the Commissioner of Income-Tax New Delhi v. M/s. Chuni Lal Moonga Ram

Judgment

'l'HE COl\IMltl~fONEH OF INCOME-TAX NEW DELHI l\1/s. CHUNI LAL MOONGA HAM (~. K. DAs, l\L HU>AYATULLAH and J.C. :-lHAH, JJ.) E'.r,ce88 /'1'1.!fif.., 1'a .. r--lnco1ne-.A .. .,~esseecarryinr1 on. business in fr1,xab1c lcrri'.!01·11- -Lu8SC'i t'.ncurred tn transactionsin nunfftxaf)Tr frl'ifor!J -Jj af[,;1oalife in coniputing income-b'xcess l'n!(ils Tax .!cl, 19 IO (1.5 nf 1940), s. 5. 1Juri11g the a.sSC!:is111cut yedr 1946-·17, the asse!:isee \Vas carryin.~ OH speculath·e \Jusiness in bullion at Delhi. It entered into transaction:-; in the nature of forward transactions with parties al Bhatinda (in the Patiala State outside the taxable territories uf llriti'!t India) in which it suffered losses. The assessee clain1c<l tlc<luctiou of these losses in the computation of its inco1ne. 11 cld, that the losses incurred in llhatinda could not be taken into acc.:uunt in co1nputing the incotne of the assessee in British Indi;t. Uu<ler 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 territorv could not be taken into consideration for purposes of Excess Profits Tax. The language of the third proviso to s. 5 \Vas one of exclusion and made the Act inapplicable to profits etc. of the part of the business which arose in non-taxalile territories. 1u1nniission1-r uf lnconie-tax v. Kara1nchand Premchand Ltd., (1%0) 40 LT. R. 106, relied on. CrnL APPELLATE J·URISDICTION : Civil Appeals Nos. 3!J ami 40 of l!HiO. AppealH froln the judgment and order dated January 23, 1H57, 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. 1961 -- May, 5. The Commissio. ner of Incometax, New Delhi. JI /s.

Chuni Lal MoongaRam Das.J. SUt'l{EME COURT REPORTS [1962] 1961. May 5. The Judgment of the Court was delivered by DAS, J. These two appeals han' liee11 brought to this Court on a l'ertifiC"nk of fitness granted by the High Court of Punjali mHler s. G6A(:?) of the Indian Incomc:-t:tx Act, l!J2:?. The relevant facts arc thes'" Messrs Chunilal l\Ioonga Ram, a firm of Delhi, carriPcl on a speculative business in bullion, mostly in gold and silver, in Chamlni Chuwk at Delhi. .Fur th<' assl·ssment year l!H6-47 it was charged to income-tax on its income from the business in the relevant accounting period. Similarly, it was clmrgPd to exeess profits tax for the chargeable aC'Counting period ending on February 6, l946. Ono of the ap1wals, Civil Appeal No .. :m of 1960, arises out of the assessment of income-tax and the other appeal, Civil A ppcal No. 40 of 1960. arises out of th!' assessmPnt of excess profits tax.

During th!' relevant aceounti11g periods the firm entered into certai11 transactio11s c•allcd "hedge" transactions in the bullion nwrkl't at Bhatinda (then a part of the Patiala Statl', thn.t is, outside the taxable territories of British India). It claimed that it had i11curred losses to non-residents there in the Sl!IllS of Rs. 6,366/- and Rs. 16,615/- in the said transactions and claimed that these losses should he taken into consideration in dot crmining its income .. • It appears from the assc·s;;mrn1t order of the lrn·ome-tax Offict•r, Ddhi, t!akd January 27, 1V49 that the firm purclias()(\ e<•rtain "snlil's" (liars of gold and silver) from a llhatimla party on the telephone, which purchasPs were later confirm<'Cl 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 intewied 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 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 s. 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 tho footing that it was not possible to.

"split up transactions of a business luca~ed in the taxable tcl't'ituries into two categories of transactions inside and outside such territorfoE" and even if such spliting up was pos8ible, 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 tu 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 a.s income, profits and gains, su~h income, profits and gains are deemed under s.

