Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAXNEW DELHI
Vs.
RESPONDENT:
M/s. CHUNI LAL MOONGA RAM
DATE OF JUDGMENT:
05/05/1961
BENCH:
DAS, S.K.
BENCH:
DAS, S.K.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION:
1962 AIR 1272 1962 SCR (2) 823
ACT:
Excess Profits Tax-Income-Assesseecarrying on business in
taxable territory-Losses incurred in transactionsin non-
taxable territory-If allowable in computing income-Excess
Profits Tax Act, 1940 (15 of 1940), s. 5.
HEADNOTE:
During the assessment year 1946-47, the assessee was
carrying on speculative business in bullion at Delhi. It
entered into transactions in the nature of forward
transactions with parties at Bhatinda (in the Patiala State
outside the taxable territories of British India) in which
it suffered losses. The assessee claimed deduction of these
losses in the computation of its income.
Held, that the losses incurred in Bhatinda could not be
taken into account in computing the income of the assessee
in British India. Under the third proviso to s. 5 of the
Excess Profits Tax Act, 1940, that part of the business of
the assessee in which the losses occurred at Bhatinda was to
be deemed to be a separate business, and consequently the
losses incurred in non-taxable territory could not be taken
into consideration for purposes of Excess Profits Tax. The
language of the third proviso to s. 5 was one of exclusion
and made the Act inapplicable to profits etc. of the part of
the business which arose in non-taxable territories.
Commissioner of Income-tax v. Karamchand Premchand Ltd.,
(1960) 40 1. T. R. 106, relied on.
JUDGMENT:
CIVIL APPELLATE JURISDICTION .- Civil Appeals Nos. 39 and 40
of 1960.
Appeals from the judgment and order dated January 23, 1957,
of the Punjab High. Court in Civil Reference No. 13 of
1955.
H.N. Sanyal, Additional Solicitor-General of India, K.
N.. Rajagopala Sastri and D. Gupta, for the appellant.
Naunit Lal, for the respondent.
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1961. May 5. The Judgment of the Court was delivered by
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DAS, J. These two appeals have been brought to this Court on
a certificates of fitness granted by the High, Court of
Punjab under s. 66A(2) of the Indian Income-tax Act, 1922.
The relevant facts are these. Messrs Chunilal Moonga Ram, a
firm of Delhi, carried on a speculative business in bullion,
mostly in ,old and silver, in Chandni Chowk at Delhi. For
the assessment year 1946-47 it was charged to income-tax on
its income from the business in the relevant accounting
period. Similarly, it was charged to excess profits tax for
the chargeable accounting period ending on February 6, 1946.
One of the appeals, Civil Appeal No. 39 of 1960, arises out
of the assessment of income-tax and the other appeal, Civil
Appeal No. 40 of’ 1960, arises out of the assessment of
excess profits tax. During the relevant accounting periods
the firm entered into certain transactions called "hedge"
transactions in the billion market at Bhatinda (then a part
of the Patiala State, that is, outside: the taxable
territories of British India). It claimed-that it had
incurred losses to non-residents there in the sums of Rs.
6,366/- and Rs. 16,615/- in the said transactions and
claimed that these losses should be taken into consideration
in determining its ’income. It appears from the assessment
order of the Income-tax Officer, Delhi, dated January 27,
1949 that the firm purchased certain "sillies" (bars of gold
and silver) from a Bhatinda party on the telephone, which
purchases were later confirmed by a letter or wire.
Similarly, the bars were also sold by the firm through a
Bhatinda party on the telephone. Apparently , no delivery
was intended to be taken or was taken of the bars bought or
sold ; nor did the firm have any branch or agent at
Bhatinda. The transactions were in the nature of forward
transactions carried out by means of telephone
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messages, letters or telegrams with parties at Bhatinda.
This was the nature of the transactions Which resulted in
the losses for which the firm claimed deduction. The
Income-tax authorities disallowed the claim on the ground
that if the Bhatinda transactions had resulted in profits,
such profits would have been exempt from tax in terms of
s.14(2)(c) as it then stood and if the profits were exempt
from tax, the proviso to a. 24(1) of the Act was a bar to
the adjustment of the losses. The assessee then moved the
Income-tax Appellate Tribunal. The Appellate Tribunal,
however, allowed the deduction claimed on grounds which are
not very clearly stated. It appears; that the Tribunal
proceeded on the footing that it was not possible to ,"split
up transactions of a business located in the taxable
territories into two categories of transactions inside and
outside such territories" and even if such spliting up was
possible, the Bhatinda transactions would fall within s. 42
of the Act and the income etc. therefrom would be deemed to
have arisen in British India. In this view of the matter,
the Accountant Member of’ the Tribunal who delivered the
judgment of the Tribunal said
"To start with, it seems to us that there is
no warrant either in terms of s. 14(2)(c) or
in terms of the proviso to s. 24(1) to split
up the transactions of a business located in
the taxable territories into transactions in
taxable territories and transactions without
taxable territories. Even if that treatment
were permitted and the profits or losses
resulting from transactions outside the
taxable territories can be described as
income, profits and gains, such income,
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profits and gains are deemed under s. 42 to
have accrued or arisen in British India. The
results of transactions of the nature under
review are’ therefore, not exempt from tax by
virtue of s. 14(2)(c). The proviso to s.
