The Commissioner of Income-Tax New
Delhi Vs. M/S. Chuni Lal Moonga Ram [1961] INSC 219 (5 May 1961)
DAS, S.K.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1962 AIR 1272 1962 SCR (2) 823
ACT:
Excess Profits Tax-Income-Assesseecarrying on
business in taxable territory-Losses incurred in transactionsin nontaxable
territory-If allowable in computing income-Excess Profits Tax Act, 1940 (15 of
1940), s. 5.
HEADNOTE:
During the assessment year 1946-47, the
assessee was carrying on speculative business in bullion at Delhi. It entered
into transactions in the nature of forward transactions with parties at
Bhatinda (in the Patiala State outside the taxable territories of British India) in which it suffered losses. The assessee claimed deduction of these losses
in the computation of its income.
Held, that the losses incurred in Bhatinda
could not be taken into account in computing the income of the assessee in British India. Under the third proviso to s. 5 of the Excess Profits Tax Act, 1940, that
part of the business of the assessee in which the losses occurred at Bhatinda
was to be deemed to be a separate business, and consequently the losses
incurred in non-taxable territory could not be taken into consideration for
purposes of Excess Profits Tax. The language of the third proviso to s. 5 was
one of exclusion and made the Act inapplicable to profits etc. of the part of
the business which arose in non-taxable territories.
Commissioner of Income-tax v. Karamchand
Premchand Ltd., (1960) 40 1. T. R. 106, relied on.
CIVIL APPELLATE JURISDICTION .Civil Appeals
Nos. 39 and 40 of 1960.
Appeals from the judgment and order dated
January 23, 1957, of the Punjab High. Court in Civil Reference No. 13 of 1955.
H.N. Sanyal, Additional Solicitor-General of
India, K. N.. Rajagopala Sastri and D. Gupta, for the appellant.
Naunit Lal, for the respondent.
824 1961. May 5. The Judgment of the Court
was delivered by DAS, J. These two appeals have been brought to this Court on a
certificates of fitness granted by the High, Court of Punjab under s. 66A(2) of
the Indian Income-tax Act, 1922.
The relevant facts are these. Messrs Chunilal
Moonga Ram, a firm of Delhi, carried on a speculative business in bullion,
mostly in ,old and silver, in Chandni Chowk at Delhi. For the assessment year
1946-47 it was charged to income-tax on its income from the business in the
relevant accounting period. Similarly, it was charged to excess profits tax for
the chargeable accounting period ending on February 6, 1946.
One of the appeals, Civil Appeal No. 39 of
1960, arises out of the assessment of income-tax and the other appeal, Civil
Appeal No. 40 of' 1960, arises out of the assessment of excess profits tax.
During the relevant accounting periods the firm entered into certain transactions
called "hedge" transactions in the billion market at Bhatinda (then a
part of the Patiala State, that is, outside: the taxable territories of British
India). It claimed-that it had incurred losses to non-residents there in the
sums of Rs. 6,366/and Rs. 16,615/in the said transactions and claimed that
these losses should be taken into consideration in determining its 'income. It
appears from the assessment order of the Income-tax Officer, Delhi, dated
January 27, 1949 that the firm purchased certain "sillies" (bars of
gold and silver) from a Bhatinda party on the telephone, which purchases were
later confirmed by a letter or wire.
Similarly, the bars were also sold by the
firm through a Bhatinda party on the telephone. Apparently , no delivery was
intended to be taken or was taken of the bars bought or sold ; nor did the firm
have any branch or agent at Bhatinda. The transactions were in the nature of
forward transactions carried out by means of telephone 825 messages, letters or
telegrams with parties at Bhatinda.
This was the nature of the transactions Which
resulted in the losses for which the firm claimed deduction. The Income-tax
authorities disallowed the claim on the ground that if the Bhatinda
transactions had resulted in profits, such profits would have been exempt from
tax in terms of s.14(2)(c) as it then stood and if the profits were exempt from
tax, the proviso to a. 24(1) of the Act was a bar to the adjustment of the
losses. The assessee then moved the Income-tax Appellate Tribunal. The
Appellate Tribunal, however, allowed the deduction claimed on grounds which are
not very clearly stated. It appears; that the Tribunal proceeded on the footing
that it was not possible to ,"split up transactions of a business located
in the taxable territories into two categories of transactions inside and
outside such territories" and even if such spliting up was possible, the
Bhatinda transactions would fall within s. 42 of the Act and the income etc.
therefrom would be deemed to have arisen in British India. In this view of the
matter, the Accountant Member of' the Tribunal who delivered the judgment of
the Tribunal said "To start with, it seems to us that there is no warrant
either in terms of s. 14(2)(c) or in terms of the proviso to s. 24(1) to split
up the transactions of a business located in the taxable territories into
transactions in taxable territories and transactions without taxable
territories. Even if that treatment were permitted and the profits or losses
resulting from transactions outside the taxable territories can be described as
income, profits and gains, such income, profits and gains are deemed under s.
