Rajputana Trading Co. Ltd. versus Commissioner of Income-Tax, West Bengal

Income-tax Act (11 of 1922), s. 10(2A) ands. 24-Speculation bu,~.i ness-Liability to pay difference waived by creditors-Amount of ltabzury written back and credited to assessee's account-Amount treated as profit under s. 10(2A)-Profit whether to be treated as profit from speculation business and set off against speculation loss.

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The assessee-appellant carried on both speculative as well as n?n· speculative business. The system of account regularly employed bt1ng merqantile, any liability for payment of diere-!1ce on acunt of speculative transactions was allowed as a deduction m computmg the profit or loss in speculative business. A certain amount being liabilities fo~ spec~~ lation differences in the account was written back and taken credit of in the profit and loss account. The creditors had waived their right to receive the amount. The Income-tax Otficer treated this amount as the assessee's income from business in terms of s. 10(2A) of the Income-tax Act, 1922. The amount was not set off against speculative loss either brought forward from the earlier year or suffered by he assessee during the accounting perJd on the ground that the liability written back and treated as business profit did not partake of the character of speculation profit. Allowing the appeal this Court : ,

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HELD : When the loss or the liability for which deduction had previously been allowed to the assessee arose out of speculative transactions the origin of such loss or liability was known and ascertainable. If such loss or liability was to be treated as profit in the circumstances gh.•en in s. !0(2A) it would be most illogical and irrational to treat the so called profits as having a neutral soulrce and not springing out of the same calegory of speculative business which led to the assessee incurring that Ioss or liability. In cases of the present kind there was a fairly dirccr and proximate relationship between the income as deemed to be arising under s. 10(2~) _and the ·speculative business which the assessee was carrying on. This income could not and would not have arisen but fdr the fact that in· the speculative business the assessee had claimed deductions on account of liabilities for speculative difference. [1016 D; 1017 E]

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Under the provisions of s. 24 of the Aot the profit or loss which is G compud has to be categorised as either speculative profit or loss or nonspeculat1ve profit or loss. If once a particular item of loss is categorised· as ·speculative loss then in that case if such loss is to be deemed to be income or profit from the business, profession or vocation by virtue of s. 10(2A) it follows by necessary implication that such income or profit can only be income or profit arisii1g from speculative business. Moreover s. 10(2A) envisages that the deemed income which is sought to be tru!:(!d should be considered to have arisen from the same business in which the H loss that had been incurred was written back. It would be highly pro • blematical to say that th-z deemed income arises firom a non-de5ctiiJt busine·ss \vhen the nature of the business which had given rise to the liability originally is known. [1017 F-H]

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.to J 4 SUPREME COURT REPORTS (1969] i SC.R.

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• 11, Donald Miranda 42 J.T.R. 166, explained . & Ors. v. Comn1issioner of lnconte-tax Bombay City A • CIVIL AP PELLA TE JURISDICTION : Civil Appeal No. 1227 of :1967.

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Appeal from the judgment and order dated January 4, 1965 of the Calcutta High Court in Income-tax Reference Nos. 215 of B 1961.

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M. C. Chag/a, M. G. Poddar, H.K. Puri and B. N. Kirpal, for the appellant.

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D. Narsaraju, T. A. Ramachandran, R. N. Sachthey and B. D. Sharma, for the respondent.

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The Judgment of the Court was delivered by Grover, J. This is an appeal by certificate from a judgement of the Calcutta High Court answering the following question referred to it in the negative and against the asscssee :- "Whether on the facts and in the circumstances of the case, the sum of Rs. 78,749 which was deemed to D be the profits and gains of business under section 10(2A) of the Income tax Act, can be said to be arising from speculative business ?" The assessee carried on both speculative as well as nonspeculative business. The system of account regularly employed being mercantile, any liability for payment of difference on ac- E

