BARODA TRADERS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question arising in this reference is one of the construction of Sub S. (2A) of S. 10 of the IT Act, 1922, and arises as a result of bringing to tax a sum of Rs. 18,401, in the assessment for the asst. yr. 1959 60. The normal accounting year of the assessee company, while it was carrying on its business in respect of which the assessment was made, was the calendar year, but whether the calendar year can be taken to be the accounting year after the assessee company closed that business is a matter of some controversy.

(2.) THE assessee company carried on business in disposal of cloth in a joint venture with M/s Chinubhai Jesingbhai of Baroda. The accounts of this joint venture were maintained by M/s Chinubhai Jesingbhai. The assessee company suffered losses in this venture during the years 1948, 1949, and 1950. Its share of loss was from time to time debited to the account of the assessee company in the books of M/s Chinubhai Jesingbhai and corresponding credit entries were made in the books of account of the assessee company in favour of M/s Chinubhai Jesingbhai. The business of disposal of cloth ceased in 1950 and at the end of 1951, the amount payable by the assessee company to M/s Chinubhai Jesingbhai came to Rs. 58,624. Therrafter, interest amounts were credited to this account from time to time and some payments also were made. In 1956, the assessee company gave a cheque for Rs. 5,000 in full settlement of the claim of M/s Chinubhai Jesingbhai. That cheque, however, was not cashed and ultimately in February, 1958, the assessee company paid Rs. 5,000 in full settlement of the debt due by it and thereafter the balance of Rs. 54,172 was transferred to its P and L a/c. On these facts, the ITO, relying on Sub S. (2A) of S. 10, brought to tax a sum of Rs. 18,401 as deemed profits of business, having accrued or arisen to the assessee company in the year 1958. The amount of Rs. 18,401 was arrived at as being the difference between the aggregate of the amounts allowed in the past assessments as expenditure or deduction, and the aggregate of amounts which were disallowed. The ITO, after citing the provisions of Sub S. (2A), held that there was no condition attached to that sub section that the business in respect of which the said profits are deemed to accrue or arise should be carried on in the previous year. The total liability of the company came to Rs. 91,782. But, as aforesaid, the ITO had in the asst. yrs. 1949 50 to 1953 54, allowed Rs. 56,014 but had allowed Rs. 35,771. The difference came to Rs. 18,401 and it was that difference which was brought to assessment.

(3.) SECTION 10 taxes the profits and gains of business, profession or vocation carried on by the assessee and it is clear from the words "carried on by him"used in Sub S. (1) that profits or gains liable to be assessed thereunder are profits or gains of business, profession or vocation carried on by the assessee during the account year relevant to the assessment year. Therefore, if a business is discontinued before the commencement of the accounting year but profits of that business are received in the accounting year after the discontinuance of that business, those profits clearly cannot be brought to tax in the year for the simple reason that the source of those profits does not exist in that accounting year and the profits would not be profits from a business carried on by the assessee. The expression "such profits or gains" in Sub S. (2), which provides for certain allowances allowable thereunder in the computation of profits or gains also presupposes that the business in respect of which profits are to be computed and in respect of which these allowances are claimable, was carried on in the relevant accounting year by the assessee. Sub s. (2A) provides that where an allowance or deduction has been granted in any year in respect of any loss, expenditure or liability and, subsequently during any previous year the assessee receives, whether in cash or in any other manner, any amount in respect of that loss or expenditure or the assessee is benefited by remission or cessation, then the amount received or the amount of liability which is extinguished by way of remission or cessation, is chargeable as business profits of that previous year. Ordinarily, even if a trading liability has been allowed during a previous year as business expenses, on the remission of such liability in any subsequent year, the amount so remitted cannot be taxed as income of the year when such remission is given, nor can the amount and the year in which allowance was given be allowed either to be readjusted or reopened. This position was made clear by the House of Lords in British Mexican Petroleum Company Ltd. vs. Jackson (1932) 16 Tax Cas. 570, where Lord Macmillanm observed that he could not conceive how the extent to which a debt was forgiven could become a credit item in the trading account for the period within which the concession was made. Sub S. (2A), however, does away with this principle and provides that the amount of remission or cessation should be taxed as profits of the year when such remission or cessation is made. But the sub section applies only if, (1) an allowance or deduction has been made in the computation of profits and gains in the assessment of any year, and (2) subsequently, during any previous year, the assessee has obtained some benefit in respect of trading liability by way of remission or cessation. By the use of the words "the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year", the sub section enacts a fiction whereu under the amount received by an assessee or the value of the benefit from remission or cessation is to be regarded as profits or gains of business, profession or vocation, which otherwise would not be income, and they are to be regarded as profits or gains as having accrued or arisen during such previous year, that is to say, during the year when such remission or cessation has been given. The sub section does not, of course, apply where the liability is time barred and the debtor dose not have to pay the debt, as such a case would not be one of remission or cessation. The deeming provision in Sub S. (2A) has thus two effects, namely : (1) that though ordinarily the amount of remission or cessation would not be profits or gains, it has to be regarded as such profits or gains, and (2) such an amount so forgiven by way of remission or cessation has to be regarded as profits or gains accruing or arising in that previous year. It is clear that the object of enacting Sub S. (2A) was to supersede the principle that once a loss is allowed as a deduction or as a trading liability, recoupment of the loss or remission of the trading liability would be a capital advantage and not a business receipt. To get over this difficulty this sub section was enacted whereunder such an advantage is to be treated as profits or gains includible in the total income of the assessee for the previous year in which such remission or cessation is granted. If Sub S. (2A) were to be independent of Sub S. (1), there would be no difficulty, for, under Sub S. (2A) the amount that is remitted or which is the subject matter of cessation would be deemed to be profits or gains of business, whether that business had ceased or not in the previous year. But the difficulty would arise if it were not to be independent and had to be read along with Sub S. (1), in which event, the paramount requirement for the application of Sub S. (2A) would be the existence of the business in the previous year. In that case, the question would be whether the deeming clause, besides enacting the fiction and treating the amount forgiven as profits or gains having accrued or arisen during that year from business, also regards that business to be existent or continuing during that year when in fact such business had ceased during that year.