COMMISSIONER OF INCOME TAX Vs. RADHESHYAM R MORARKA

JUDGEMENT

(1.) THIS is a reference by the Tribunal at the instance of the Commissioner under S. 66(1) of the Indian IT Act, 1922. The assessee concerned is an individual. The assessment year in question is 1959 60, the corresponding previous year being the calendar year 1958. The only point in dispute and which is concerned in the reference is the addition of two amounts of Rs. 33,860 and Rs. 35,063; these amounts represent the surplus realised by the assessee on two decrees purchased by him, in which decrees the judgment debtors were the Kalyan Mills Ltd., Ahmedabad. This was a textile mill at Ahmedabad. At the relevant time, the assessee and his associates had substantial interest in the said Mills. It was ascertained by us from counsel for the Revenue that the interest of the assessee and his associates was nearly 81% of the total share holdings of the said company. The Kalyan Mills were indebted to several parties. Two of these creditors had obtained decrees against the Mills respectively for Rs. 1,38,663 and Rs. 2,16,504. Gangadhar Baijnath and Rameshwarprasad Bagla were the judgment creditors in the first decree, and one Krishnakant Ramakant was the judgment creditor in the other decree. These two judgment creditors in their turn were indebted to a third party, viz., Radheshyam Satyanarayan, a firm in which the assessee was a partner. This firm, in its turn, was indebted to a company called Amalgamated Commercial Traders Private Ltd., the extent of the debt being Rs. 3,90,310. This private limited company was the sole selling agent of a sugar refinery company and the assessee was a director in the company managed by the sugar refinery company.

(2.) ON 28th April, 1957, the assessee purchased the decree in favour of Gangadhar Baijnath and Rameshwarprasad Bagla for Rs. 1,04,803, i.e., at a discount of Rs. 33,860. Similarly, he also took over the decree in favour of Krishnakant Ramakant for Rs. 1,81,441, i.e., at a discount of Rs. 35,063. However, the consideration was not paid in cash. He credited the aggregate amount of consideration, viz., Rs. 2,86,244 to the account of Radheshyam Satyanarayan in his books, giving a corresponding debit to the account of Kalyan Mills. On the very same day an amount of Rs.

(3.) THE matter was thereafter carried in appeal to the AAC, where it was argued on behalf of the assessee that the reduced prices at which the decrees were purchased were not calculated to operate as a means for carning profits but were intended solely to provide a safety margin or cover to ward off the possibility of loss in case the Kalyan Mills Ltd., Ahmedabad, were not able ultimately to discharge their liabilities to the fullest extent. The balance sheets and the financial position of the said company for the years ended 31st March, 1957, and 31st March, 1958, were filed with the AAC and after perusing them he opined that the gloomy picture painted by the chartered accountant, who appeared on behalf of the assessee, was not in accordance with the facts. The AAC was of the opinion that this conclusion was also borne out by the assessee being able to recover his dues from the Mills in full without resorting to any legal process in the short period of about nine months. The AAC, therefore, concluded that the only purpose for which the decrees and claims were purchased at a discount was to gain a substantial profit in due course. The AAC was also of opinion that the assessee must have had a speculative motive when he entered into the transactions under review. In the view of the AAC, therefore, the two transactions connected with the recovery of money from Kalyan Mills Ltd. were entered into by the assessee as a speculative venture of the nature of trade and accordingly he upheld the course of action adopted by the ITO.