42 to have accrued or arisen in British India. The results of transactions of
the nature under review are' therefore, not exempt from tax by virtue of s.
14(2)(c). The proviso to s.
214(1) does riot in any case come 826 into
play. The Income-tax authorities have, in this view that we have, taken wrongly
disallowed the assessee's claim for adjustment of losses amounting to Rs.
6,360/and Rs. 16,615/-. We allow these losses." The Tribunal accordingly
allowed the two appeals. We may here state that the Income-tax authorities as
also the Tribunal considered the claim for deduction in relation to the
assessment for income-tax only. As to the excess profits tax there was-no
separate discussion of the provisions of S. 5 of the Excess Profits Tax Act,
1940 and they dealt with the assessment of excess profits tax as a mere
consequential matter.
The, Commissioner of Income-tax, Delhi, then
made two applications asking the Tribunal to refer certain questions of law
arising out of its orders to the High Court of Punjab, The Tribunal cam to the
conclusion that no questions of law arose out of its orders and rejected the
applications. The High Court was then moved under s. 66 (2) of the Indian
income-tax Act, 1922 and the High, Court heard the two applications together
and directed the Tribunal to state a case on the following two questions which,
in the opinion of the High Court, arose out of the Tribunal's orders.
(1) Whether the claim of loss in this case is
governed by the provisions of S. 10(1) or 24(1) proviso read with s. 14(2)(c),
or by the provisions of s. 42 ? (2) Whether on the facts of the case a loss of
Rs. 22,981/is allowable in computing the income of the assessee chargeable to
the Excess Profits Tax ?" The Tribunal then' drew up a statement of case
on the two questions aforesaid. By its judgement and order dated January 23,
1957 the High Court answered both the questions in favour of the 827 assessee.
Thereafter the Commissioner of Income tax, Delhi, asked for and obtained a
certificate under s.66A(2) of the Indian Income-tax Act and on that certificate
the present appeals have been brought to this Court.
As to the first question the learned
Additional SolicitorGeneral, appearing on behalf of the appellant, has conceded
that him 'not in a, position to dispute the correctness of the answer given, in
view of the decision of this Court in Commissioner of Income-tax v.
Indo-Mercantile Bank Ltd. (1).
This disposes of Civil Appeal No. 39 of 1960
which must be dismissed.
In Civil Appeal No. 40 of 1960 the second
question falls for decision. In answering this second question the High Court
has proceeded on two grounds : firstly, it has referred to s.5 of the Excess
Profits Tax Act, 1940, particularly the third proviss thereto, and contracting
the provisions of that section with s.5 of the Business Profits Tax Act of 1947
has expressed the view that neither of these provisions touched the question
whether losses incurred in an Indian State could be taken into account in
assessing the taxable income of an assessee in British India for purposes of
assessing excess profits tax or business profits tax ; it then referred to the
decision of the Bombay High Court in Karamchand Premchand Ltd. v. Commissioner
of Income-tax, Bombay (2) and said:
"It would seem that inspite of the
slightly different language of the Excess Profits Tax Act from that of the
Income-tax Act, no distinction has ever been drawn in this matter between the
principles governing assessment to income-tax and the principles governing
assessment to excess profits tax and in fact it would appear to have been the
universal (1) (1959) 36 I.T.R, 1.
(2) (1956)30I.T.R.849, 828 practice that
decisions of the Income-tax authorities and High Courts have been followed by
consequential orders relating to the same assessee's taxable income for the
purpose of the Excess Profits Tax Act and the learned counsel for the
Commissioner has not been able to cite any decision in which different
principles have been applied in this particular matter. Admittedly one of the
reasons given in his judgment by Chagla C.J.
for coming to the decision mentioned above
'was that the third proviso had been changed in the Business Profits Tax Act as
compared with the Excess Profit-, Tax Act, but this is only one of a number of
reasons and the questions has not been considered at all whether under the
proviso in the Excess Profits Tax Act losses made in an Indian State could have
been computed in assessing the assessee's income from business in British
India. I can only say that in the circumstances it seems to me likely that if
the point had arisen the same view that I.
have expressed above would have been taken,
namely, that whereas for the excess profits tax profits earned in an Indian
State could not be taken into consideration at all, such profits could be taken
into account if brought into taxable territories for assessing profits tax and
that is regards losses. they I could be taken into account in assessing the
business whether they occurred in a State. or in what was British India."
The second ground given by the High Court depended on the facts found. The High
Court expressed the view that, on the facts found it was doubtful if the losses
in question could be deemed to have occurred in Bhatinda.
It said "It is not in dispute that the
only place where the assessee carries on business is 829 Delhi and that its
transactions in other markets are carried out by means of communication by
telephone or Post. There is no Suggestion that the firm has any agent or branch
in any native State and it therefore seems to me that whether profits result or
losses are incurred as the result of transactions of this kind even with firms
in Indian States, the profits accrue or the losses are incurred at the place
where the payments are received or from which they are made, namely, the firm's
place of business at Delhi." On behalf of the appellant it is contended
that both the aforesaid grounds given by the High Court for the answer which it
gave to the second question are unsubstantial.
