Full Judgment Text
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PETITIONER:
INDORE MALWA UNITED MILLS LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX(CENTRAL) BOMBAY
DATE OF JUDGMENT:
19/02/1962
BENCH:
ACT:
Income Tax --Proceedings under s. 24 of the Indian Income-
tax Act-Scope and effect of section and its proviso-Set-off
of loss-Indian Income-tax Act, 1922 (11 of 1922) ss 24(1),
(2) 14(2) (c), 4(1) (a), (c).
HEADNOTE:
The assessee company carried on a business of manufacture
and sale of textile goods. The manufacture was made at its
mills in Indore which was an Indian State before integra-
tion and had its own law as to income-tax known as the
Indore Industrial Tax Rules, 1927. The sales of textile
goods so manufactured were made at various places, some
inside and some outside the taxable territories of the then
British India. For and upto assessment year 1949-50 the
assessee company was treated as a non-resident.Indore became
a part of the taxable territories within the meaning of the
Indian
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Income-tax Act, 1922 in the two assessment years 1950-51 and
1951-52 and the asscssee company was held to be "resident
and ordinarily resident" within the meaning of that Act.
Upto the assessment year 1949-50 that part of its profits
which was received by the assessee company in British India
was subjected to tax together with it.,; other income which
accrued in British India. In making the calculation of
business profits or loss received or arising in the taxable
territories, a proportion was struck between the total
turnover and its sales the proceeds whereof were received in
the taxable territories. The assessee company raised two
questions in the course of the assessment proceedings, one
of which with regard to the entire loss of Rs. 5,19,590/- of
the year 1948-49 which it claimed to set-off against the
profits made in its business in the two assessment years.
The assessee company contended that the business was one and
under s. 24 it was entitled to set off the losses which it
had sustained in 1948-49. The High Court decided this
question against the assessee company, but gave a
certificate under s. 66A of the Act.
Held, on appeal, that the High Court correctly answered the
questions the provisions of s. 24 of the Act read with the
provisions in s. 4(1) (a) and (c) and s. 14(2)(c) make it
clear that sub-s(1) of s: 24 when it talks of profits or
gains has reference to taxable profits or taxable gains ; it
has no reference to income accruing or arising without the
taxable territories which were not liable to be assessed in
the case of non-residents. In determining the nature of the
losses under consideration in these appeals the relevant
year was 1948-49, the year in which the losses occurred, and
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the High Court rightly took the view that for the
application of sub-s (2) of s. 24, the losses must be such
losses as could have been set-off under sub-s.(1) of s. 24.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 149 and 150
of 1961.
Appeals from the judgment and order dated September 23,
1968, of the Bombay High Court in I.T.R. No. 86 of the 1957.
R.J. Kolah, J. B. Dadachanji, O. C. Mathur and Ravinder
Narain, for the appellants.
K.N. Rajagopala Sastri and D. Gupta, for the respondent.
312
1962, February 19. The Judgment of the Court was delivered
by.
S.K. DAS, J.-These are two appeals on a certificate of
fitness granted by the High Court of Judicature at Bombay
under,%. 66A(2) of the Indian Income-tax Act, 1922. The
relevant facts which have given rise to them are shortly
stated below.
The Indore Malwa United Mills, a limited liability company,
is the appellant before us and will be- -referred to in this
judgment as the assessee company. The respondent is the
Commissioner of Income-tax(Central), Bombay. The assessee
company carried on a business of manufacture and sale of
textile goods. The manufacture was made at its mills in
Indore which was Indian State before integration and had its
own law as to income-tax known as the Indore Industrial Tax
Rules, 1927. The sales of textile goods were made at
various places, some inside and some outside the taxable
territories of British India. For and upto the assessment
year 1949-50 the assessee company was treated as a non-
resident within the meaning of s.4A of the Indian Income-tax
Act, 1922. For the assessment years 19-50-51, and 1951-52
which are two assessment years under consideration, the
account years were the calendar years 1946 and 1950 respec-
tively. Indore became a part of the taxable territories
within the meaning of the Indian Income. tax Act is the two
assessment years and the assessee company was held to be
"resident and ordinarily resident" with the meaning of that
Act. Upto the assessment year 1949-50 that part of its
profits which was received in British India was subjected to
tax together with its other income which accrued in British
India, namely, interest on securities and interest on bank
accounts. In the assessments made for the assessment years
1948-49 and 1919-50 the
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position of the assessee company was stated to be as
follows:
1948-49
Income tinder the head ’Interest on
securities’ ... Rs. 1,032
Income under the head ’Other sources’
interest from banks ... Rs. 231
-----------
Rs 1,263
Business loss Rs. 1,992/-. Balance of lossRs. 729/-
carried forward.
