Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the amount of Rs. 1,07,469 receivable from M. Satyanarayanamurthy of Secunderabad on account of sale of free market sugar stock of 3,564 bags did not represent the assessee’s income for the asst. yr. 1974-75 ?

Counsel Appeared

M. Suryanarayana Murthy, for the Revenue : S. Parvatha Rao, for the Assessee

Y.V. ANJANEYULU, J.:

This is a reference arising under the IT Act, 1961, relating to the asst. yr. 1974-75. The reference is at the instance of the CIT and the Tribunal referred the following question :

” Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the amount of Rs. 1,07,469 receivable from M. Satyanarayanamurthy of Secunderabad on account of sale of free market sugar stock of 3,564 bags did not represent the assessee’s income for the asst. yr. 1974-75 ?”

We may mention, for the sake of completeness, that the CIT sought a reference of one more question but that was rejected by the Tribunal.

As far as the question referred for the consideration of this Court is concerned, we may notice a few facts. The assessee, the Palakol Cooperative Agricultural and Industrial Society, carries on business in the sale of sugar. During the course of its business transaction, the assessee entered into a contract with one M.Satyanarayanamurthy of Secunderabad for sale of 3,564 bags of sugar for a total consideration of Rs. 12,21,561. The aforesaid party failed to lift the stock with the result that the assessee had to sell the stocks in the open market. On auction sale, the assessee was able to realise a consideration of Rs. 11,14,092 as against the original consideration of Rs. 12,21,561 for which the contract was entered into with Sri Satyanarayanamurthy. In the books of account, the assessee seems to have made entries somewhat curiously. It treated the sum of Rs. 12,21,561 covered by the original contract with Satyanarayanamurthy as sale consideration, claimed the actual receipts on account of sale as only Rs. 11, 14,092 and treated the difference between the two as sales return and showed it as a reserve liability in its accounts. It also appears that the assessee filed a suit against the said Satyanarayanamurthy for recovery of the shortfall in the sale consideration amounting to Rs. 1,07,469 by way of damages. On these facts, the question arose before the ITO whether the assessee was entitled to claim the shortfall of Rs. 1,07,469 which did not represent sale proceeds and consequently could not enter into its income for the assessment year under consideration. The ITO was of the view that the assessee was following the mercantile system of accounting and in view of the entries made in the accounts and also the real effect of the transaction, the sum of Rs. 1,07,469 ought to be treated as income of the asst. yr. 1974-75.

Aggrieved by the aforesaid decision, the assessee appealed to the CIT (Appeals). The Commissioner took a contrary view and held that the amount is not liable to be treated as income.

The Revenue filed an appeal against the order of the CIT (Appeals) before the Tribunal. After examining the relevant circumstances, the Tribunal came to the conclusion that the view of the CIT (Appeals) in the facts and circumstances was quite justified. Accordingly, the appeal filed by the Revenue was dismissed and the order of the CIT (Appeals) was upheld. It is in these circumstances that the CIT sought a reference of the aforesaid question to this Court.

Learned standing counsel for the Revenue reiterates that the total sale consideration which the assessee ought to receive was Rs. 12,21,561, according to the contract entered into with Sri Satyanarayanamurthy, and the assessee itself credited in the books the aforesaid amount as sales, although the difference between the amount realisable as per the original contract and that actually received was treated as sales return and excluded from the income returned. According to learned standing counsel, the amount is liable to be taxed in the assessment year under consideration. If and when the assessee’s claim for damages in the suit filed is decided against the assessee, it would be open to the assessee to claim deduction of the same in the year in which the Court may finally decide.

Learned counsel for the assessee, Sri Parvatharao, submits that the observation of the Tribunal that the suit filed by the assessee was not correct (sic). It appears that the suit filed was decreed and Satyanarayanamurthy promptly filed an appeal against it and the same is pending. It is said that the aforesaid mistake in the observation of the Tribunal was brought to the notice of the Tribunal itself after the statement of the case was drawn up. Even so, contends learned counsel, the differential amount between the contract price and the price actually realised cannot be treated as a sale and much less as income. It is, therefore, urged that the Tribunal was justified in coming to the conclusion that the income for the assessment year under consideration cannot include the sum of Rs. 1,07,469.

We are inclined to agree with learned counsel for the assessee. Notwithstanding the somewhat cumbersome entries made in the books of account, the facts are clear. As far as the assessee in this case is concerned, there is no dispute that the sale price realised on the sale of 3,564 bags of sugar in public auction was only Rs. 11,14,092. The question of treating Rs. 12,21,561 as sale proceeds notionally and claiming the difference between the notional sale figure and the actual sale figure as sales return is unsupportable even as a matter of accounting principle. There is indeed no sales return in the present case and the assessee could not have credited the gross amount of Rs.

12,21561, which was not fully realised, as representing the consideration on the sale of 3,564 bags of sugar. It may be true that, on the facts, the cause of action had arisen in favour of the assessee to file a civil suit for damages against Sri Satyanarayanamurthy and make him accountable for the loss, if any, suffered. Unless and until the claim for damages was scrutinised by the Court and a final decree was given in favour of the assessee, it cannot be said that any income accrued or arose to the assessee in the transaction. In that view, we consider that the Tribunal came to the conclusion correctly that the differential amount of Rs. 1,07,469 cannot form part of the assessee’s income for the assessment year under consideration. We may add that if, in due course, the assessee’s claim is upheld either wholly or in part, the extent of the claim upheld, being relatable to the business carried on by the assessee would be liable to be taxed as the assessee’s income from business in the year in which the assessee’s claim is finally determined by the Court.

Having regard to the above, we would answer the question referred in the affirmative, that is to say, in favour of the assessee and against the Revenue. No costs.

[Citation : 171 ITR 607]