KUMARA PILLAI, J. :- This is a reference made by the Madras Bench of the Income-tax Appellate Tribunal under S. 66(2) of the Indian Income tax Act in compliance with the direction of the High Court of Travancore Cochin State in the order in Original Petition No 194 of 1955.

2. The assessee, Helen Rubber Industries Limited is a company incorporated in the former State of Travancore and having its registered office at Kottayam. It had a factory for the manufacture of rubber goods at Kottayam (not at Kanjirappally as wrongly stated in the order of reference by the Income-tax Appellate Tribunal). In the Malabar year 1116 the assessee-company (referred to hereinafter as the company) leased the aforesaid factory for a period of 15 years to certain persons (referred to hereinafter as lessees) by a registered instrument. Clauses 14 and 16 of the lease-deed provide for payment of damages in certain circumstances by the lessees to the company. They read :

"14, The lessees further covenant and guarantee that during the continuance of the lease and for a period of three years after the expiration of the lease, the lessees or any of them shall not directly or indirectly work for, advise or be in any manner connected with any other rubber goods manufacturing concern or themselves carry on any such concern except continuing the business of manufacturing goods from Rubber latex now carried on by them at Kanjirappally and that on the breach of any of the above guarantees the lessees shall pay the lessors a lump sum of Rs. 10,000 only as compensation therefor."

16. "If the lessees discontinue the lease before the efflux of the period herein provided or cause such discontinuance by their default to observe or by their breach of any of the terms of this agreement to be observed or performed by them, the lessees shall become liable and shall pay to the lessors a sum of Rs. 10,000 by way of liquidated damages for such discontinuance .........."

Disputes and dissensions arose between the lessees and the company shortly after the grant of the-lease, and these disputes and dissensions gave rise to four suits between them in the District Court of Kottayam; (1) O.S. No. 134 of 1117 and (2) O.S. No. 126 of 1121 instituted by the lessees against the company and another person : and (3) O.S. No. 144 of 1118 and (4) O.S. No. 180 of 1124 instituted by the company against the lessees. All those disputes and suits were finally settled by a compromise by which the lease was terminated. Under the compromise the lessees also paid to the company a sum of Rs. 23,311-3-0 on account of the damages provided for in Cls. 14 and 16 of the lease deed and certain other claims, and it was credited in the companys accounts as follows :

Balance due on ledger account Rs. 8,186 0 0

Damages for breach of clause 14 of the lease deed " 7,075 1 6

Damages for breach of clause 16 of the lease deed " 8,050 1 6

_________

" 23,311 3 0

3. This payment was made after the extension of the Indian Income tax Act to Travancore Cochin by the Indian Finance Act, 1950. The first assessment on the company under the Indian Income tax Act was for the year 1950-51, accounting period : 1949 A.D. Before that, the company was being assessed under the Travancore Income tax Act, 1121, and in respect of the three assessments prior to the assessment of 1950-51 namely, the assessments for the Malabar years 1123, 1124 and 1125-the company was not taxed at all as it had made no profits during the relevant accounting periods and had incurred only losses. In 1950-51 also the company was not taxed as it had no profits or gains during the accounting period, and it was expressly stated in the assessment order of that year that the losses of 1123, 1124, 1125 M.E. and 1950-51, A.D., amounting in all to Rs. 14,003-1-3, were to be carried forward. That assessment order says :

"The assessee has returned a loss of Rs. 3,954/-. Sri Cherian, companys auditor representative appeared with the accounts in response