The, first ground, it is contended, is
untenable in law, and the second. proceeds not on the findings of fact arrived
at by the Tribunal but on new findings made by the High Court, which course was
not open to the High Court to take.
We consider that these contentions are
correct. As to the first ground, it seems clear to us that under the third
proviso to s.5 of the Excess Profits Tax Act, 1940 where the profits etc., of a
part of the firm's business accrued or arose it Bhatinda, that part of the,
business shall for the purpose of the said section be deemed to be a separate
business. If that is so the losses which arose at Bhatinda must also be the
losses of a separate business. We may here read s.5 and the third proviso
thereto :
.lm15 " s. 5. This act shall apply to
every business of which any part of the profits made during the chargeable
accounting period is chargeable to income-tax by virtue of the provisions of
sub-clause (i) on sub-clause (ii) of clause (b) of subsection (1) of section 4
of the 830 Indian Income-tax Act, 1922, or of clause (c) of that sub-section :
Provided further that this act shall not
apply to any business the whole of the profits of which accrue or arise in an
Indian State and where the profits of a part of a business accrue or arise in
an Indian State, such part shall, for the purposes of this provision, be deemed
to be a separate business the ",hole of the profits of which accrue or
arise in an Indian State and the other part of the business shall, for all the
purposes of this Act, be deemed to be, a separate business." In
Commissioner of Income-tax v. Karamchand Premchand Ltd.(1). This Court
considered s. 5. of the Business Profits Tax Act, 1947 and pointed out the
distinction between the third proviso thereto and the third proviso to s. 5 of
the Excess Profits Tax Act, 1.940. This Court quoted. with approval the
decision in Commissioner of Excess Profits Tax, Bombay City v. Bhogilal H.
Patel Bombay (2 ) and held that the language used in the third proviso to S. 5
of the Excess Profits Tax Act, 1940 was one of exclusion and that Act did not
apply to profits etc. of that part of the business which arose in an Indian State.
If that part of the business has to be treated as a separate business for the
purposes of the Excess Profits Tax Act, it is difficult to see how the losses
incurred in an Indian State can be taken into consideration for the same
purposes. We think that the High Court was in error in thinking that the third
proviso to s. 5 of the Excess Profits Tax Act did not touch the question which
the High Court had to answer. On the (2) (1952) 21 I.T.R. 72, (1) (1960) 40
I.T.R. 106.
831 contrary, we think that the proviso
answers the question against the assessee.
Now, as to the second ground given by the
High Court. It seems to us that there can be no doubt that the assessing
authorities proceeded on the footing that the losses for which the assessee
firm claimed a deduction arose and were incurred at Bhatinda, even though the
firm's place of business was Delhi. The Income-tax Officer, as also the
Appellate Assistant Commissioner referred to s. 14(2)(c ) of the Income-tax
Act, 1922; that provision related to income, profit-, or gains accruing or
arising in an Indian State.
The assessing authorities proceeded on the
footing that as the proof its we are exempt from tax in terms of s. 14(2)(c),
the losses arising out-. side the taxable territories could not be taken into
account. The Tribunal did not rely on s. 14(2)(c), nor on the proviso to s. 24
(1) of the Income-tax Act, 1922. But it relied on s.42. That again shows that
it proceeded on the footing that though the income actually arose outside the
taxable territories, it should be deemed to have arisen within the taxable
territories by reason of its business connection in the taxable territories.
The High Court had to answer the second question on the facts found; it could
not arrived at fresh findings of fact. Such a course was not open to it.
Indeed, it is true that the Tribunal said
that the firm's transactions could not be split up, but the actual decision of
the tribunal proceeded on the basis that. even it the transactions could be
split up, s.42 applied and the income actually arising at Bhatinda would be
deemed to have arisen in the taxable territories and so the losses must be
taken into consideration for arriving at the income. The Tribunal considered
the matter solely from the point of view of the assessment of income-tax. It
did not consider the third proviso to s. 5 of the Excess Profits Tax Act, 1940
and what effect it had in the matter of the assessment of' excess profits tax.
We agree that if the income 832 did not arise or accrue in Bhatinda but the
whole of it arose in Delhi, the third proviso would have no application.
If however, part of the income etc. arose in
Bhatinda, there that part of the business was a separate, business for the
purposes of the Excess Profits Tax Act and the losses' incurred at Bhatinda
could not be taken into account. We are of the view that on the facts found,
the answer to the second question must be in favour of the appellant and
against the assessee. Civil Appeal No. 40 of 1960 must, therefore, be allowed.
The two appeals were heard together and in
view of the divided success of the parties, the parties must bear their own
costs in both appeals.
Civil Appeal No. 39 dismissed.
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