Full Judgment Text
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PETITIONER:
WESTERN STATES TRADING CO LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA
DATE OF JUDGMENT18/01/1971
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
SHAH, J.C. (CJ)
HEGDE, K.S.
CITATION:
1971 AIR 2274 1971 SCR (3) 383
ACT:
Income Tax Act 1922, s. 10(2)(vii) and 24(2)-Appellant
selling colliery after running it for part of the year-loss
on sale written off-if allowable under s. 10(2) (vii)-
Profits on shares forming part of stock-intrade of
appellant’s share-dealing business-Whether could be set off
against business loss of previous years,
HEADNOTE:
The assessee entered into an agreement with another company
on November 29, 1954 for the sale of its colliery. It was
provided in the agreement that pending completion of the
sale or delivery of possession, the vendor was to carry on
business on behalf of the purchaser and run the colliery as
on and from September 1, 1954 on the account and at the
cost of the purchaser. In the course of the appellant’s
assessment to income tax for which the accounting year was
from September 1, 1954 to August 31, 1955, the Income Tax
Officer, after making adjustment for certain assets which
according to him were not entitled to depreciation, worked
out the figure of loss at Rs. 11,257.00; however he rejected
a claim to set off this loss against the appellant’s other
income on the view that the assessee did not carry on the
business of the colliery during the year since the transfer
took place with effect from September 1, 1954. The
Appellate Assistant Commissioner upheld this order and,
although the Tribunal, in appeal, accepted the assessee’s
contention that it carried on business till November 29,
1954, it did not allow the loss on the view that it had
resulted from a closing down sale. In respect of the same
year, certain dividends on shares received by the assessee
were included in its income under s. 12 but its claim to set
off this income against the loss in business for earlier
years brought forward, was disallowed. The High Court, upon
a reference made to it, held against the appellant on both
these issues. On appeal to this Court,
HELD : The Tribunal had, in clear and unequivocal terms,
upheld the contention of the appellant that it had actually
carried on the business till November 29, 1954. Section
10(2) (vii) provides that profits or gains shall be computed
after making the allowances in respect of any such building,
machinery or plant which had been sold etc., the amount by
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which the written down value thereof exceeds the amount ’for
which the building, machinery or plant is actually sold or
its scrap value. The first proviso requires that such amount
should actually be written off in the books of the assessee.
It is difficult to see bow all the conditions necessary for
the allowance under the above provisions were , not
satisfied. The colliery business was carried on by the
appellant during part of the relevant accounting year. The
machinery and plant had been used for the purpose of the
business. The sale of the colliery took place during the
accounting year; and the loss of Rs. 11,237.00 was written
off in the books of the appellant. [387 C-F]
Commissioner of Income Tax, Bombay City II v. National
Syndicate, 41 I.T.R. 225; followed.
384
Once it is accepted that the colliery business was carried
on for a part of the relevant assessment year, the assessee
would be entitled to get a set off under s. 24(2) of the Act
if the shares on account of which the dividends were
received formed part of the assessee’s trading assets. It
was not disputed that the shares formed part of the
stock-in-trade of the share dealing business of the
assessee. There could be no reason, therefore, for the
assessee not being entitled to the set off claimed. [388 B-
D]
C.I.T., Andhra Pradesh v. Cocanada Radhaswami Bank Ltd., 57
I.T.R. 306; Commissioner of Income Tax Madhya Pradesh v.
Shrikishan Chandmal, 60 I.T.R. 303 and Commissioner of
Income Tax, Ahmedabad v. Bhavnagar Trust Corporation (P.)
Ltd., 69 I.T.R. 278; referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 589 and 590
of 1967.
Appeals by special leave from the judgment and order dated
May 7, 1965 of the Calcutta High Court in Income-tax
Reference Nos. 183 and 238 of 1961.
C. K. Daphtary, B. P. Maheshwari and N. R. Khaitan, for
the appellant (in both the appeals).
S. C. Manchanda, S. K. Aiyar, R. N. Sachthey and B. D.
Sharma for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Grover, J. These appeals by special leave from a judgment of
the Calcutta High Court arise out of certain questions of
law which were referred relating to the assessment for the
assessment year 1956-57, the relevant accounting year being
from September 1, 1954 to August 31, 1955.