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The assessee carried on both speculative as well as nonspeculative business. The system of account regularly employed being mercantile, any liability for payment of difference on ac- E count of speculative transactions was allowed as a doduction in computing the profit or loss in speculative business. At the commencement of the accounting year relevant for the assessment year 1955-56 i.e., July 1, 1953 there was a balance of such liabilities for speculation differences in the account of one Ramnath Narendranath amounting to Rs. 83,049. Out of this liabilitv the F assessee had paid to the party a sum of Rs. 7,825 in cash. ·The balance of Rs. 75,224 along with a sum of Rs. 3,525 being similar liability due to other two creditors aggregating Rs. 78,749 was written back and taken credit of in the profit and Joss account for the year ending June 30, 19 54. 1l1e creditors had waived their right to receive the amount. The Income-tax Officer treated the G amount·of Rs. 78,749 as the assessee's income from business in terms of s. 10(2A) of the Income tax Act, 1922, hereinafter ·called the Act. The amount was not set off against the speculative loss either brought forward from the earlier years or suffered by the assessec during the accounting period .on the groun~ that ·the liability written back and treated as busmess profit did not H partake of the character of speculation profit.

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The contention of the assesscc was that the amount should be 1reatcd as profit from speculative business as the liability which

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RAJPUTANA TRADING co. v. c.r:r. (Grover, J.)

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A was written back related to such business. In other words the • assessee claimed that the amount of Rs. 78,749 should be available for set off against speculation loss. The Revenue authorities did notl accede to this contention. Before the tribunal it was. pressed on behalf of the assessee that the department could not stop by treating the liability written back as income from business

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B but must also categories and specifically describe what the nature of the business was and since the liability related to the particular business the income could only be construed as arising from that business. The tribunal negatived this contention. According to it the effect of the provision of s. 10(2A) of the Act is that it charges the amount to tax by its own force as a business income. "The income character of the receipt is designated by the fiction

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c of law and it is to be brought under assessment as an income from business without any further categorisation. It cannot therefore· be said that this income arose to the assessee from any speculation business. It is treated as business income only by virtue of the specific provision made in this regard".

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D The High Court referred to the decision of this Court in Donald Miranda & Others v. Commissioner of Income-tax, Bombay City II(') but held that there was no warrant for saying that the remission of a speculative liability should be treated as. speculative income accruing to the assessee. The decision of this. court was distinguished on the ground that it related to refund of E excess profits tax whlch stood on different footing inasmuch as it had to be paid because of an unusual rise in the income of the assessee over the standard profits and when refund of the tax paid was made it was logical to hold the same as income from business in respect of which the excess profits tax liability arose.

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Section 10(2A) of the Act was in these terms:

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"Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee has received whether in cash or in any G other manner whatsoever any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by hlm or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation H and to have accrued or arisen during that previous year" .

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(1) 42 l.T.R. 166.

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[1969) I SC.R.

SUPREME COURT REPORTS

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1016

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• It is apparent that one of the main purposes of the above provi• sion which has been now re-enacted with some changes in s. 41 ·Of the Income tax Act 1961 was to catch cases of remission of .debt by creditors in respect of earlier trading items which were allowed as deduction. As pointed out by the High Court, in the present case, if a portion of the loss or liability incurred by the assessee in a particular year is subsequently diminished by way of remission or otherwise, s. 10(2A) creates a fiction and directs that the remission or the dimunition shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during the relevant previous year. The contention of the assessee, however, was that the fiction should be carried a step further and if the Joss in respect of which the portion was remitted was a speculative Joss the notional profits and gains of business which come into existence by the fiction of the section should be categorised as speculative income. Now it is difficult to understand how the fiction should not be carried to its logical conclusion by necessary implication. When the loss or the liability for which deduction had previously been allowed to the assessce arose out of speculative transactions the origin of such loss or liability is known and ascertainable. If such loss or liability is to be treated as profit in the circumstances given in s. I 0 ( 2A) it would be most illogical and irrational to treat the so called profits as having a neutral source and not springing out of the same category of speculative business which led to the asscssee incurring that loss or liability. The decision of this coun in Donald Mirandas case(') may not bo directly in point but there are certain observations in it which are quite apposite. It has been held therein that when any portion of the tax collected on excess profits is refunded under the provisions of the Indian Finance Act 1942 or the Excess Profits Ordinance 1943, it necessarily has the same quality which it had before the amount which was charged with the payment of the tax had under the provisions <>f those Acts. This is what was observed at page 170 :