214(1) does riot in any case come
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into play. The Income-tax authorities have,
in this view that we have, taken wrongly
disallowed the assessee’s claim for adjustment
of losses amounting to Rs. 6,360/- and Rs.
16,615/-. We allow these losses."
The Tribunal accordingly allowed the two appeals. We may
here state that the Income-tax authorities as also the
Tribunal considered the claim for deduction in relation to
the assessment for income-tax only. As to the excess
profits tax there was-no separate discussion of the
provisions of S. 5 of the Excess Profits Tax Act, 1940 and
they dealt with the assessment of excess profits tax as a
mere consequential matter.
The, Commissioner of Income-tax, Delhi, then made two
applications asking the Tribunal to refer certain questions
of law arising out of its orders to the High Court of
Punjab, The Tribunal cam to the conclusion that no questions
of law arose out of its orders and rejected the
applications. The High Court was then moved under s. 66 (2)
of the Indian income-tax Act, 1922 and the High, Court heard
the two applications together and directed the Tribunal to
state a case on the following two questions which, in the
opinion of the High Court, arose out of the Tribunal’s
orders.
(1) Whether the claim of loss in this case is
governed by the provisions of S. 10(1) or
24(1) proviso read with s. 14(2)(c), or by the
provisions of s. 42 ?
(2) Whether on the facts of the case a loss
of Rs. 22,981/- is allowable in computing the
income of the assessee chargeable to the
Excess Profits Tax ?"
The Tribunal then’ drew up a statement of case on the two
questions aforesaid. By its judgement and order dated
January 23, 1957 the High Court answered both the questions
in favour of the
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assessee. Thereafter the Commissioner of Incometax, Delhi,
asked for and obtained a certificate under s.66A(2) of the
Indian Income-tax Act and on that certificate the present
appeals have been brought to this Court.
As to the first question the learned Additional Solicitor-
General, appearing on behalf of the appellant, has conceded
that him ’not in a, position to dispute the correctness of
the answer given, in view of the decision of this Court in
Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. (1).
This disposes of Civil Appeal No. 39 of 1960 which must be
dismissed.
In Civil Appeal No. 40 of 1960 the second question falls for
decision. In answering this second question the High Court
has proceeded on two grounds : firstly, it has referred to
s.5 of the Excess Profits Tax Act, 1940, particularly the
third proviss thereto, and contracting the provisions of
that section with s.5 of the Business Profits Tax Act of
1947 has expressed the view that neither of these provisions
touched the question whether losses incurred in an Indian
State could be taken into account in assessing the taxable
income of an assessee in British India for purposes of
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assessing excess profits tax or business profits tax ; it
then referred to the decision of the Bombay High Court in
Karamchand Premchand Ltd. v. Commissioner of Income-tax,
Bombay (2) and said:
"It would seem that inspite of the slightly
different language of the Excess Profits Tax
Act from that of the Income-tax Act, no
distinction has ever been drawn in this matter
between the principles governing assessment to
income-tax and the principles governing
assessment to excess profits tax and in fact
it would appear to have been the universal
(1) (1959) 36 I.T.R, 1.
(2) (1956)30I.T.R.849,
828
practice that decisions of the Income-tax
authorities and High Courts have been followed
by consequential orders relating to the same
assessee’s taxable income for the purpose of
the Excess Profits Tax Act and the learned
counsel for the Commissioner has not been able
to cite any decision in which different
principles have been applied in this
particular matter. Admittedly one of the
reasons given in his judgment by Chagla C.J.
for coming to the decision mentioned above
’was that the third proviso had been changed
in the Business Profits Tax Act as compared
with the Excess Profit-, Tax Act, but this is
only one of a number of reasons and the
questions has not been considered at all
whether under the proviso in the Excess
Profits Tax Act losses made in an Indian State
could have been computed in assessing the
assessee’s income from business in British
India. I can only say that in the
circumstances it seems to me likely that if
the point had arisen the same view that I.
have expressed above would have been taken,
namely, that whereas for the excess profits
tax profits earned in an Indian State could
not be taken into consideration at all, such
profits could be taken into account if brought
into taxable territories for assessing profits
tax and that is regards losses. they I could
be taken into account in assessing the
business whether they occurred in a State. or
in what was British India."
The second ground given by the High Court depended on the
facts found. The High Court expressed the view that, on the
facts found it was doubtful if the losses in question could
be deemed to have occurred in Bhatinda.