1949-50
Interest on securities ... Rs. 1,023
Bank interest ... Rs. 2 13
---------
Rs.1,236
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Less : loss of 1948-49 set off .... Rs. 729
---------
Total income ... Rs. 507
In making the calculation of business profits or loss
received or arising in the taxable territories, a proportion
was struck between the total turn-over of the assessee
company and its sales the proceeds whereof were received in
the taxable territories. The following table, which is part
of the order of assessment of 1950-51, shows clearly how the
calculation was made.
314
1 2 3 4 5
Rs. Rs. Rs. Rs.
-----------------------------------------------------------
Net profit Deprecia- Busi- Total
of the as per ness turnover
Assess- company the Indian income of the
ment befor al- Income- of the company
year lowance Tax Act com-
of depre- pany
ciation (Col.2
minus
col.3)
6 7 8 9
Rs. Rs. Rs. Rs.
-----------------------------------------------------------
Sales for Business profit other Total in
which considered as income come for
proceeds having been accruing the prupose
were received in the in the of assess-
received taxable terri- taxable ment under
in the tories(by appor- terri- the Indian
taxable tioning the tories Icome-Tax
territories amount in Act.(Col.8)
col. 4 in the
proportion of
col 5: col.6)
315
Daring the course of the assessment proceedings for 1950-51
the assessee company claimed that it was entitled to a set
off of the entire losses of the assessment year 1948-49
which it was common ground before the Tribunal, came to Rs.
5,19,590/-, and not merely the proportionate loss. The
assessee company also claimed that the depreciation
allowances of the two years 1948-49 and 1949-50 to which
effect could not be given in those years and which had,
therefore, to be carried forward should be added to the
depreciation allowance of 1950-51 and be set off against the
profits and gains of the assessee company liable to
assessment in the assessment years in question. It is to be
noted that the assessment of the assessee company for the
assessment years 1948-49 and 1949-50 was made both under the
Indian Income-tax Act and under the Indore Industrial Tax
Rules, 1927. Now the assessee company made two claims in
the course of the assessment proceedings for 1950-51. One
was with regard to the loss of Rs. 5,19,590/- and the
assessee company’s contention was that it was entitled to
set off this loss against the profits made in its business
in that year and it also contended that it was entitled to
carry forward the unabsorbed depreciation into that year.
The first contention of the assessee company was rejected by
the Tribunal but the second was allowed. Two questions were
then raised, one at the instance of the assessee company and
the other at the instance of the Commissioner, dealing with
the aforesaid two claims of the asseessee company. These
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two questions were :
" 1. Whether the loss of Rs. 5,19,590/- of the
year 1948-49 is liable to be set off against
the assessee’s business income for the assess-
ment years 1950-51 and 1951-52 ?
2. Whether the unabsorbed depreciation of
the years 1948-49 and 1949-50 is liable to
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be set off against the income of the assessee
for the eassessment years 1950-51 and 1951-
52."
On being satisfied that aforesaid two questions arose out of
its order, the income-tax Appellate Tribunal, Bombay Bench
A, referred them to the High Court of Bombay under s, 66(1)
of the Indian Income-tax Act. The High Court answered the
first question against the assessee company and the second
question in its favour by its judgment and order dated
September 23,’1958. The assessee company then moved the
High Court for a certificate under s. 66A(2) of the Indian
Income-tax Act with regard to the answer given by the High
Court to the first question and having obtained a
certificate of fitness has preferred the two appeals to this
Court. We are concerned in these two appeals with the
correctness or otherwise of the answer given by the High
Court to the first question; the second question does not
fall for our consideration.
On behalf of the assessee company s. 24(2) of the Indian
Income-tax Act has been relied on in support of the claim
that the assessee company is entitled to carry forward and
set off the entire loss of Rs. 5,19,590/- incurred in the
year 1948-49 against the assessee company’s business income
for the assessment years 1950-51 and 1951-52. Mr. Kolah
appearing on behalf of the assessee company has put his
argument in the following way. First of all, he has
submitted that the Income-tax Officer wrongly proceeded on
the footing as though the assessee company was carrying on
two separate businesses, one within the taxable territories
and the other outside them. Mr. Kolah has contended that
the business was one business within the meaning of s. 10 of
the Indian Income-tax Act and in the two assessment years in
question Indore having become a part of the taxable terri-
tories provisions in sub-s. (2) of s. 24 came into
operation; therefore, the losses which the assessee
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company sustained in 1948-49, being a previous year not
earlier than the previous year mentioned in the sub-section
and the losses not having been set off under sub-s.(1) of s.