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"It would thus appear that the amount of excess profits tax was an allowable deduction for the purpose of computation of the business profits of an assesscc under section 12( I) of the Excess Profits Tax Act and when it or a portion of it was refunded it had to be treated as income of the assessce. When it was deposited with the Central Government it was a portion of the profits of the business of the assessee and when it was returned to the asscssec it must be restored to its character of being a part of the profits of a business. It cannot be said that its nature changes merely because it is refunded as a consequence of some provi-

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(!) 42 1.T.R. 166.

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RAJPUTANA TRADING co. v. C.I.T. (Grover, J.)

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sions in the Finance Act or the Excess Profits Tax Ordinance. Its nature remains the same. The effect of the deposit under the Acts above mentioned was as if a slice of the business profits was taken and deposited with the Central Government Treasury and then when it was found that a larger amount had been deposited than was exigible a portion of it was returned. By being put in a Government Treasury it does not cease to be what it was before, i.e. profits of a business."

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Keeping in view the entire process by which remission of liability is to be deemed to be profits and gains of business etc. within the meaning of s. 10(2A) it is difficult to understand how such profits and gains can be completely divorced from the speculative business in respect of which iillowance was made in the earlier year. That allowance or deduction was not liable to be reopened except for the reason that the creditors waived the payment of the debts to them by the assessee which attracted the fiction introduced by s. 10(2A) of the Act. According to the counsel for the assessee full effect must be given to that fiction and if full effect is given the conclusion is inevitable that the income in question is income from speculative business. Thus there is no question of resorting to any double fiction. The simplest and the most obvious way of looking at the matter is that once the amount of liabilitv which is written back is to be treated as income from business it must be categorised and related to some business. In cases of the present kind there is a fairly direct and proximate relationship between the income as deemed to be arising ,under s. 10(2A) and the speculative business which the assessee was carrying on. This income could not and would not have arisen but for the fact that in the speculative business the assessee had claimed deductions on account of liabilities for speculation difference.

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:F There is a good deal of force in the point Qf view pressed on behalf of the appellant that under the provisions of s. 24 of the Act the profit or loss which is computed has to be categorised as either speculative profit or loss or non-speculative profit or loss. If once a particular item of loss is categorised as speculative loss then in that case if such loss is to be deemed to be income or ·G profit from the business, profession or vocation by virtue of the provisions of s. 10(2A) it follows by necessary implication that such income or profit can only be income or profit arising from speculative business. Moreover s. 10(2A) envisages that the deemed income which is sought to be taxed should be considered to have arisen from the same business in which the loss that had H been incurred was written back. It would be highly problematical to say that the deemed income arises from a non-descript business when the nature of the business which had given rise to • the liability originally is known.

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[1969] l S.C.R.

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Sl.JPRn1E COURT REPORTS

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C Appeal allowed. r ' I

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• The above submission of the appellant effectively meets the • main reasoning which prevailed with the High Court that when s. 10(2A) treats the remission of liability as profits of the assessec's business, profession or vocation without giving to it any "local habitation or name'', there is no reason why it should be treated as profits and gains of the same kind of business in which the liability was incurred.

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In our opinion the question which was referred to the High Court should have been answered in the affirmative and in favour of the assessee. The appeal is accordingly allowed and the answer returned by the High Court is hereby discharged. In view of the nature of the point involved the parties are left to bear their own costs. '

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Y.P.

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LIS:ip.C.1./69-2,500-S,c. Vl-18·11·69·· GIPF.

Rajputana Trading Co. Ltd. v. Commissioner of Income-Tax, West Bengal

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Rajputana Trading Co. Ltd. v. Commissioner of Income-Tax, West Bengal

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