COMMISSIONER OF INCOME TAX Vs. SHEWBUX JAHURILAL

JUDGEMENT

(1.) IN this matter a single question of law depending on the method of accounting used by the assessee has been referred to this Court under s. 66(1) of the INdian IT Act. The facts are very simple. The assessee entered into ten several forward contracts with Sri Lachminarayan Jute Manufacturing Co. Ltd. in April, 1946, to supply loose jute at specified rates, delivery to be effected in September, October, November and December, 1946. Under the terms of the contracts the buyers had the option, in the event of non-delivery of goods by the due dates, of cancelling them on the fifth working day after the due date and recovering the difference between the price specified in the contracts and the market prices as on the date of cancellation of the contracts. It would appear that the due dates of the contracts were extended upto 28th Feb., 1947. As the assessee did not effect delivery the buyers served notices on 1st March, 1947, stating in respect of each contract that as the assessee had failed to hand over the documents in fulfilment of its obligation the buyers declared their option to cancel the contract and to charge the difference between the contract price and the market price prevailing on the fifth working day after the due date. It should be noted here that in April, 1946, when the contracts were entered into the Jute Control Order of 1944 was in force in West Bengal regulating the prices of all kinds of loose jute. By this order the maximum and the minimum price for jutes of various kinds grown in various areas were fixed within certain specified limits and no person could enter into a valid contract for sale or purchase of such jute beyond the price limits specified. This order came to an end on 30th Sept., 1946, and immediately the prices of all kinds of jute shot up with the result that a large number of sellers were unable or unwilling to deliver the goods to their buyers. All the jute contracts which had to be entered into with jute mills were to be on certain terms and conditions including an arbitration clause. The buyers in this case referred the matter to the Bengal Chamber of Commerce claiming a sum of Rs. 3,58,997 as payable by the assessee to them for the failure of the latter to supply the goods. The case of the assessee was that there were no valid and subsisting contracts between it and the sellers and the contracts, if any, were frustrated as a result of the discontinuance of the order controlling the prices thereof. According to the assessee the very basis of the contracts having been destroyed the same became void and the sellers were relieved of all obligations thereunder. After a certain amount of litigation in this Court the arbitrations were proceeded with and awards were made against the assessee for a total sum of Rs. 3,58,997 besides costs. These awards were made between the months of May and August, 1948. Judgments were passed by this Court in terms of the awards early in 1949. Thereafter, the assessee entered into a settlement with the buyers on 25th April, 1949, whereby it was agreed that the buyers' claim including costs would be settled at Rs. 1,35,000, Rs. 90,000 of which was to be paid immediately and the balance of Rs. 45,000 to be paid in certain instalments between December, 1949 and April, 1950, provided however that if the first three instalments of Rs. 10,000 each were paid on the respective due dates the last instalment of Rs. 15,000 due on or before April, 1950, would be written off and the buyers would accept Rs. 1,20,000 in full satisfaction of their claim. This settlement was given effect to and the instalments of Rs. 90,000 besides the three of Rs. 10,000 were duly paid by February, 1950. The assessee which maintained its books of account under the mercantile system made no mention of any claim against it by Sri Lachminarayan Jute Manufacturing Co. Ltd. in 1946, but debited Rs. 1,20,000 paid to the said company in the asst. yr. 1950-51 as a loss. According to the Department the assessee should have shown the loss of Rs. 3,58,997 in the asst. yr. 1947-48 and should have sought for adjustment in the asst. yr. 1950-51. The question of law which has been referred to this Court is:

(2.) IT is now agreed that the last mentioned assessment year in the question should read 1947-48 and the question is amended accordingly.

(3.) THERE is no dispute before us that the loss of Rs. 1,20,000 in this case does not fall under item (xv) but can be claimed only under s. 10(1) as a loss suffered in business. The question then is whether it was for the assessee to anticipate the loss on the basis of the claim by the buyers in March, 1947, and show that loss in its books of account denying the liability therefor at the same time, and claim to have the matter adjusted if and when the dispute between the assessee and the buyers was settled either by litigation or by negotiation.