Indore Malwa United Mills Ltd. Vs. The
Commissioner of Income-Tax (Central) Bombay [1962] INSC 62 (19 February 1962)
19/02/1962
ACT:
Income Tax --Proceedings under s. 24 of the
Indian Incometax Act-Scope and effect of section and its proviso-Set-off of
loss-Indian Income-tax Act, 1922 (11 of 1922) ss 24(1), (2) 14(2) (c), 4(1)
(a), (c).
HEADNOTE:
The assessee company carried on a business of
manufacture and sale of textile goods. The manufacture was made at its mills in
Indore which was an Indian State before integration and had its own law as to
income-tax known as the Indore Industrial Tax Rules, 1927. The sales of textile
goods so manufactured were made at various places, some inside and some outside
the taxable territories of the then British India. For and upto assessment year
1949-50 the assessee company was treated as a non-resident. Indore became a
part of the taxable territories within the meaning of the Indian 311 Income-tax
Act, 1922 in the two assessment years 1950-51 and 1951-52 and the asscssee
company was held to be "resident and ordinarily resident" within the
meaning of that Act.
Upto the assessment year 1949-50 that part of
its profits which was received by the assessee company in British India was
subjected to tax together with it.,; other income which accrued in British
India. In making the calculation of business profits or loss received or
arising in the taxable territories, a proportion was struck between the total
turnover and its sales the proceeds whereof were received in the taxable
territories. The assessee company raised two questions in the course of the
assessment proceedings, one of which with regard to the entire loss of Rs.
5,19,590/of the year 1948-49 which it claimed to set-off against the profits
made in its business in the two assessment years.
The assessee company contended that the
business was one and under s. 24 it was entitled to set off the losses which it
had sustained in 1948-49. The High Court decided this question against the
assessee company, but gave a certificate under s. 66A of the Act.
Held, on appeal, that the High Court
correctly answered the questions the provisions of s. 24 of the Act read with
the provisions in s. 4(1) (a) and (c) and s. 14(2)(c) make it clear that
sub-s(1) of s: 24 when it talks of profits or gains has reference to taxable
profits or taxable gains ; it has no reference to income accruing or arising
without the taxable territories which were not liable to be assessed in the
case of non-residents. In determining the nature of the losses under
consideration in these appeals the relevant year was 1948-49, the year in which
the losses occurred, and the High Court rightly took the view that for the
application of sub-s (2) of s. 24, the losses must be such losses as could have
been set-off under sub-s.(1) of s. 24.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 149 and 150 of 1961.
Appeals from the judgment and order dated September 23, 1968, of the Bombay High Court in I.T.R. No. 86 of the 1957.
R.J. Kolah, J. B. Dadachanji, O. C. Mathur
and Ravinder Narain, for the appellants.
K.N. Rajagopala Sastri and D. Gupta, for the
respondent.
312 1962, February 19. The Judgment of the
Court was delivered by.
S.K. DAS, J.-These are two appeals on a
certificate of fitness granted by the High Court of Judicature at Bombay under,%. 66A(2) of the Indian Income-tax Act, 1922. The relevant facts which have
given rise to them are shortly stated below.
The Indore Malwa United Mills, a limited
liability company, is the appellant before us and will be-referred to in this
judgment as the assessee company. The respondent is the Commissioner of
Income-tax(Central), Bombay. The assessee company carried on a business of
manufacture and sale of textile goods. The manufacture was made at its mills in
Indore which was Indian State before integration and had its own law as to
income-tax known as the Indore Industrial Tax Rules, 1927. The sales of textile
goods were made at various places, some inside and some outside the taxable
territories of British India. For and upto the assessment year 1949-50 the
assessee company was treated as a nonresident within the meaning of s.4A of the
Indian Income-tax Act, 1922. For the assessment years 19-50-51, and 1951-52
which are two assessment years under consideration, the account years were the
calendar years 1946 and 1950 respectively. Indore became a part of the taxable
territories within the meaning of the Indian Income. tax Act is the two
assessment years and the assessee company was held to be "resident and
ordinarily resident" with the meaning of that Act. Upto the assessment
year 1949-50 that part of its profits which was received in British India was
subjected to tax together with its other income which accrued in British India,
namely, interest on securities and interest on bank accounts. In the
assessments made for the assessment years 1948-49 and 1919-50 the 313 position
of the assessee company was stated to be as follows:
1948-49 Income tinder the head 'Interest on
securities' ... Rs. 1,032 Income under the head 'Other sources' interest from
banks ... Rs. 231 ----------Rs 1,263 Business loss Rs. 1,992/-. Balance of
lossRs. 729/carried forward.
