TARACHAND GHANSHYAMDAS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference made under S. 66(1) of the Indian IT Act by the Tribunal. The facts, as given in the statement of the case, are as follows :

(2.) THE assessee, a registered partnership firm, was carrying on, inter alia, banianship business under Shaw Wallace and Company, and their business was conducted under the general banianship agreement. The crux of the agreement between the parties was that the assessee should be responsible for Shaw Wallace and Co. for any loss which the firm may sustain and it should guarantee the due fulfilment of all the contracts entered into with them through the assessee, and it should indemnify Shaw Wallace and Co. against any loss in respect thereof. Due to quarrels among its partners the assessee -firm decided to wind up its business, and when Shaw Wallace and Co. came to know of the assessee's decision, they informed the assessee that they would help it in the winding up of the mutual banianship matters and for an early settlement of its dealings with the assessee to the benefit of all concerned. While sending their letter, they attached a statement showing the outstandings position as on December 13, 1957, at Rs. 5,54,105 which the assessee had guaranteed. They expected to realise a major portion of the outstandings from the merchants directly, and they considered that a sum of Rs. 75,000 being the expected balance amount due from the outstandings would be bad debt. Shaw Wallace and Co. suggested in that letter that they would receive Rs. 75,000 from the assessee and relieve it of all its obligations of guarantee and indemnity. They also suggested that, in case they recovered even that debt, they would refund the sum of Rs. 75,000 or such sum as may be found due after giving credit to the amounts realised. They further informed the assessee that the said arrangement would enure up to January 1, 1961. By that time, they would try to recover and after the expiry of the said date whatever amount they recovered would be on their account. The assessee accepted the said arrangement, paid a sum of Rs. 75,000 to Shaw Wallace and Co., debited the same to the profit and loss account, and claimed a deduction of the aforesaid amount as liability due to Shaw Wallace and Co., in the course of the assessment proceedings for the year 1958 -59.

(3.) AFTER having failed with the Tribunal, the assessee requested the Tribunal to refer the matter to this Court and the Tribunal, inasmuch as in their opinion a question of law arose out of its order, has drawn up an agreed statement of the case and referred to this Court the following question of law :