The assessee owned a colliery called the Western Kajoria
Colliery, hereinafter referred to as "colliery". It entered
into an agreement with another company on November 29, 1954
to sell the colliery to it. According to this agreement the
vendor was to sell and the purchaser was to buy as on and
from September 1, 1954 all the underground rights etc of the
colliery with the machinery and other articles detailed in
the schedules annexed to the agreement. It is not necessary
to give the details of the other stock-intrade which the
purchaser was to purchase. The sale was to be completed
within one year from the date of the execution of the
agreement. According to clause 7 of the agreement pending
completion of the sale or delivery of possession of the
premises to the purchaser the vendor was to carry on
business on behalf of the purchaser and run the said
colliery as on and from September 1, 1954 on the account and
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at the cost of the purchaser. The purchased was to get all
the profits and was liable for all the losses from that
date.
385
The price fixed for the colliery was Rs. 3,50,000. The
book, value of the assets was Rs. 4,80,290/-. In the
relevant assessment year the loss of Rs. 70,290/- was
claimed by the assessee. The Income tax Officer rejected
the claim for deduction of the loss from the assessee’s
other income on the- ground that during the accounting
period the assessee did not carry on the business of
colliery since the transfer took place with effect from
September 1, 1954. After making adjustment for certain
assets which, according to the Income tax Officer, were not
entitled to depreciation he determined the figure of loss to
be Rs. 11,257/-. This loss was also disallowed. The
Appellate Assistant Commissioner upheld the order of the
Income tax Officer. The Appellate Tribunal, however
accepted the contention of the assessee that it carried on
business till November 29, 1954 but did not allow the loss
as the Tribunal was of the view that it had resulted from a
closing down sale.
There was another item of dividends received from certain
shares held by the assessee during the relevant accounting
year. The Income tax Officer included these dividends in
the Company’s income under S. 12 of the Income tax Act,
1922, hereinafter called the "Act". The assessee failed to
satisfy the authorities that the income received on account
of the dividends could be set off against the loss in
business of earlier years brought forward. The Tribunal
made a reference of the following two questions under s.
66(1) of the Act :
"(1) Whether on the facts and in the
circumstances of the case the sum of Rs.
11,257/- being a claim for loss on sale of
assets on which depreciation was allowable in
earlier years is allowable under Section 10
(2) (vii) in computing the total income of the
assessee?
(2) Whether on the facts and in the
circumstances of the case dividend income was
to be taken as income, profits and gains of
business of the company and set off against
losses brought forward from earlier years
under section 24(2)?"
Since certain other questions had been sought to be referred
by the assessee in respect of which the Tribunal declined to
make a reference the assessee moved the High Court and the
High Court directed that the following questions be referred
"(3) Whether in the facts and circumstances of
the case, the interest income from Western
Kajoria Collieries Ltd. is income taxable
under Section 10 of the Indian Income tax Act
or under Section 12 of the said Act ?
11-L807SupC.1171
386
(4) Whether on the facts and circumstances of I the case
there was any material to hold that the loan of M/s Shri
Vijoy Corporation Ltd. was an accommodation loan not
advanced during the normal course of money lending business?
(5) If the answer to question (4) is that the loan was a
business loan whether the debt had become bad in the year of
account and deductible in computation of the total income?
(6) Whether in the facts and circumstances of the case the
Tribunal was right in refusing to allow set off of earlier
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years business losses under section 24(2)?"
The two references were dealt with together by the High
Court.
On the first question the High Court was of the view that
the sale was a closing down sale and the net result of the
transaction was that the assessee was working the colliery
from September 1, 1954 for and on account of the purchaser.
While recognising that the coal business was not stopped as
from September 1, 1954 the High Court came to the conclusion
that it was on account of the purchaser that the business
was carried on and any profits ,or losses which might have
resulted until the actual sale were to be those of the
purchaser and the vendor was to get only the price fixed
together with interest. The first question was answered
against the assessee. The second question was also answered
against the assessee on the view that no colliery business
in the relevant year was carried on by it and therefore no
question of set off could arise. The third and the fourth
questions were answered in accordance with the findings of
fact given by the Tribunal and against the assessee. The
fifth question was not pressed and was not answered. The
sixth question was covered by the second question and
therefore no answer was returned with regard to it as well.