1949-50 Interest on securities ... Rs. 1,023
Bank interest ... Rs. 2 13 --------Rs.1,236 Less : loss of 1948-49 set off ....
Rs. 729 --------Total income ... Rs. 507 In making the calculation of business
profits or loss received or arising in the taxable territories, a proportion
was struck between the total turn-over of the assessee company and its sales
the proceeds whereof were received in the taxable territories. The following
table, which is part of the order of assessment of 1950-51, shows clearly how
the calculation was made.
314 1 2 3 4 5 Rs. Rs. Rs. Rs. ----------------------------------------------------------Net
profit DepreciaBusiTotal of the as per ness turnover Assesscompany the Indian
income of the ment before alIncomeof the company year lowance Tax Act comof
deprepany ciation (Col.2 minus col.3) 6 7 8 9 Rs. Rs. Rs. Rs. ----------------------------------------------------------Sales
for Business profit other Total in which considered as income come for proceeds
having been accruing the prupose were received in the in the of assessreceived
taxable territaxable ment under in the tories(by apporterrithe Indian taxable
tioning the tories Icome-Tax territories amount in Act.(Col.8) col. 4 in the
proportion of col 5: col.6) 315 Daring the course of the assessment proceedings
for 1950-51 the assessee company claimed that it was entitled to a set off of
the entire losses of the assessment year 1948-49 which it was common ground
before the Tribunal, came to Rs.
5,19,590/-, and not merely the proportionate
loss. The assessee company also claimed that the depreciation allowances of the
two years 1948-49 and 1949-50 to which effect could not be given in those years
and which had, therefore, to be carried forward should be added to the
depreciation allowance of 1950-51 and be set off against the profits and gains
of the assessee company liable to assessment in the assessment years in
question. It is to be noted that the assessment of the assessee company for the
assessment years 1948-49 and 1949-50 was made both under the Indian Income-tax
Act and under the Indore Industrial Tax Rules, 1927. Now the assessee company
made two claims in the course of the assessment proceedings for 1950-51. One
was with regard to the loss of Rs. 5,19,590/and the assessee company's
contention was that it was entitled to set off this loss against the profits
made in its business in that year and it also contended that it was entitled to
carry forward the unabsorbed depreciation into that year.
The first contention of the assessee company
was rejected by the Tribunal but the second was allowed. Two questions were
then raised, one at the instance of the assessee company and the other at the
instance of the Commissioner, dealing with the aforesaid two claims of the
asseessee company. These two questions were :
" 1. Whether the loss of Rs. 5,19,590/of
the year 1948-49 is liable to be set off against the assessee's business income
for the assessment years 1950-51 and 1951-52 ?
2. Whether the unabsorbed depreciation of the
years 1948-49 and 1949-50 is liable to 316 be set off against the income of the
assessee for the eassessment years 1950-51 and 195152." On being satisfied
that aforesaid two questions arose out of its order, the income-tax Appellate
Tribunal, Bombay Bench A, referred them to the High Court of Bombay under s,
66(1) of the Indian Income-tax Act. The High Court answered the first question
against the assessee company and the second question in its favour by its
judgment and order dated September 23,'1958. The assessee company then moved
the High Court for a certificate under s. 66A(2) of the Indian Income-tax Act
with regard to the answer given by the High Court to the first question and
having obtained a certificate of fitness has preferred the two appeals to this
Court. We are concerned in these two appeals with the correctness or otherwise
of the answer given by the High Court to the first question; the second
question does not fall for our consideration.
On behalf of the assessee company s. 24(2) of
the Indian Income-tax Act has been relied on in support of the claim that the
assessee company is entitled to carry forward and set off the entire loss of
Rs. 5,19,590/incurred in the year 1948-49 against the assessee company's
business income for the assessment years 1950-51 and 1951-52. Mr. Kolah
appearing on behalf of the assessee company has put his argument in the
following way. First of all, he has submitted that the Income-tax Officer
wrongly proceeded on the footing as though the assessee company was carrying on
two separate businesses, one within the taxable territories and the other outside
them. Mr. Kolah has contended that the business was one business within the
meaning of s. 10 of the Indian Income-tax Act and in the two assessment years
in question Indore having become a part of the taxable territories provisions
in sub-s. (2) of s. 24 came into operation; therefore, the losses which the
assessee 317 company sustained in 1948-49, being a previous year not earlier
than the previous year mentioned in the sub-section and the losses not having
been set off under sub-s.(1) of s. 24, the assessee company was entitled to
carry forward the losses and set them off against the profits and gains of the
assessee company from the same business under any other head, as the time limit
of six years had not expired. As against this argument, the contention on
behalf Of the respondent has been that s-24 has no application in the facts of
the present case inasmuch as in the year 1948-49 in which year the losses had
occurred, the assessee company was treated as a nonresident. On behalf of the
respondent it has been submitted that the provisions of s. 24 are applicable
only to profits and against which are assessable under the Indian Income-tax
Act and in the case of nonresidents who were assessees in British India or in
the taxable territories. The claim to set off is only allowable in respect of
loss of profits or gains incurred by the nonresidents under any of the heads
mentioned in s. 6, and s. 24 is applicable only to such loss of profits arid
gains which if they had been profits and gains would have been assessable in
British India or the taxable territories. It is contended that in the case of
nonresidents, income accruing or arising without British India or without
taxable territories is not liable to be assessed and the loss of such profits
and gains is not contemplated to be set off within the provisions of sub-ss.
