windfall and not income arising from the assessee's business or agricultural activities. This perspective aligns with Rowlatt J.'s judgment in "British Mexican Petroleum Co. v. Jackson," where such remissions were not considered income.

8. Legislative Context:
The court acknowledged that the introduction of sub-section (2A) of section 10 in the Indian Income-tax Act, 1922, and its reintroduction as section 41 of the Income-tax Act, 1961, aimed to address such remissions. However, the general law before these amendments did not support taxing benefits from remissions.

Conclusion:
The court concluded that the amount of Rs. 33,747.09, waived by the creditor and credited to the assessees' accounts, does not constitute agricultural income for the assessment year 1964-65. The question referred was answered in the affirmative, in favor of the assessee and against the department. The court directed the parties to bear their costs and ordered that a copy of the judgment be sent to the Appellate Tribunal as required by section 260(1) of the Income-tax Act, 1961.