24, the assessee company was entitled to carry forward the
losses and set them off against the profits and gains of the
assessee company from the same business under any other
head, as the time limit of six years had not expired. As
against this argument, the contention on behalf Of the
respondent has been that s-24 has no application in the
facts of the present case inasmuch as in the year 1948-49 in
which year the losses had occurred, the assessee company was
treated as a nonresident. On behalf of the respondent it
has been submitted that the provisions of s. 24 are
applicable only to profits and agains which are assessable
under the Indian Income-tax Act and in the case of non-
residents who were assessees in British India or in the
taxable territories. The claim to set off is only allowable
in respect of loss of profits or gains incurred by the
nonresidents under any of the heads mentioned in s. 6, and
s. 24 is applicable only to such loss of profits arid gains
which if they had been profits and gains would have been
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assessable in British India or the taxable territories.It is
contended that in the case of nonresidents, income accruing
or arising without British India or without taxable
territories is not liable to be assessed and the loss of
such profits and gains is not contemplated to be set off
within the provisions of sub-ss. (1) and (2) of s. 24 of the
Indian Incometax Act,.
Before we consider these contentions it is necessary to set
out the material provisions of the Indian Income-tax Act as
they stood at the relevant time.
"14. (1) Subject to the provisions of this
Act, the total income of any previous year of
any person includes all income, profits and
gains from whatever source derived
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which-
(a) are received or deemed to be received in
British India in such year by or on behalf of
such person, or
(b) x x x x
(e) if such person is not resident in
British India during such year, accrue or
arise or are deemed to accrue or arise to him
in British India during such year:
x x x
14, (1) x xx
(2) The tax shall not be payable by an
assessee-
(a) x x x
(b) x x x
(c) in respect of any income, profits or
gains accruing or arising to him within an
Indian State, unless such income, profits or
gains are received or deemed to be received in
or are brought into British India in the pre-
vious year by or on behalf of the assessee, or
are assessable under section 12B or section
42.
24. (1) Where any assessee sustains loss of profits or
gains in any year under any of the heads mentioned in
section 6, he shall be entitled to have the amount of the
loss set off against his income, profits or gains under any
other head in that year :
Provided that, where the lose sustained is a loss of profits
or gains which would but for the loss have accrued or arisen
within an Indian State and would, under the provisions of
clause (c) of subsection (2) of section 14, have been
exempted from tax, such loss shall not be set off except
against profits or gains accruing or arising within an
Indian
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State and exempt from tax under the said provisions.
x x x
(2) Where any assessee sustains a loss of profit or gains
in any year, being a previous year not earlier than the
previous year for the assessment for the year ending on the
31st day of March, 1940, under the head "Profits and gains
of business, profession or vocation", and the lose cannot be
wholly set off under sub-section (1) the portion not so set
off shall be carried forward to the following year and set
off against the profits and gains, if any, of the assessee
from the same business, profession or vocation for that
year; and if it cannot be wholly so set off, the amount of
loss not so set off shall be carried forward to the follow-
ing year, and so on; but no loss shall be so carried forward
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for more than six years:
Provided that-
(a) Where the loss sustained is a loss of profits and gains
of a business, profession or vocation to which the first
proviso to sub-section (1) is applicable and the profits and
gains of that business, profession or vocation are, under
the provisions of clause (c) of sub-section (2) of section
14, exempt from tax, such loss shall not be set off except
against profits and gains accruing or arising in an Indian
State from the same business, profession or vocation and
exempt from tax under the said provisions;
(b) Where depreciation allowance is, under clause (b) of
proviso to clause (vi) of sub-section of section 10, also to
be carried forward, effect shall be given to the provisions
of this sub-section;
x x x
It may perhaps be stated here that Mr. Kolah has placed no
reliance on the provisions of the Taxation Laws (Part B
States) (Removal of
320
Difficulties) Order, 1950. Clause 3 of the said Order
provides that losses suffered in Indian States can be
carried forward and set off only if under the State law they
could be so carried forward or set off. Admittedly, Under
the Indore Industrial Tax Rules, 1927 there was no provision
for the carrying forward of losses; therefore, cl. 3 of-the
Taxation Laws (Part B States)(Removal of Difficulties)
Order, 1950 was of no assistance to the assessee company.
This view of the High Court has not been contested before us
and we need, therefore, make no further reference to this
aspect of the case.
The answer to the question which we have to consider depends
on the true scope and effect of s. 24 of the Indian Income-
tax Act. Under the Indian Income-tax Act, 1922, assessees
are divided into three categories (a) resident and
ordinarily resident, (b) resident but not ordinarily
resident, and (c) not resident. We are concerned in the
present’ case with, an assessee who in the year in which the
loss which is sought to be carried forward occurred, was a
nonresident. Sub-section (1) of s.4, the material portion
of which we have quoted earlier, states that person Who are
not resident in India ire liable to charge under cl. (a) or
cl.(c) of the said subsection. They may be taxed under cl.
