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Whether the loss incurred in the groundnuts and masoor business could be set off against the profits of the assessee's other business of the relevant year? Analysis: The judgment pertains to a reference under section 256(2) of the Income-tax Act, 1961, regarding the assessment years 1963-64 and 1964-65. The central question was whether the losses from the groundnuts and masoor business could be offset against the profits of the assessee's other business. The assessee had income in both India and East Pakistan during the relevant years. The managing agent of the assessee disclosed the business in groundnut and masoor on behalf of the assessee. However, the Income-tax Officer in Pakistan and India disallowed the losses claimed by the assessee as they found that the business was beyond the authority of the assessee as per the memorandum of association. The Appellate Assistant Commissioner accepted the assessee's contention and allowed the losses. Subsequently, the Tribunal endorsed the view of the Appellate Assistant Commissioner, emphasizing that the business was not illegal per se, but it was beyond the authority of the assessee to conduct such business. The Tribunal held that there should be no distinction between losses and profits of an illegal business. The High Court analyzed the facts and legal principles in detail. It noted that the assessee did not produce account books from East Pakistan or later from Bangladesh due to unavoidable reasons. The Income-tax Officer in Pakistan did not dispute the correctness of the losses claimed by the assessee. The High Court highlighted that even if a business is illegal, any profits derived from it are assessable, and there should be no distinction between the losses and profits of an illegal business. The Court referred to precedents and emphasized that the nature of a transaction or whether it falls within a company's powers does not affect the assessability of profits or losses. The Court cited cases where losses were allowed even when the business was outside the scope of the company's memorandum of association. Ultimately, the High Court agreed with the Tribunal's conclusion that the losses from the groundnuts and masoor business should be allowed, answering the reference question in favor of the assessee. In conclusion, the judgment clarifies that the illegality of a business does not preclude the allowance of losses for tax purposes. The High Court upheld the Tribunal's decision, emphasizing that the nature of the transaction and the company's powers do not impact the assessability of profits or losses. The judgment provides a comprehensive analysis of the legal principles surrounding the allowance of losses from an allegedly unauthorized business activity, ultimately ruling in favor of the assessee.
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