1965 (4) TMI 6 - HC - Income Tax

Set off of loss - If a person carries on two or more distinct businesses, the profits or losses of all of them ought to be added together and the aggregate sum so arrived at would represent his profits or gains in the business. If the net result of this calculation shows a loss, such loss may u/s 24 of the Act be set off against the profits or gains derived by the assessee from other heads of income of that year

Summary

Issues:
Interpretation of loss claimed in arecanut business for assessment year 1955-56 and its admissibility for deduction against profits from other business.

Detailed Analysis:
The judgment pertains to a reference under section 66(2) of the Income-tax Act arising from the assessment year 1955-56. The assessee, originally a partner in a firm carrying on businesses in rice mill and arecanuts, became the sole proprietor after the firm's dissolution. The assessee claimed a loss of Rs. 14,059 from the arecanut trade due to adverse market conditions. The Income-tax Officer accepted most of the claimed loss but disallowed Rs. 500 for staff payment due to lack of profits. The Appellate Assistant Commissioner disallowed the arecanut loss, attributing borrowed funds to the rice mill business. The Appellate Tribunal upheld this decision, considering the businesses as an integral whole despite separate accounts.

The Tribunal's decision was challenged through a reference to the High Court, questioning the disallowance of the arecanut business loss. The Court analyzed the facts, emphasizing that the assessee maintained the establishment and awaited market improvement, indicating ongoing business intent. Citing legal precedents, the Court highlighted that business activity is not solely based on continuous operations but includes preparatory actions during dormant periods. The Court affirmed that the Income-tax Officer correctly allowed the arecanut loss but addressed whether the loss could be set off against profits from the rice mill business.

The Court examined the principle that income tax is levied on the aggregate income, not distinct business heads. Legal authorities were cited to support the position that losses from one business can be set off against profits from another when the businesses are interrelated. Precedents such as Arunachalam Chettiar v. Commissioner of Income-tax were referenced to establish the entitlement to set off losses against profits in multiple businesses. Consequently, the Court held that the Income-tax Officer's decision was legally sound, allowing the arecanut loss deduction and affirming the principle of setting off losses against profits from different business segments.

In conclusion, the High Court ruled in favor of the assessee, allowing the deduction of the arecanut business loss and affirming the right to set off losses against profits from other business activities. The assessee was granted costs, including counsel fees.