In the present appeals we are concerned with the first and
the second question. It has been submitted on behalf of the
appellant that the loss of Rs. 11,257/- was allowable under
s. 10(2) (vii) of the Act in computing the total income of
the appellant. The Tribunal had recorded a finding which
was-one of fact; that in the relevant accounting year the
appellant did carry on the colliery business. The finding
of the Tribunal had not been challenged by the department by
raising an appropriate question and therefore it was not
open to the High Court to go against the finding of the
Tribunal and hold that the business was carried on for and
on account of the purchaser. At any rate it was an un-
387
disputable fact that the appellant carried on the business
upto November 29, 1954 and it was only by virtue of the
agreement made on that day that it agreed to treat the
business as having been transferred to the purchaser with
effect from September 1, 1954. By means of the agreement it
was not possible to alter the actual state of affairs,
namely, the carrying on of the business by the appellant.
In our judgment there is a good deal of substance in the
above contentions urged on behalf of the appellant. The
Tribunal had, in clear and unequivocal terms, upheld the
contention of the appellant that it had actually carried on
the business till November 29, 1954. Section 10(2) (vii)
provides that profits or gains shall be computed after
making the allowance in respect of any such building,
machinery or plant which had ’been sold etc. the amount by
which the written down value thereof exceeds the amounts for
which the building, machinery or plant is actually sold or
its scrap value. The first provise requires that such
amount should actually be written off in the books of the
assessee. It is difficult to see how all the conditions
necessary for the allowance under the above provisions were
not satisfied. The colliery business was carried on by the
appellant during part of the relevant accounting year. The
machinery and plant had been used for the purpose of the
business. The sale of the colliery took place during the
accounting year. The loss of Rs. 11,275/- was written off
in the books of the appellant The present case appears to be
covered by the decision of this Court in Commissioner of
Income tax, Bombay City II v. National Syndicate(1) in which
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all the above conditions for the applicablity of S. 10(2)
(vii) were held to be, present. It was said that there was
no other condition to be found in the section Dr in the Act
which had to be complied with. There was nothing to show
that the business of the assessee should have been carried
on for the whole year or that the machinery or plant should
have been used for the whole of the accounting period or if
the assessee worked only for a part of the year and then
sold out the loss that lie incurred was not a business loss.
The decisions which were relied upon by the High Court are
hardly of much assistance in the matter and are
distinguishable on facts. The first question should have
been answered in favour of the assessee.
On the second question once it is accepted that the colliery
business was carried on for a part of the relevant
assessment year the assessee would be entitled to get a set
off under s. 24(2) of the Act if the shares on account of
which the dividends were received formed part of the
assessee’s trading assets. It is well settled by the
decisions of this Court (see C.I.T. Andhra Pradesh v.
Cocanada
(1) 41 I.T.R. 225.
388
Radhaswami Bank Ltd.(1) that S. 6 of the Act classifies the
taxable income under the several heads but the scheme is
that income tax is one tax and s. 6 only classifies the
taxable income under different heads for the purpose of
computation of the net income of the assessee. While sub-
s.(1) of S. 24 provides for setting off the loss under one
of the heads mentioned in s. 6 against the profits under a
different head in the same year sub-s.(2) provides for the
carrying forward of the loss for one year and setting off
the same against the profits or gains of the assessee from
the business in the subsequent year or years. It was
emphasised in the aforesaid decision that sub-s. (2) of S.
24 in contradistinction to sub-s. (1) is concerned only with
the business and not with its heads under s. 6 of the Act.
Dividends are included in the meaning of income under sub-s.
(1A) of s. 12 which is the residuary head. Applying the
principles adverted to before the amount of dividends would
form a part of the income from business of the assessee if
the shares were a part of the assessee’s trading assets and
the assessee would be entitled to a set-off as claimed
against the loss from its business incurred during the
previous years. It does not appear to have been disputed at
any stage that the shares formed part of the stock-in-trade
of the share dealing business of the ass,see. There could
be no reason, therefore, for the assessee not being entitled
to the set off claimed. The High Courts have consistently
taken the view that business loss carried forward from
earlier years can be set off against dividend income derived
from shares held as stock-in-trade. (vide Commissioner of
Income tax Madhya Pradesh v. Shrikishan Chandmal(2) and
Commissioner of Income tax, Ahmedabad v. Bhavnagar Trust
Corporation (P) Ltd.(,") The second question, therefore,
’should have been answered in favour of the assessee.
In the result the appeals are allowed with costs in this
Court and the decision of the High Court is set aside only
with regard to questions 1 and 2, the answers to which are
returned as already indicated. One hearing fee.
R.K.P.S. Appeals allowed.
(1) 57 I.T.R. 306.
(3) 69 I.T.R. 278.
(2) 60 I.T.R. 303.
389
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