(1) and (2) of s. 24 of the Indian Income tax Act,.
Before we consider these contentions it is
necessary to set out the material provisions of the Indian Income-tax Act as
they stood at the relevant time.
"14. (1) Subject to the provisions of
this Act, the total income of any previous year of any person includes all
income, profits and gains from whatever source derived 318 which(a) are
received or deemed to be received in British India in such year by or on behalf
of such person, or (b) x x x x (e) if such person is not resident in British
India during such year, accrue or arise or are deemed to accrue or arise to him
in British India during such year:
x x x 14, (1) x xx (2) The tax shall not be
payable by an assessee(a) x x x (b) x x x (c) in respect of any income, profits
or gains accruing or arising to him within an Indian State, unless such income,
profits or gains are received or deemed to be received in or are brought into
British India in the previous year by or on behalf of the assessee, or are
assessable under section 12B or section 42.
24. (1) Where any assessee sustains loss of
profits or gains in any year under any of the heads mentioned in section 6, he
shall be entitled to have the amount of the loss set off against his income,
profits or gains under any other head in that year :
Provided that, where the lose sustained is a
loss of profits or gains which would but for the loss have accrued or arisen
within an Indian State and would, under the provisions of clause (c) of
subsection (2) of section 14, have been exempted from tax, such loss shall not
be set off except against profits or gains accruing or arising within an Indian
319 State and exempt from tax under the said provisions.
x x x (2) Where any assessee sustains a loss
of profit or gains in any year, being a previous year not earlier than the
previous year for the assessment for the year ending on the 31st day of March,
1940, under the head "Profits and gains of business, profession or
vocation", and the lose cannot be wholly set off under sub-section (1) the
portion not so set off shall be carried forward to the following year and set
off against the profits and gains, if any, of the assessee from the same business,
profession or vocation for that year; and if it cannot be wholly so set off,
the amount of loss not so set off shall be carried forward to the following
year, and so on; but no loss shall be so carried forward for more than six
years:
Provided that(a) Where the loss sustained is
a loss of profits and gains of a business, profession or vocation to which the
first proviso to sub-section (1) is applicable and the profits and gains of
that business, profession or vocation are, under the provisions of clause (c)
of sub-section (2) of section 14, exempt from tax, such loss shall not be set
off except against profits and gains accruing or arising in an Indian State
from the same business, profession or vocation and exempt from tax under the
said provisions;
(b) Where depreciation allowance is, under
clause (b) of proviso to clause (vi) of sub-section of section 10, also to be
carried forward, effect shall be given to the provisions of this sub-section;
x x x It may perhaps be stated here that Mr.
Kolah has placed no reliance on the provisions of the Taxation Laws (Part B
States) (Removal of 320 Difficulties) Order, 1950. Clause 3 of the said Order
provides that losses suffered in Indian States can be carried forward and set
off only if under the State law they could be so carried forward or set off.
Admittedly, Under the Indore Industrial Tax Rules, 1927 there was no provision
for the carrying forward of losses; therefore, cl. 3 of-the Taxation Laws (Part
B States)(Removal of Difficulties) Order, 1950 was of no assistance to the
assessee company.
This view of the High Court has not been
contested before us and we need, therefore, make no further reference to this
aspect of the case.
The answer to the question which we have to
consider depends on the true scope and effect of s. 24 of the Indian Incometax
Act. Under the Indian Income-tax Act, 1922, assessees are divided into three
categories (a) resident and ordinarily resident, (b) resident but not
ordinarily resident, and (c) not resident. We are concerned in the present'
case with, an assessee who in the year in which the loss which is sought to be
carried forward occurred, was a nonresident. Sub-section (1) of s.4, the
material portion of which we have quoted earlier, states that person Who are
not resident in India ire liable to charge under cl. (a) or cl.(c) of the said
subsection. They may be taxed under cl.
