The Hindu Business Line : As usual, casual

THE law regarding taxability of casual and non-recurring income has undergone vast changes in the past three decades. There was a time when casual receipts were considered outside the purview of the tax law. The situation has changed. Judicial authorities, however, continue to hang on to the old impression that casual incomes are tax-exempt.

In the Swastika Metal Works case (274 ITR 280), the company placed an order on an American firm for purchase of copper ingots valued at $103805.87. The firm opened a letter of credit with a Delhi bank. The American company dispatched the goods by steamer and the bank made good the payment against delivery of documents against title to the goods along with the bill of exchange drawn upon Swastika Metal Works and endorsed in favour of the bank in terms of the letter of credit.

The bank collected Rs 30,000 from Swastika Metal works on presentation of the bill. Unfortunately, Indo-Pakistan hostilities broke out and Pakistan confiscated the goods in the ship on arrival at Karachi. The bank filed a claim for payment of insurance money on account of loss of the cargo. The American company had insured the goods for $1,14,495. The insurance company accepted the bank's claim and paid the bank the said sum.

The rupee was devalued in the meantime and the bank received Rs 8,60,217.88 as equivalent of $1,14,495. Swastika had paid only Rs 4,99,063 to the American firm towards the cost of goods. It demanded from the bank a sum of Rs 3,54,808 being the excess amount received by the bank. Disputes arose between the bank and Swastika. The suit was finally compromised and the bank paid Rs 1,42,000 to Swastika. The question arose whether this amount was taxable and if so, under what provision of the tax law. There was difference of opinion among the Members of the Tribunal and by a majority of 2 to 1, the issue was settled in favour of Swastika.

The Revenue took up the matter on reference before the Punjab and Haryana High Court. The question was whether the Tribunal was right in law in holding that the Rs 1,42,000 received by Swastika from the bank was in the nature of casual receipt and not partaking of the nature of income liable to tax for the assessment year (AY) 1974-75.

As it happens in such cases, the Revenue was looking for some section or the other to bring the Rs 1,42,000 to tax. First, it was Section 41(1) of the I-T Act, 1961. The High Court found that Swastika had not claimed the value of goods lost in any assessment year and no allowances had been made by the assessing officer (AO) on that account in any of the assessment years. The bank got itself reimbursed because it had made payment to the American company in dollars. Due to devaluation of the rupee, the bank received Rs 8,60,217 against Rs 4,99,063 made to the supplier of goods by Swastika.

The court observed that the benefit of devaluation of rupee belonged to the bank and not to Swastika whose relation with the bank was merely that of a debtor and creditor. Relying on the Supreme Court ruling in Universal Radiators vs CIT (201 ITR 800), the Punjab and Haryana High Court decided that the amount received as a settlement between the parties was nothing more than a casual receipt and not a trading receipt and, therefore, not liable to tax. Devaluation surplus was a casual and non-recurring receipt.

The matter concerned assessment year 1974-75. With effect from April 1, 1972, the law was amended and casual and non-recurring incomes were brought under the tax net above the specified limits under Section 10(3).

The High Court could have got out of the problem by declaring the receipt as capital. But there could have been problems in coming to the conclusion because it related to goods in transit which were of the nature of stock-in-trade. Surprisingly, the Revenue did not point out the amendment of the law. The sum of Rs 1,42,000 is taxable in the AY 1974-75 if it is considered as casual receipt which is not capital in nature.

The judgment was delivered in December 2004.

Probably, a review petition could have been filed to consider the impact of the amendment of Section 10(3) in the AY 1974-75. The question of whether it is capital receipt or revenue receipt was neither raised at any stage nor decided by the High Court, as if the parties were oblivious of the provisions of the amended law.

(The author is a former Chief Commissioner of Income-Tax.)

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