S. Ranganathan, J.
1. This Income-tax reference arises out of the assessment for 1961-62 (previous year being the financial year 1960-61) of Jagdish Narain Saxena (hereinafter referred to as 'the assessed'), who has since died. The question of law referred to this court under s. 66(1) of the Indian I.T. Act, 1922, is :
'Whether, on the facts and circumstances of the case, the Tribunal was right in law in adding Rs. 1,13,092 to the total income of the assessed in the accounting year ending March 31, 1961 ?'
2. The question arises for consideration in the following circumstances.
3. The assessed was an exporter of hides and skins. During the financial years relevant to the assessment years 1957-58 to 1959-60, the relationship between the assessed had a National Grindlays Bank Ltd. (hereinafter referred to as 'the bankers') became strained. The assessed had been having an overdraft account with the bank right from 1952. On July 18, 1955, he executed a letter of hypothecation in favor of the bank for an overdraft up to a limit of Rs. 1 lakh pleading thereforee the stocks in the assessed's godown at Delhi. Earlier, a deed of lien had been executed in favor of the bankers in respect of the lien had been executed in favor of the bankers in respect of the goods laying in Bombay with the bankers and, on this arrangement, the assessed was entitled to overdraft to the extent of Rs. 1 1/2 lakhs. Thus, the total overdraft facility available to the assessed was to the extent of Rs. 2 1/2 lakhs. According to the assessed, however, the banker never confirmed the letter of hypothecation or insisted upon periodical statement of stocks in the godown at Delhi because the stocks in their possession in their godown at Bombay were more than sufficient to meet the overdrafts.
4. The assessed alleged that due to the carelessness of the bankers while giving inspection, the goods lying at Bombay had been damaged. The bank sent to Delhi all the goods and returned them to the assessed in a damaged condition, except for 1,300 pieces. The assessed claimed compensation for loss but the bank was not prepared to accept the same. According to a letter written by the assessed's representatives to the ITO :
'As the banker had clearly told the assessed his inability to compensate the assessed in respect of the loss of goods, the banker refused to have further transactions with the assessed. The assessed had also found that a case against the bank claiming compensation from them for the loss of goods would be unsuccessful and, thereforee, had to content himself with the loss.'
5. It was at this point of time that a fortuitous circumstances came to the help of the assessed. On 10th and 11th December, 1958, the employees of the bank entered the godown of the assessed and removed all the skins, ostensibly under the terms of the letter of hypothecation dated July 18, 1955. To quote again from the assessed's letter to the ITO : 'the assessed seized this opportunity and filed a criminal complaint against the banker' on the strength of the fact that the letter of hypothecation had not been confirmed by the bankers. On February 6, 1960, a Magistrate at Delhi framed charges, inter alia, against two employees of the bank, under s. 380 read with s. 34 of the Indian Penal Code. The bank employees filed a revision petition before the Addl. Sessions Judge praying that a recommendation be made to the High Court that the charge should be quashed but this petition was dismissed on May 18, 1960. The petitioners thereafter preferred a revision petition before the Punjab High Court.
6. At this stage, the bankers, presumably finding their case to be weak, entered into negotiation with the assessed and compromise was arrived at between the parties on the terms of the assessed's letter dated December 31, 1960, to the bankers wherein he offered without prejudice :
'I have been maintaining an overdraft account with your bank and according to you, certain amounts are due from me on the basis of the same. On the other hand, my contention is that I have a claim against the bank, which exceeds the amount of year claim against me.
I am prepared to forgo and give up my claim against the bank, if the bank is ready to writ off the amount outstanding against me.'
7. Consequent on this compromise, the assessed applied to the High Court for permission to withdraw the prosecution. This permission was granted by the order of Falshaw J., dated January 5, 1961, who, since charges had been framed against the accused, also formally acquitted the accused (i.e., the petitioners before the High Court).
8. The result of the above compromise was that the bank waived the sum of Rs. 1,93,159 which was the balance of the overdraft due to it from the assessed. The assessed, again to quote the auditor's letter, 'transferred be towards the loss sustained by him earlier as a result of the stocks which were in Bombay in the custody of the bank' and offered this amount for taxation spread over the three assessment years 1957-58 (Rs. 39,940), 1958-59 (Rs. 73,152) and 1959-60 (Rs. 80,067) and accounts were so taxed in the respective assessment years. While completing the assessment for 1961-62, the ITO was of opinion that the sum of Rs. 1,93,159 (received by way of 'compensation' from the bank on account of damages) was liable to tax in that assessment year. He, thereforee, brought the amount to tax for this assessment year. Subsequently he took action to delete the additions made in the earlier assessment years but actually he deleted only additions (aggregating to Rs. 1,13,092), made in the assessment years 1957-58 and 1958-59 but the addition of Rs. 80,067 in 1959-60 was not deleted.