(a) on income received or deemed to be
received in India even if it accrues elsewhere, or under on income which
accrues or arises or is deemed to corue or arise in India even if it is
received elsehere. The liability to tax in respect of income received in India
is common to both residents and non-residents and is imposed by the general
clause (a). A non-resident, unlike a resident, is not argeable in respect of
income accruing or arising without India and not received in India. Section
4(2) (c), which is now deleted, had great importance when British India was
distinct from Indian states, because it exempted income which accrued 321 or
was received in the Indian States but was not brought into British India. The
deletion of this clause became inevitable upon the merger of the Indian States.
This clause which wan inserted in 1941 exempted income accruing or arising
within the Indian States; but the exemption did not apply if the income was
received or deemed to be received in or was brought into the taxable
territories in the previous year by or on behalf of the assessee or if the
income was assessable under s. 128 or s. 42. The Position, therefore, was that
losses made in British India could not be reduced by adjusting against them the
profits in the Indian States which were exempted under the clause, but the
income exempted from the clause had,, however, to be included in the assessee's
total income for the purpose of determining the rate applicable to his taxable
income. But so far as a non-resident was concerned the clause had no
application, because a nonresident was not chargeable in respect of' income
accruing or arising without India and not received in India. Now, we come to s.
24, sub ss.(1) and (2) with the provisos appended thereto which we have quoted
earlier in this judgment. It appears that prior to 1950 profits accruing in the
Indian States, later called Part B States, were exempt from tax under s.
14(2)(c), unless they were, received in or brought into the territories then
referred to as British India or were assessable under s. 128 or s. 42. The
first proviso to sub-s.(1) as it stood at the relevant time dealt with losses
accruing in the qaondam Indian States and provided that losses incurred in the
Indian States should be set off only against profits accruing in the Indian
States. This was a reasonable provision, because an assessee who was not liable
to tax in respect of his profits arising in the Indian States could not be
allowed to set off his losses incurred in the Indian States against his profits
arising in British India. that losses incurred in an Indian State could be
Similarly cl.(a) of the provision to sub-s.(2) enacted that losses incurred in
an Indian State could be 322 carried forward and set off only against profits
accruing in an Indian State from the same business in a Subsequent year.
The -argument on behalf of the respondent is
that so far as a non-resident is concerned, he is not chargeable in respect of
income accruing or arising without India and not received in India. Therefore,
in his case it is unnecessary to go to the provisos, but s. 24 itself has no
application because sub-s. (1) of s. 24 when it refers to loss of profits or
gains, has reference to taxable profits or taxable gains and sub-s.(2) of s. 24
can only be applied in a case where the loss cannot be set off under sub-s.(1)
because of the absence or inadequacy of profits etc. In other words, the argument
is that s. 24 is applicable only to such loss of profits and gains which if
they had been profits and gains would have been assessable in British India or
the taxable territories; but in the case of nonresidents, income accruing or
arising without British India or without the taxable territories not being
liable to be assessed, the loss of such profits and gains is not contemplated
to be set off within the provisions of s. .24, sub-ss. (1) and (2).
Mr. Kolah has pointed out that sub-s.(2) of
s. 24 as also sub-s.(1) talk of "any assessee" and he has argued that
there is no reason why the provisions of sub-s.(2) of s. 24 should not the
applicable to a non-resident assessee. He has further argued that whatever
might have been the effect of the provisos in 1948-49, in 1950-51 Indore became
part of the taxable territories and the assessee company became entitled to
carry forward the losses up to six years and there is nothing in s. 24(2) to
prevent' him from making the claim. We are unable to accept this argument as
correct.
Reading the provisions in s. 24 with the
provisions in s.4(1)(a) -and s. 1.4(2)(c) it seems clear to us that s. (24)(1)
when it talks of profits or gains has reference to 323 taxable profits or
taxable gains in other words, it has reference to such profits and gains as
would have been assessable in British India or the taxable territories. It has
no reference to income accruing or arising without British India or without the
taxable territories which were not liable to be assessed in the case of
non-residents. We are further of the view that for determining the nature of
the losses under consideration in the present appeals, the relevant year was
1948-49, the year in which the losses occurred and the High Court rightly took
the view that for the application of sub-s. (2) of s. 24, the losses must be
such losses as could have been set off under sub-s.(1) of s. 24. We agree with
the view expressed by the High Court that the loss &mounting to Rs.
5,19,590/was not such a loss as could have been set off either under sub-s. (1)
or sub-s. (2) of s. 24.
We have, therefore, come to the conclusion
that the High Court correctly answered the question which was referred to it.
Accordingly, the appeals fail and are dismissed with costs, one hearing fee.
Appeals dismissed.
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