(a) on income received or deemed to be received in India
even if it accrues elsewhere, or under on income which
accrues or arises or is deemed to corue or arise in India
even if it is received elsehere. The liability to tax in
respect of income received in India is common to both
residents and non-residents and is imposed by the general
clause (a). A non-resident, unlike a resident, is not
argeable in respect of income accruing or arising without
India and not received in India. Section 4(2) (c), which is
now deleted, had great importance when British India was
distinct from Indian states, because it exempted income
which accrued
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or was received in the Indian States but was not brought
into British India. The deletion of this clause became
inevitable upon,the merger of the Indian States. This
clause which wan inserted in 1941 exempted income accruing
or arising within the Indian States; but the exemption did
not apply if the income was received or deemed to be
received in or was brought into the taxable territories in
the previous year by or on behalf of the assessee or if the
income was assessable under s. 128 or s. 42. The Position,
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therefore, was that losses made in British India could not
be reduced by adjusting against them the profits in the
Indian States which were exempted under the clause, but the
income exempted from the clause had,, however, to be
included in the assessee’s total income for the purpose of
determining the rate applicable to his taxable income. But
so far as a non-resident was concerned the clause had no
application, because a nonresident was not chargeable in
respect of’ income accruing or arising without India and not
received in India. Now, we come to s. 24, sub ss.(1) and
(2) with the provisos appended thereto which we have quoted
earlier in this judgment. It appears that prior to 1950
profits accruing in the Indian States, later called Part B
States, were exempt from tax under s. 14(2)(c), unless they
were, received in or brought into the territories then
referred to as British India or were assessable under s. 128
or s. 42. The first proviso to sub-s.(1) as it stood at the
relevant time dealt with losses accruing in the qaondam
Indian States and provided that losses incurred in the
Indian States should be set off only against profits
accruing in the Indian States. This was a reasonable
provision, because an assessee who was not liable to tax in
respect of his profits arising in the Indian States could
not be allowed to set off his losses incurred in the Indian
States against his profits arising in British India. that
losses incurred in an Indian State could be Similarly
cl.(a) of the provision to sub-s.(2) enacted that losses
incurred in an Indian State could be
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carried forward and set off only against profits accruing in
an Indian State from the same business in a Subsequent year.
The -argument on behalf of the respondent is that so far as
a non-resident is concerned, he is not chargeable in respect
of income accruing or arising without India and not received
in India. Therefore, in his case it is unnecessary to go to
the provisos, but s. 24 itself has no application because
sub-s. (1) of s. 24 when it refers to loss of profits or
gains, has reference to taxable profits or taxable gains and
sub-s.(2) of s. 24 can only be applied in a case where the
loss cannot be set off under sub-s.(1) because of the
absence or inadequacy of profits etc. In other words, the
argument is that s. 24 is applicable only to such loss of
profits and gains which if they had been profits and gains
would have been assessable in British India or the taxable
territories; but in the case of nonresidents, income
accruing or arising without British India or without the
taxable territories not being liable to be assessed, the
loss of such profits and gains is not contemplated to be set
off within the provisions of s. .24, sub-ss. (1) and (2).
Mr. Kolah has pointed out that sub-s.(2) of s. 24 as also
sub-s.(1) talk of "any assessee" and he has argued that
there is no reason why the provisions of sub-s.(2) of s. 24
should not the applicable to a non-resident assessee. He
has further argued that whatever might have been the effect
of the provisos in 1948-49, in 1950-51 Indore became part of
the taxable territories and the assessee company became
entitled to carry forward the losses up to six years and
there is nothing in s. 24(2) to prevent’ him from making the
claim. We are unable to accept this argument as correct.
Reading the provisions in s. 24 with the provisions in
s.4(1)(a) -and s. 1.4(2)(c) it seems clear to us that s.
(24)(1) when it talks of profits or gains has reference to
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taxable profits or taxable gains in other words, it has
reference to such profits and gains as would have been
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assessable in British India or the taxable territories. It
has no reference to income accruing or arising without
British India or without the taxable territories which were
not liable to be assessed in the case of non-residents. We
are further of the view that for determining the nature of
the losses under consideration in the present appeals, the
relevant year was 1948-49, the year in which the losses
occurred and the High Court rightly took the view that for
the application of sub-s. (2) of s. 24, the losses must be
such losses as could have been set off under sub-s.(1) of s.
24. We agree with the view expressed by the High Court that
the loss &mounting to Rs. 5,19,590/- was not such a loss as
could have been set off either under sub-s. (1) or sub-s.
(2) of s. 24.
We have, therefore, come to the conclusion that the High
Court correctly answered the question which was referred to
it. Accordingly, the appeals fail and are dismissed with
costs, one hearing fee.
Appeals dismissed.
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