It said
"It is not in dispute that the only place
where the assessee carries on business is
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Delhi and that its transactions in other
markets are carried out by means of commu-
nication by telephone or Post. There is no
Suggestion that the firm has any agent or
branch in any native State and it therefore
seems to me that whether profits result or
losses are incurred as the result of transac-
tions of this kind even with firms in Indian
States, the profits accrue or the losses are
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incurred at the place where the payments are
received or from which they are made, namely,
the firm’s place of business at Delhi."
On behalf of the appellant it is contended that both the
aforesaid grounds given by the High Court for the answer
which it gave to the second question are unsubstantial.
The, first ground, it is contended, is untenable in law, and
the second. proceeds not on the findings of fact arrived at
by the Tribunal but on new findings made by the High Court,
which course was not open to the High Court to take.
We consider that these contentions are correct. As to the
first ground, it seems clear to us that under the third
proviso to s.5 of the Excess Profits Tax Act, 1940 where the
profits etc., of a part of the firm’s business accrued or
arose it Bhatinda, that part of the, business shall for the
purpose of the said section be deemed to be a separate
business. If that is so the losses which arose at Bhatinda
must also be the losses of a separate business. We may here
read s.5 and the third proviso thereto :
.lm15
" s. 5. This act shall apply to every business of which any
part of the profits made during the chargeable accounting
period is chargeable to income-tax by virtue of the
provisions of sub-clause (i) on sub-clause (ii) of clause
(b) of subsection (1) of section 4 of the
830
Indian Income-tax Act, 1922, or of clause
(c) of that sub-section :
Provided further that this act shall not apply
to any business the whole of the profits of
which accrue or arise in an Indian State and
where the profits of a part of a business
accrue or arise in an Indian State, such part
shall, for the purposes of this provision, be
deemed to be a separate business the ",hole of
the profits of which accrue or arise in an
Indian State and the other part of the busi-
ness shall, for all the purposes of this Act,
be deemed to be, a separate business."
In Commissioner of Income-tax v. Karamchand Premchand
Ltd.(1). This Court considered s. 5. of the Business
Profits Tax Act, 1947 and pointed out the distinction
between the third proviso thereto and the third proviso to
s. 5 of the Excess Profits Tax Act, 1.940. This Court
quoted. with approval the decision in Commissioner of Excess
Profits Tax, Bombay City v. Bhogilal H. Patel Bombay (2 )
and held that the language used in the third proviso to S. 5
of the Excess Profits Tax Act, 1940 was one of exclusion and
that Act did not apply to profits etc. of that part of the
business which arose in an Indian State. If that part of
the business has to be treated as a separate business for
the purposes of the Excess Profits Tax Act, it is difficult
to see how the losses incurred in an Indian State can be
taken into consideration for the same purposes. We think
that the High Court was in error in thinking that the third
proviso to s. 5 of the Excess Profits Tax Act did not touch
the question which the High Court had to answer. On the
(2) (1952) 21 I.T.R. 72,
(1) (1960) 40 I.T.R. 106.
831
contrary, we think that the proviso answers the question
against the assessee.
Now, as to the second ground given by the High Court. It
seems to us that there can be no doubt that the assessing
authorities proceeded on the footing that the losses for
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which the assessee firm claimed a deduction arose and were
incurred at Bhatinda, even though the firm’s place of
business was Delhi. The Income-tax Officer, as also the
Appellate Assistant Commissioner referred to s. 14(2)(c ) of
the Income-tax Act, 1922; that provision related to income,
profit-, or gains accruing or arising in an Indian State.
The assessing authorities proceeded on the footing that as
the proof its we are exempt from tax in terms of s.
14(2)(c), the losses arising out-. side the taxable
territories could not be taken into account. The Tribunal
did not rely on s. 14(2)(c), nor on the proviso to s. 24 (1)
of the Income-tax Act, 1922. But it relied on s.42. That
again shows that it proceeded on the footing that though the
income actually arose outside the taxable territories, it
should be deemed to have arisen with in the taxable
territories by reason of its business connection in the
taxable territories. The High Court had to answer the
second question on the facts found; it could not.arrived at
fresh findings of fact. Such a course was not open to it.
Indeed, it is true that the Tribunal said that the firm’s
transactions could not be split up, but the actual decision
of the tribunal proceeded on the basis that. even it the
transactions could be split up, s.42 applied and the income
actually arising at Bhatinda would be deemed to have arisen
in the taxable territories and so the losses must be taken
into consideration for arriving at the income. The Tribunal
considered the matter solely from the point of view of the
assessment of income-tax. It did not consider the third
proviso to s. 5 of the Excess Profits Tax Act, 1940 and what
effect it had in the matter of the assessment of’ excess
profits tax. We agree that if the income
832
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, there
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
second question must be in favour of the appellant and
against the assessee. Civil Appeal No. 40 of 1960 must,
therefore, be allowed.
The two appeals were heard together and in view of the
divided success of the parties, the parties must bear their
own costs in both appeals.
Civil Appeal No. 39 dismissed.
Civil Appeal No 40 allowed,
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