Law:

Section:

Section 28(i) of the income-tax act, 1961-Business income-Assesses contracted for advance purchase of gunny bags required under law as packing material-supplies rendered unnecessary by subsequent change in law and consequently goods disposed of at prices higher than contracted-Whether resultant profits constitute business income-Held, on facts, yes Facts The assessee-company, carrying on business in the manufacture and sale of cement, was required under the law to pack cement in new gunny bags. Between May and September 1960, it entered into contracts with a firm for the supply of new gunny bags between September 1960 and March 1961 but having been allowed in December 1960 by the Government to pack cement in second-hand gunny bags, it no longer needed to buy the new bags already contracted for. However, as the prices of new gunny bags had risen in the meantime, the assessee did not cancel the contracts but asked the suppliers to dispose of the bags according to its instructions. As a result of this arrangement, the assessee made a profit of Rs. 4,45,618 being the difference between the originally contracted price of the gunny bags and the price at which these were disposed of. The ITO treated this amount as part of the assessee's business profits rejecting the assessee's claim that it was a casual and non-recurring receipt. Both the AAC and the Tribunal upheld the ITO's order. The Tribunal held, inter alia, ( i) that the transaction originated as a routine transaction of the assessee's day-to-day business and its settlement in the light of business exigencies was equally a routine operation of business; and (ii) that it was not possible to call the surplus as casual or accidental and, even if it was characterised as casual, it could not by any stretch of imagination taken as anything but receipts arising from business and, therefore, on that count the amount was not entitled to exclusion. On reference: Held The gunny bags transaction arose as a normal incident in the assessee's business of manufacture and sale of cement. Fluctuations in the prices of raw materials, stores or packing material was a normal hazard of the trade and, in the case of large…

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