9. The assessed appealed to the AAC and contended that the assessed's liability to the bank was wiped off during the accounting year not as a result of any civil case but because of the criminal complaint and that the provisions of s. 41(1) were not attracted. The AAC accepted this contention. He observed :
'There was no allowance of deduction in respect of the liability wiped off this year given to the appellant in any previous year. At the most we can say that the appellant suffered such losses which he made goods subsequently indirectly through wiping off this liability. The losses incurred by the appellant, however, were never allowed to the appellant in any assessment year as such. Actually he has mentioned that earlier portions of this liability remitted have already been considered against the losses incurred by the appellant. Shri Annadhanam is justified in this background in the contending that the benefit accruing to the appellant because of the wiping off the liability is not converted by the provisions of section 41(1).'
10. The ITO preferred an appeal to the Tribunal which was successful. The Tribunal was of the opinion that the amount could not be held to have been received 'for withdrawing the criminal case'. The auditor's letter clearly showed that the assessed wanted to wipe off the claim in view of the inadvertence and negligence of the bankers. Referring to s. 41(1), the Tribunal held :
'From a perusal of the facts we are of the opinion that the amount realised is a part of the consideration for wiping off the assessed's trading a criminal case against the bank. The criminal case against the bank employees would not alter the real character of the goods which were nothing but the stock of goods of the assessed. We find that a sum of Rs. 1,13,092 out of the amount received by the assessed from the bank has not been brought to tax. Hence, we are of the opinion that in view of the provisions of section 41(1) of the Act, this amount could be brought to tax during the accounting year.'
11. The balance having been already brought to tax in 1959-60, the Tribunal held that Rs. 1,13,092 was assessable in the assessment year 1961-62. Hence, this reference.
12. We are of opinion that the Tribunal was right in sustaining the addition of Rs. 1,13,092 in the assessment year 1961-62, though on different grounds. We are unable to see how the cessation of the assessed's liability to the bank could give rise to a charge under s. 41(1) as has been suggested by the Tribunal, for, as rightly pointed out by the AAC, the assessed's indebtedness to the bank was not a trading liability in respect of which any deduction was or could not been allowed in any year. But, at the same time, it is clear that the payment received by the assessed (by way of adjustment) was by way of compensation for loss or damage to the assessed's stock-in-trade, viz., hides and skins. The accounts of the assessed for these years are not before us but it is clear from the narration that the balance due to the bankers were adjusted against the write-off of the stocks damage and hence returned for assessment in earlier years. The loss and damage had taken place in the earlier years and the payment which was received in accounting year ending March 31, 1961, was assessable in assessment year 1961-62. The only ground on which the AAC considered an assessment on this footing to be unsustainable was that 'the losses incurred by the appellant, however, were never allowed to the appellant in any assessment year as such'. He gave this finding because he thought that Rs. 1,93,159 had been assessed in the three assessment years 1957-58 to 1959-60. That is why he observed : 'portions of this liability remitted have already been considered against the losses incurred by the appellant'. This was clearly not correct, for the AAC passed his order on February 15, 1968, by which time already the assessments made for 1957-58 and 1958-59 had been set aside (on March 25, 1967, itself). The Tribunal, in para. 4 of the statement of case, had pointed out this oversight on the part of the AAC; possibly it had not aside. The resultant position, thereforee, is that the losses, to the extent of Rs. 1,13,052, had been allowed in 1957-58 and 1958-59 and so the receipt of account year 1960-61 was liable to tax under s. 41(1). The AAC's conclusion was right in respect of the balance of Rs. 80,067 which stood taxed in assessment year 1959-60. Even otherwise the compensation received being in irrespective of whether the assessed had claimed or omitted to claim the loss or damage to the stock-in-trade as and when it occurred, as he should have done.
13. Shri Dutta, appearing for the assessed, contended that the payment was received by the assessed as compensation for agreeing not to pursue the prosecution of the bank officials and cannot be treated as compensation for loss of stock-in-trade. We cannot accept this contention. A perusal of the letter of the auditors (portions of which have been extracted earlier), of the order of the Magistrate framing the charges, of the revisional order of the Addl. Sessions Judge and of the order of Falshaw J., make it clear that the dispute between the parties was of an 'eminently civil nature' and that the attempt of the assessed as well as the banker was only to reach a settlement in respect of the loss or damage to the goods. This finding of the Tribunal was, thereforee, based on material and cannot be interfered with.
14. For the above reasons, we answer the question in the affirmative and against the assessed. The Commissioner will be entitled to the costs of this reference. Counsel's fee Rs. 300.