Oak, C.J:— This is a reference under section 256 of the Income-tax Act, 1961. The Pioneer Consolidated Company of India, Ltd., New Delhi, is the assessee. The assessment year is 1962-63. The accounting year was the financial year 1961-62.
2. The assessee is a public limited company carrying on the business of clearing and forwarding agents, selling agents and commission agents. During the course of its business the company received various amounts from its constituents for incurring expenses for and on behalf of the constituents, and towards commission of the company for services rendered to the constituents. From the various amounts received by the company from a number of constituents a total sum of Rs. 29,643 was lying in the books of the company to the credit of those constituents up to 1960-61. Those amounts were not claimed by the respective constituents. During the relevant accounting year the assessee-company transferred the amount of Rs. 29,643 to the credit of its profit and loss account. The Income-tax Officer treated this amount of Rs. 29,643 as income of the assessee-company during the year 1961-62. The assessee-company urged before the Appellate Assistant Commissioner and the Appellate Tribunal that the sum of Rs. 29,643 could not be treated as income of the assessee for the assessment year 1962-63. The assessee's contention was rejected by the Appellate Assistant Commissioner and by the Tribunal.
3. Again, the assessee was sole selling agent for Messrs. Turpentine and Subsidiary Industries Ltd. up to 1955-56. Under the terms of the agency, the assessee was responsible for realising outstanding claims for and on behalf of the Turpentine and Subsidiary Industries Ltd. The. assessee-company was under a legal obligation to pay the principal for the unrealised amounts. During the relevant accounting year the assessee-company paid a sum of Rs. 8,679 to the principal. This amount was claimed by the assessee as business expenditure. The claim was disallowed by the Income-tax Officer. The same view was taken by the Appellate Assistant Commissioner and by the Appellate Tribunal, Allahabad.
4. Being dissatisfied with the decision of the Tribunal on these two points, the assessee applied to the Tribunal for stating a case to this court. Accordingly, the Tribunal has referred the following two questions of law to this court:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 29,643 being the credit balance written off was income of the assessee chargeable to income-tax?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that the deduction of Rs. 8,679 was not allowable to the assessee in the assessment year 1962-63 because the selling agency in respect of which the amount was payable had ceased to exist in the assessment year 1955-56?”
5. Firstly, we take up question No. 1 relating to the sum of Rs. 29,643. It is significant that the assessee itself credited this amount to its profit and loss account. Mr. M.P Mehrotra appearing for the assessee contended that mere entry in the accounts of an assessee does not create a liability to tax. That is true. But an entry in the accounts of a company indicating a receipt is, prima facie, evidence of income.
6. The assessee advanced a number of pleas in support of its contention that the sum of Rs. 29,643 did not represent the assessee's income. It was suggested that it might be capital receipt, or a receipt in the nature of a windfall. It was also suggested that it might be a receipt or income of some earlier year. The various alternatives may now be considered.
7. As already mentioned, the sum was shown in the books of the company in the profit and loss account. There is no indication that this was in the nature of a capital receipt. The sum of Rs. 29,643 consists of various items, which were received by the assessee from time to time in connection with its business. Since the amounts were received at different times in the course of business of the assessee, it is not possible to treat the receipt as a windfall or casual income. The receipts were clearly in connection with the business of the assessee.
8. It appears that the various amounts were received by the assessee long before the accounting year 1961-62. Mr. M.P Mehrotra suggested that there might have been income of certain sums, when the claims of the constituents against the company for those items became barred by time. But it was urged that that could not be the income for the accounting year 1961-62. It is possible that the claims of the constituents against the company for certain sums were barred by time some time before the financial year 1961-62. But the material on the record does not disclose the exact time, when those claims became barred by time. It further appears that the company chose to indicate the various amounts in its books as deposits outstanding in favour of the constituents. So long as those sums represented deposits in favour of the constituents, the sums could not be treated as income of the assessee. It was only during the relevant accounting year that the sum of Rs. 29,643 was transferred from the deposit account to the profit and loss account. It was at this stage that the amount assumed the character of income of the assessee. The Tribunal was right in holding that the sum of Rs. 29,643 represented income of the assessee for the assessment year 1962-63.
9. Next we have to consider the sum of Rs. 8,679 mentioned in question No. 2. The income-tax authorities gave different reasons for disallowing this amount of expenditure incurred by the assessee. The Income-tax Officer disallowed the claim on the ground that the assessee did not take any legal action against the debtors of the principal, and permitted the claims to become barred by time. It may be that the assessee was negligent to that extent. But that had nothing to do with the nature of the expenditure incurred by the assessee. The department was not concerned with the question whether the assessee acted diligently or carelessly. The question before the authorities was whether the expenditure was business expenditure or not.
10. Another contention weighed with the Appellate Assistant Commissioner. He laid emphasis on the fact that after the year 1955-56 the assessee was no longer an agent of Messrs. Turpentine and Subsidiary Industries Ltd. Mr. Brijlal. Gupta appearing for the department also urged that that was a good reason for disallowing the expenditure of Rs. 8,679.
11. Mr. Brijlal Gupta relied on the Commentary on Income-tax by Kanga and Palkhivala, 4th edition, volume I. The learned authors observed on page 325:
“If the business is discontinued before the commencement of the accounting year, the profits of the business received in the accounting year cannot be taxed because the source of income does not exist in the accounting year at all.”
12. That passage has reference to discontinuance of the business of the assessee. In the present case there is no indication that the assessee's commission business discontinued after 1955-56. All that happened was that the relationship of principal and agent between Messrs. Turpentine and Subsidiary Industries Ltd. and the assessee-company ceased in the year 1955-56. But that does not imply that the assessee's commission business ceased. In the statement of the case it was stated by the Tribunal that the “assessee is a public limited company carrying on business of clearing and forwarding agents, selling agents and commission agents.” That observation clearly implies that the commission business of the assessee continued even after the year 1955-56.
13. At one time the assessee was an agent of Messrs. Turpentine and Subsidiary Industries, Ltd. In connection with that agency, the assessee-company incurred a certain liability. That liability (Rs. 8,679) was discharged by the assessee during the accounting year 1961-62. This payment was clearly in the nature of business expenditure. The Tribunal was wrong in not accepting this payment of Rs. 8,679 as business expenditure.
14. We answer question No. 1 in the affirmative, and against the assessee. We answer question No. 2 in the negative, and in favour of the assessee. Parties shall bear their own costs in this reference.
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