1961 (5) TMI 4 - SC - Income Tax

Whether on the facts of the case a loss of 22, 981 is allowable in computing the income of the assessee chargeable to the excess profits tax ? Held that - As to the first ground it seems clear to us that under the third proviso to section 5 of the Excess Profits Tax Act 1940 where the profits etc. of a part of the firm s business accrued or arose at Bhatinda that part of the business shall for the purpose of the said section be deemed to be a separate business. The High Court was in error in thinking that the third proviso to section 5 of the Excess Profits Tax Act did not touch the question which the High Court had to answer. On the contrary we think that the proviso answers the question against the assessee. We agree that if the income 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 then 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 question must be in favour of the appellant and against the assessee. Civil Appeal be allowed.

Summary

Issues Involved:
1. Applicability of section 10(1), section 24(1) proviso read with section 14(2)(c), or section 42 of the Indian Income-tax Act, 1922.
2. Allowability of loss of Rs. 22,981 in computing the income chargeable to the excess profits tax.

Detailed Analysis:

Issue 1: Applicability of Section 10(1), Section 24(1) Proviso, Read with Section 14(2)(c), or Section 42 of the Indian Income-tax Act, 1922
The firm, Messrs. Chunilal Moonga Ram, engaged in speculative transactions in bullion at Bhatinda and claimed losses incurred in these transactions should be considered in determining its income. The income-tax authorities disallowed the claim, asserting that if the Bhatinda transactions had resulted in profits, they would be exempt from tax under section 14(2)(c). Consequently, the proviso to section 24(1) barred the adjustment of losses. The Tribunal, however, allowed the deduction, arguing that it was not feasible to split the transactions into those within and outside the taxable territories. It further stated that even if such splitting was possible, the Bhatinda transactions would fall under section 42, deeming the income to have arisen in British India. Therefore, the losses should be allowed.

The High Court directed the Tribunal to state whether the claim of loss is governed by section 10(1), section 24(1) proviso read with section 14(2)(c), or section 42. The Tribunal upheld the claim, and the High Court answered in favor of the assessee. The appellant conceded that the answer given by the High Court was correct, especially in light of the decision in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. Consequently, Civil Appeal No. 39 of 1960 was dismissed.

Issue 2: Allowability of Loss of Rs. 22,981 in Computing the Income Chargeable to the Excess Profits Tax
The High Court addressed this issue on two grounds. Firstly, it contrasted section 5 of the Excess Profits Tax Act, 1940, with section 5 of the Business Profits Tax Act, 1947, concluding that neither provision addressed whether losses incurred in an Indian State could be considered in assessing taxable income in British India. It cited the Bombay High Court's decision in Karamchand Premchand Ltd. v. Commissioner of Income-tax, noting that no distinction had been made between the principles governing income-tax and excess profits tax assessments.

Secondly, the High Court doubted whether the losses could be deemed to have occurred in Bhatinda, given that the assessee's business was conducted from Delhi, and transactions were made via telephone or post without any branch or agent in Bhatinda.

The appellant contended that both grounds were unsubstantial. The third proviso to section 5 of the Excess Profits Tax Act, 1940, deems the part of the business accruing profits in an Indian State as a separate business. Consequently, losses incurred in Bhatinda should be considered losses of a separate business, not affecting the taxable income in British India. The High Court erred in not recognizing this distinction.

The Tribunal had proceeded on the basis that losses arose in Bhatinda, and the High Court was not entitled to make new findings of fact. The Tribunal's decision was based on section 42, deeming the income to have arisen in British India due to business connections. However, the Tribunal did not consider the third proviso to section 5 of the Excess Profits Tax Act, 1940, which excludes profits arising in an Indian State from the Act's application.

On the facts found, the answer to the second question was in favor of the appellant, leading to the allowance of Civil Appeal No. 40 of 1960.

Conclusion:
- Civil Appeal No. 39 of 1960: Dismissed.
- Civil Appeal No. 40 of 1960: Allowed.

Both parties were directed to bear their own costs in both appeals.