42 tu hav1o; 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(2Xc). The proviso to s. 24(1) does not in any case come The OommUlioner of l?ICOtllt· tax, New Delhi. MIB. Ghu1ti Lal Moonga Ram Da8 J. The Oonttnissio. ner of l ncoinetax, New Delhi. M /s. Chuni Lal .Moonga Ram Das J. SUPllEME COURT REPORTS [l!J62] into play. 'fhe Income-tax authoritio& have in this view that we have taken wrongly disallowed the asscssee's ulaim for adjustment of losses amounting to Its. 6,3tiu/- 1rnd Rs. lti,615/-. We allow these losses." The Tribunal anmrdingly allowed the two appeals. We may here state that the Income-tax authorities as also the Tribunal cornidered the claim for deduction in relation to the assessml'nt for income-tax only. As to the exl'ess profits tax there was no separnte discussion of the provisions of s.

5 of the Excess Pl'Ofits Tax Ad, 1940 and they dealt with the assessment of excess profifo tax as a mere consequential matter. The Commissioner of Income-tax, Delhi, then made two applicatfons asking the Tribunal to refer certain questions of law arioing out of its orders to the High Court of Punjab. The Tribunal came to the conclusion that no questions of law arose out of its orders and rnjcctcd the applications. The High Court was thrn1 moved under s. 66 (2) of the Indian Income-tax Act, l!J22 and the High Court heard the two applications together and directed the Tribunal to state a Pase on the following two questions whieh, in the opinion of the High Court, arose out of the TribunaJ's mdern. "(l) (2) 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?

Whether on the facts of the casA 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 judg. ment and order dated January 23, 1957 the High Court answered both the questions in favour of the assessee. Thereafter .the Commissioner of Incometax, Delhi, asked for and obtained a certificate under s.66A(2) of the Indian Income-tax !\et 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 eonccd!'d that hr is not in a position to dispute the correctness of th0 answef given, in view of the rleeision of this Conrt in f'mnmissioner of Income-tax v, lndo-Mercant-ile Bank Ltd. ('J. This disposes of Civil Appeal No. 39 of l9fi0 whic:h must be dismisser!. In Civil Appeal No. 40 of l9fi0 tlw s0eond question falls for deeision.

In answering this si,eond question the High Court h:is Jll'OPf'<'<l<•rl nn two grounrls : firntly, it has rpferrecl to s.:i of the Excess Profits Tax Act, 1940, partienlarly the third proviss thereto, itrnl eontmsting the provisions of that section with s.!i of the Rusi1wss Profits Titx Act of 1947 has <'Xpress{'(l th<' viPw that neithPr of these provisions tmwhPrl thP qn<>stfon whP!h<·r losses inenrn,rl in an Imlian Stat.0 eonlrl he takm1 into account in assessing the taxable income of an asRr>ssee in British Tnrlia. for JHll'JlOSPS of aHs1•ssing excess profits tax or lnrnirwss prnfits tnx ; it th<·n rcforr<'fl to tlw <loeision of the Bomhay High Court in Kammchand Premdiaud Ltrl. v. C'om1n·issinner nf lncmne-lax, Bombny (') am! sairl :

"It would serm that inspitr nf tll(' s li!(htly different Jangnag<' of tlw ExC'ess Profits Tax Act from that of the Income-tax Act, no distinntion has ever been drawn in this matter hetwt>Pn th<' principks gnYl'l'l1ing asspssment to incom0-tax anrl thn principles governing assessm•!nt to cxcPss profits tax :uul in fact it would appeitr to have been the universal \!J. (1959) 361.T.R. I (2) (1956) 30 I.T.R. 849, The Oomini&'Jio· ner of I '11CO'Tlie• tax, New Delhi. M/s. Ohuni Lal Mrxmga. Ram DasJ. The 0 ommiasio· mr of ] 'll()()mt• tax, New Delhi. Mjs. Chuni La I l!foonga Ram DIU J. (196.2] 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 fort.he purpose of the Excess Profits Tax Act and the learned counsel for the Commissioner has not been ablP to cite anv decision in which different principles have bPen applied in this particular matter.

Arlmittedly 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 changer! in the Business Profits Tax A<•t as compared with the Excess Profits Tax Act, hut this is only one of a numhrr of reasons and the questionis has not het'n consirkrcd at. all whether nuder the proviso in the Excess Profits Tax Act losses made in an Indian State could have been computed in assessing the assessee's incomP from bnsinP;;s in British India.

