1962 (6) TMI 62 - HC - Income Tax

Summary

Issues Involved:
1. Allowance of losses suffered in earlier years and depreciation under the Indian Income Tax Act as deductions in the computation of available profits.
2. Inclusion of Rs. 90,000 in the total amount of available profits for remittance to taxable territories.
3. Taxation of Rs. 97,398 as remittances of income under section 4(1)(b)(iii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Allowance of Losses and Depreciation
Question (c): Whether the Tribunal was right in not allowing the applicant the losses suffered in earlier years as well as the depreciation allowable under the Indian Income Tax Act as deductions in the computation of available profits, if any?

The court held that there is no obligation on the Income Tax authorities to allow prior losses as a deduction under the Income Tax Act. Losses incurred in previous years cannot be considered an item of expenditure for the year in which the income is determined. The Act allows for the adjustment of previous years' losses against the profits of the current year, but if the assessee does not carry forward these losses in the books of the current year, the authorities are not obligated to deduct them. The court cited *Sarupchand Hukumchand v. Commissioner of Income Tax* to support this view.

Regarding depreciation, the court held that depreciation on assets located in the Hyderabad State (where the Income Tax Act was not applicable) should not be deducted under section 10(2) of the Act. Depreciation is not an outgoing expenditure for business purposes but a reserve created out of profits to account for asset wear and tear. Thus, the Tribunal was justified in rejecting the claim for depreciation.

Answer: The Tribunal was right in not allowing the losses suffered in earlier years and the depreciation allowable under the Indian Income Tax Act as deductions in the computation of available profits.

Issue 2: Inclusion of Rs. 90,000 in Available Profits
Question (b): Whether, on the facts and in the circumstances of the case, the sum of Rs. 90,000 has been rightly included in the total amount of available profits which could be remitted to the taxable territories, if any?

The court examined the remittance of Rs. 90,000 from the Latur branch to Bombay in May 1943. It was previously held that these remittances could not be considered as profits since they were made before the profits were determined. The Tribunal's view that the determined profits of the previous year must be taken as available for remittance in the subsequent year was challenged. The court noted that the department must prove that the determined profits were available at the place of business in the native State at the date of remittance.

The court referred to the Supreme Court decision in *Turner Morrison & Co. Ltd. v. Commissioner of Income Tax*, which established that trading receipts contain dormant profits attributable to them. The remittances of Rs. 85,000 and Rs. 5,000 from Latur to Bombay were considered to include profits attributable to those receipts.

Answer: The entire amount of Rs. 90,000 has not been rightly included in the total amount of available profits. The amount that could be included is Rs. 90,000 minus the proportionate profits attributable to the said amount, computed in the light of this judgment.

Issue 3: Taxation of Rs. 97,398 as Remittances of Income
Question (a): Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the action of the Income Tax authorities, taxing the sum of Rs. 97,398 as remittances of income under section 4(1)(b)(iii) of the Act?

The court addressed the contention that only the excess of remittances from Parbhani and Latur to Bombay over the remittances from Bombay to these branches should be considered as profits remitted. The Tribunal had adopted a rough method, deducting expenses incurred in Bombay for purchases from the total remittances.

The court referred to the principle laid down in *Commissioner of Income Tax v. Jankidas Kaluram Rewari*, which states that the presumption that remittances represent profits weakens if there are remittances in both directions. The Tribunal's approach to require correspondence for each remittance was deemed unreasonable. The court concluded that the excess remittances should be considered profits.

Answer: The Tribunal was in error in taxing the sum of Rs. 97,398 as remittances of income under section 4(1)(b)(iii). Instead, the sum of Rs. 71,874 should be taxed, provided accumulated profits to that extent were available at Parbhani and Latur for being remitted.

Conclusion:
The court answered the reference accordingly, directing the assessee to pay two-thirds of the department's costs. The answers to questions (a) and (c) for the year 1946-47 were as indicated in the judgment, and question (b) for the assessment year 1946-47 was deemed not to survive.