CHAGLA, C.J. - The question that is raised in this reference is really covered by the decision which my brother and I gave and which is reported in Mohsin Rehman Penkar v. Commissioner of Income-tax, Bombay city. In that case we held that if a mercantile system of accounting is adopted and a certain liability is allowed by the Income-tax department as a permissible deduction, and if subsequently that liability is discharged not by actual payment by the assessee but by remission of liability by the creditor, then the remission of liability can never be considered as an income which would be liable to tax. The facts here are almost identical. The assessee who dealt in shares in curred a loss of Rs. 22,027 in forward share dealings. This loss was duly adjusted against the business receipts in the assessment for the year 1943-44 which meant that the department accepted the sum of Rs. 22,027 as a permissible deduction. In the subsequent year this liability was settled by the assessee paying a sum of Rs. 5,301 and the creditor agreeing to forego his claim, namely Rs. 16,544. The department now claims that this sum of Rs. 16,544 must be looked upon as an income of the assessee liable to ta : The Tribunal was in the first instance divided; one learned member taking the view that this was not income and the President Mr. A. N. Shah taking a contrary view, and it was referred to a third member Mr. Sankara Narayana who agreed with the view of the president.
Now I must confess that our decision was not before the Tribunal and they were considerably influenced by an earlier decision of this Court reported in the case of Union Bank of Bijapur and Sholapur Ltd. v. Commissioner of Income-tax,Bombay. That was a decision of Sir. John Beaumont, and in that case the bank claimed a certain amount as loss by reason of embezzlement on the part of an employee and the loss claimed was allowed. In a subsequent year the Bank recovered a portion of the sum embezzled and the Income-tax authorities included the net sum realized thereby in the total income of the assessee for that year urging that the assessee having treated the loss as a revenue loss and obtained relief on that basis, any recovery made in respect of that loss must be regarded as a revenue gain as and when it occurred. Sir John Beaumont accepted that contention stating that the assessee having alleged that the embezzlement was and embezzlement of income, which could properly be set off against income in a previous year, could not firm in another year that was not income and that a recovery in respect of it was a casual appreciation of capital. Now it will be noticed that in the case before Sir John Beaumont the assessee actually received part of the money embezzled. His contention was that it was a capital accretion and not income. But as what was embezzled was part of the income and some of that part came back to the assessee, it could not possibly change its complexion and become capital accretion. The case therefore before Sir John Beaumont is clearly distinguishable and all that the learned Chief Justice laid down there was that if a part of the income is lost, and subsequently it comes back to the assessee, it is liable to be taxed.
In the case before us it cannot be said that the sum of Rs. 16,544 which is remitted by the creditor has been received by the assessee as income which is liable to tax.
Our attention has also been drawn by Mr. Pandit to a decision of the Nagpur High Court which was really decided before we decided the case reported in 16 Income Tax reports page 183 (Mohsin Rehman Penkar v. Commissioner of Income-tax, Bombay city) but which was reported subsequently; and that case is reported in the same volume at page 430 (Agarchand Chunnilal v. Commissioner of Income-tax C. P. and Berar) and the Nagpur high court has taken the same view of this question as we have done.
The result, therefore, is that the answer to the question submitted to us must be in the negative. Commissioner to pay the costs.
TENDOLKAR, J. - I agree.
Reference answered in the negative.