I can only say that in th" eircumHtaucrs it seems to me likely that if the point ha<! arisen the same view that I have Pxprrssed above would have bPt'n taken, namPly, that wherPaR for the cxN·ss profitR tax profits eanrnrl in an Indian Statt' could not bn taken into consideration at all, such profits coulrl be taken into account if brought into taxahl0 tl'rritories for nssessing profits tax and that as r0gards losses they could be taken into a·ccount in aHsessing 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 th<> facts fonnd it was doubtful if the losses in question could be deemed to have occurred in Hhatinda. It said: "It is not in dispute that the only place where the assessee carries on busineliS is !'1UPREME COURT REPORTS Delhi and that its transactions in other markets are carried out by means of communication hy telephone or Post.

TherP is no suggestion that the firm has any agent or hra.nch in any native 8tatP ancl it therefort' se<·ms to mP that wlwthPr profits result or losses an· incurred as tlw result of transactionH of this kirn 1 r•ven with firms in Indian SlaleH, the prnfits accrue nr the loRses are incurred at the place wherP the payments are reePived or from which they are made, namely, the firm's place of husinPRR at Delhi." On hohalf of the appellant .it is contended that holh the afort'said grounds given hy the High Court for thP answPr which it gave to the second question nre unsubstantial. The first ground, it is cont<·nderl, is 11nt<-nable 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 courst' was not open to the High Coul't to take. We consider that tiwsc contentions arc correct.

As to tho first ground, it seems clear to us that under tho third proviso to s.5 of the Excess Profit.s 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 bt' deemed to be a separate lmsincss. 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 : "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} or Bub-clause (ii) of clause (b) of sub-section (1) of section 4 of the The Oommi$•io· 11er of Iricomet az, New Delhi. M /8. Ohuni La I Mon'Tlga Ram Das J. The Oommissio· ner of l ncome· tax, New Delhi. M /s. Ohuni Lal Moonga Ram Das J. SUPREME OOURT REPORTS [1962] Indian Inc.ome-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 Indiah State and where the profits of a part of a business accme or arise in an Indian State, such part shall, for the pmposes of this proviRion, be <let>med to he a separate business tho who le of the profits of which accrue or arisP in an Indian State and the oth<>r part of the busi· ness 1ihall, for all the purposes of this Act, be deemed to be a separate business." In CornmiBSianer of Tnc-01ne-ta1' v. Karamchand Prrmchand Ltd.('). This C0mt considered s. fi. of the Business Profits Tax Ad, 1047 and pointed out the distinction b(•tweon the t-hird pro· viso thereto and the thirrl proviso to s. r; of the Excess Profits Tax Act, 1940. This Comt quott•d with apprm·al t-he decision in C01n111i88foner a.f Excess Prof.its Tax, Bombay Oi'.!J! v. Rhogila.l H, Pltfel Bombay (') and held that th0 language 1rnerl in the third proviRo to s.

5 of the Excess Profits Tax Act, 1940 was one of exclusion and that Act did not apply to profits et.c. 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 husinesR for the purposes of the Excess Profits Tax Act, it is diffi. cult to see how the losses incurred in an Indian State can be taken into coasideration 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 whieh the High Court hiid to answer. On the (I) (1960) 40 l.T.R. 106. (2) ( 1952) 21 I.T.R. 72, SUPREME OOURT REPORTS 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 doubtthat the assessing authorities proceeded on the footing that the losses for 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, profits or gains accruing or arising in an Indian State. The assessing auth_orities proceeded on the footing that as the profits were exempt from tax in terms of s. 14(2)(c), the losses arising outside 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 terrifories. 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 exce68 profits tax. We agree that if the income The Oommiasiofler of Income-tax, New Delhi M/s. Ohuni Lal Moonga Ham DasJ. Th, Commissioner of Income-tax, New Delhi. .IL<. Ghuni Lal ,lfoonga Racn Da• .I. SUPREME COUR'l' REPORTS (1962) did not arise or accrue in Rhatinda but the whole of it n rose 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 AC't and the losses incurred at Bhatinda could not bP taken into account. \Ve ar•' of the view that on the facts found, the answer to l he seroml queHtion 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 par· tieH must bear their own costs in both appeals. Civil Appeal No. 39 dismissed. Civil Appeal No. 40 allowed.