Judgment

BHAGWATI, J.:- This appeal by special leave arises out of an assessment to income-tax made on M/s. Groz Backert Saboo Ltd. (hereinafter referred to as the assessee) for the assessment year 1962-63, the corresponding accounting year being the financial year ending 31st March, 1962. The assessee set up in collaboration with M/s. Theodor Groz & Soehne and Ernst Packert, West Germany (hereinafter referred to as the West German Collaborators) a factory for fabrication and manufacture of hosiery needles and it was not disputed on behalf of the assessee that this factory started business sometime prior to the commencement of the relevant year of account. It appears that in the early part of the relevant accounting year, the assessee received from the West German Collaborators consignment of machinery costing Rs. 9,45,545/- and along with this consignment, the West German Collaborators also sent to the assessee certain goods free of cost. These goods consisted partly of raw-materials and partly of semi-finished needles at various stages of manufacture. The invoice in respect of this consignment was dated 4th April, 1961 and it showed only the price of the machinery consigned to the assessee and did not make any mention of the raw-materials and semi-finished needles supplied to the assessee along with this consignment, since these goods were supplied free of cost and no charge was made in respect of the same. The Customs Authorities raised objection in respect of these goods and a separate invoice had, therefore, to be sent by the West German Collaborators showing Rs. 44,448.20 as the value of the raw-materials, namely, wire and strip and Rs. 30,000/- as the value of the semi-finished needles supplied to the assessee. These goods were not entered in the books of account of the business immediately on receipt by the assessee but they were brought into the books for the first time on 30th September, 1961 by making the following entries : Rupees 44,448.20 debited to the account of "Wire and Strip" and credited to the "Wire and Strip Gift Account" and Rs. 30,000/- debited to the account of "Semi-Processed Needles" and credited to the "Semi-Processed Needles Gift Account." The assessee utilised these goods in the manufacture of finished products and sold the same in the market and the sale proceeds received by the assessee were credited in the trading account maintained in the books of account of the business, since they represented revenue receipts arising from the sale of the finished products. On 31st March, 1962, being the last date of the accounting year, the assessee closed the "Wire and Strip Gift Account" and the "Semi-Processed Needles Gift Account" by transferring the respective sums of Rs. 44,448.20 and Rs. 30,000/- to the credit of the "Capital Reserve Account" and debited an aggregate sum of Rs. 74,448.20 to the trading account by making corresponding credit entries in the accounts of "Wire and Strip" and "Semi-Processed Needles". The net effect of these entries was that the profit of the assessee was reduced by Rs. 74,448.20. The Income-tax Officer, in course of the assessment of the assessee to income-tax for the assessment year 1962-63, took the view that the debit of Rs. 74,448.20 was wrongly made in the trading account as on 31st March, 1962 since no monies were expended by the assessee in acquiring the raw-materials and semi-finished needles, but they were received by way of gift from the West German Collaborators and hence no amount was deductible in respect of the value of these goods. The same view was taken by the Appellate Assistant Commissioner in appeal and on further appeal, the Tribunal also affirmed the same view. This led to a Reference by the Tribunal at the instance of the assessee and the following two questions were referred for the opinion of the High Court :

1. Whether on the facts and in the circumstances of the case, the sum of Rupees 74,448.20 being the actual value of raw material received from