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Moshe Rehman Penkar Vs. the Commissioner of Income-tax (Mofussil) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai
Decided On
Case NumberIncome-tax Reference No. 18 of 1947
Judge
Reported inAIR1948Bom378; (1948)50BOMLR358
AppellantMoshe Rehman Penkar
RespondentThe Commissioner of Income-tax (Mofussil)
Excerpt:
.....he was given remission for the interest payable during each accounting year. after some years, the assessee made up the accounts with his creditor by paying a portion of the money found due, and the creditor remitted the remainder of the amount. in the relevant accounting year, the assessee was assessed to income-tax on the amount so remitted:-;that the assessee having already been taxed on accrual basis was not liable to be assessed to income-tax on the sum remitted by his creditor. - maharashtra scheduled castes, scheduled tribes, de-notified tribes (vimukta jatis), nomadic tribes, other backward classes and special backward category (regulation of issuance and verification of) caste certificate act (23 of 2001), sections 6 & 10: [s.b. mhase, a.p. deshpande & p.b. varale, jj] caste..........which was payable by him on this sum of rs. 17,500 and those deductions were allowed to him by the income-tax department. up to the year of account with which we are concerned, viz. s.y. 1999 (october 30, 1943, to october 17, 1944), about rs. 15,000 had been claimed by the assessee as deductions for interest and allowed to him. the total amount due to dharkar at the foot of the mortgage was found to be rs. 29,059-6-6 in the accounting year. on june 24, 1944, the assessee paid a sum of rs. 15,000 to dharkar and dharkar accepted that amount in full settlement of his claim against the assessee. in other words dharkar remitted the balance of rs. 14,059-6-6 and gave up his claim for that amount. the income-tax authorities have taken the view that this sum of rs. 14,059-6-6 is income for which.....
Judgment:

M.C. Chagla, C.J.

1. The assessee is a businessman having many activities. He used to borrow moneys from one Dharkar and in 1922 he mortgaged certain properties to Dharkar to secure payment of Rs. 17,500 found to be due and owing to Dharkar, The assessee keeps his accounts on accrual basis and in the returns submitted by him from 1932 onwards he claimed, as a permissible deduction, interest which was payable by him on this sum of Rs. 17,500 and those deductions were allowed to him by the Income-tax Department. Up to the year of account with which we are concerned, viz. S.Y. 1999 (October 30, 1943, to October 17, 1944), about Rs. 15,000 had been claimed by the assessee as deductions for interest and allowed to him. The total amount due to Dharkar at the foot of the mortgage was found to be Rs. 29,059-6-6 in the accounting year. On June 24, 1944, the assessee paid a sum of Rs. 15,000 to Dharkar and Dharkar accepted that amount in full settlement of his claim against the assessee. In other words Dharkar remitted the balance of Rs. 14,059-6-6 and gave up his claim for that amount. The income-tax authorities have taken the view that this sum of Rs. 14,059-6-6 is income for which the assessee is liable to pay tax. The argument advanced before us by the Advocate General is that inasmuch as the assessee has adopted the mercantile basis and he has been given deductions on the basis of what he was liable to pay and not on the basis of what he has actually paid, if, in fact, it is found that in respect of a certain amount, for which there was a liability on the assessee, that liability is discharged and the amount is not claimed from the assessee, then to that extent the discharge of the liability must be looked upon as a revenue receipt and income on which the assessee must be taxed. In our opinion that is a wholly fallacious argument. Once the Income-tax Department accepts the mercantile system of accounts-keeping and taxes an assessee on the accrual and not on the payment basis, the Department is not concerned as to how the liability incurred by the assessee is in fact discharged. He may discharge that liability by actual payment or he may discharge it by getting a remission from his creditor. But that is a question entirely for the debtor to determine. It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation. The House of Lords had to consider a case which is almost similar to the one which we have before us. That case is The British Mexican Petroleum Co., Ltd. v. Jackson (H.M. Inspector of Taxes) (1931) 16 T.C. 570. There the appellant company entered into a contract with an oil-producing company for the purchase of petroleum for a minimum period of twenty years. The appellant company came into difficulties and the accounts of the company's business were made up for the year ended June 30, 1921, and for eighteen months ended December 31, 1922. On June 30, 1921, the amount which the appellant company owed to the oil producing company was . 1,073,281 and on June 81, 1922, . 1,270,232. The appellant company paid to the oil-producing company . 325,000 and was released by the oil producing company from its liability to pay the balance, viz, . 945,232. The amount so released was carried direct to the appellant company's balance sheet and was shown as a separate item under the head 'reserve' on December 31, 1922. The contention of the Crown was that the amount released should be brought into account in computing the appellant company's profits for the purposes of income-tax either in the account for eighteen months up to December 81, 1922, or alternatively for the year ending June 30, 1921, that account being re-opened for that purpose. Both those contentions were rejected by the Court. The House of Lords took the view that the account having been once settled as of June 30, 1921, and the liability of the appellant company fixed, that could not be re-opened merely because a creditor had remitted a part of the debt. With regard to the other contention that the remission should be looked upon as a trading receipt, Lord Thankerton at p. 592 states as follows:

The appellant's alternative contention, which was not seriously pressed by the Attorney General, is equally unsound, in my opinion. I am unable to see how the release from a liability, which liability has been finally dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted.

2. Lord Macmillan at p. 593 is equally emphatic as to what he thought about it. This is what the learned Lord says:

I say so for the short and simple reason that the Appellant company did not, in those eighteen months, either receive payment of that sum or acquire any right to receive payment of it. I cannot see how the extent to which a debt is forgiven can become a credit item in the trading account for the period within which the concession is made.

These remarks of the learned Law Lords apply in their entirety to the facts of this case. Here too the real attempt on the part of the Department is to re-open assessment of the assessee for the earlier years. What they are really challenging is that the deductions allowed to the assessee in the previous years in respect of interest which he was liable to pay was not a proper deduction allowed to him. That attempt on the part of the Department cannot be allowed to succeed.

3. We, therefore, answer the question submitted to us in the negative. The Commissioner must pay the costs of this reference.


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