Indore Malwa United Mills Ltd. v. the Commissioner of Income-Tax(Central) Bombay

Judgment

JY62. M /s~ SooraJmull .Nagai mull . Commi.s.fiontr pf lncome-ta.t, Calcutt..i Shah J. FebruaT)' 191 ' the Oovrt or Tribunal is founded. The Legi.slature has expressly entrusted th~ powei:- of appraisal of f!Vidence to the T.axing authorities, and the decision of those authorities would orqinarily be regarded as final. This is not to say that in a proper case this Court m;i.y not, in the interest of justice. when occasion demands it, review the evidence. "Tli:e" power of this Court unde~ Art. 136 is not restricted; but it is only in very exceptional cases that this Court enters upon appraisal of evidence in appeals filed with special leave and this case does not disclose any such exceptional circumstances. On this ground the appeals Nos. 238 and 239 of 1961 filed by the assessees and the Commissioner against the order of the Tribunal must fail and are dismissed with costs. One hearing fee. Appeals dismissed. INDORE MALWA UNITED MILLS LTD. THE COMMISSIONER OF INCOME-TAX (CEN'J."'RAL)

BOMBAY (S. K. DAS, M. HIDAYATULLAH and J.C. SHAH, JJ.) 1 Income Tax-Propeedings under s. 24 of the Indian Income-ta:& Act,-Scope and effect of section and its proviso- Set-off of loss-Indian Income-ta:& Act, 1922 (11 of 1922). as 24(1), (2), 14(2) (c), 4(1) (a); (c)l . ' The assessce company carried on a business of manufacture and sale of textile goods. The manufacture was·111ade ac 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 'rax R,;les, 1927. The sales of textile goods so manufacttlred wer~ made 'at various places, some inside and some outside the taxable territories of the then British India. For and tipfo assessment' year 1949-50 the assessee company was treated as a pon-resident.

Indore became a part of the taxable territories within the meaning of the Indian SUPBE:ME_ COURT REPORTS Tncome-tax Act, 1922 in the two assessment years 1950-51 and 1951-52 and the assessee company was held to be "resident and ordinarily resi8.ent" wi,thin the meaning of that Act. Upto the asseisment ,year 1949-50 that part of its profits which was received by the'assessee company in British India was s_ubjected to tax together with its other income which accrued in British India. In making the calculation of busi-. nesS' 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 receivfd in the taxable territories. The assessee company raised· two questions in the_ course of the assessment proceedings, one of which with regard. to the entile loss of Rs. 5119,590/- of the year 1948-49 whi~h it ' claimed to set-off against the profits made. in its "busine~s in the two assessment years.

The a'Ssessee company contCnded that ihe business was one arid under s. 2-4- it \Vas entitled to set off the losses which it hlid sustained in- 1948-49;- :fhe High i:;ourt decided this question against the assessee compai;iy, but gave a certif[cate under s. 66A of the .Act. Held, on app~~J, that the High Gourt,correctly answered· the question. The pro'Oisions of s. 24 of the Act read with tlie provisions ins. 4(1) (a) and (c) and s. 14(2)(c) make it clear that sub-s(l) of s. 24 when it talks of profits or gains has reference to. iaxab]e profits or tB.xablc gains ; it has no reference to incorrie accruing or arising withollt t}J.e taxable t.,crritories which were not liable to be assessed in the case of non-residents. In determining the natllre of the loss.cs under consi'deration in these appeals the_ relevant year was 1948-49, the year irt wh\ch the Ios~es occurred, and·th' High (four! rightly took the View that for the app!ip>tion of sub-s (2) of s.

24, the losses must be ~uch losses as cpuld have been set-off under ,:;ub-s.( I) o~ s. 24. Nos. CIVIL APPELLATE J~ISDICT~oi{: Civil Appeals 149 and 150 of 1961. Appeals from· the judgment and order dated September 23, 195~, of the Bdmbay High Court in I.T.R. No. 86 of the 1957. R. J. Kolah, J. B. Da_dachanji, 0. 0. Math'Ur and Ravinder Narain, for lhe appellants. J K. N. Rajagopala Sastri and D. Gupta, for the respondent. lndp1t II a/wa Tlnited Mills Ltd The Commissioner of Incum1-tax (Oentral) . Bombay 1~6t /ndurt .~!alu:a L·n:·rcd .\Jilh L~·l. ·rhe < ... :-:i:11mi11,iot;!r 01 /1,(//Tn(-lt,X (c /11:r'1l. Bombay lJa• J, SUPltE~IE COURT HEPORTS [1962] SUPP. l!J(i2. February 19. The Judgment of the Court was dclivt·re<l by. · S. K. D.i.s, J.-These are two appeals on a certific'l.te of fitness granted by the High Cour• of Ju<lica tu re at Bombay under s. ti6A(2) of the Indian Income-tax Act, 19:!2. The relernnt facts which have given rise to them arc shortly stated below.

The Indore !'lfahrn United l\Iills, a limitfd liability company, is the appellant before us and will be referred to in this judgment as the assessee company. Tho respondent i• the Commissioner of Income-tax(Central), Bombay. The assessec company carried on a business of m1mufacture 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 kwiwn all the Indore Industrial Tax Rules, 1927. 'fho sales of texti!o goods. were made at various places, some inside and some outside the taxable 1.-0rritories of Briti~h India. For and upto the assessment.year 1949-50 the assesHec company was treated as a non.resident within the meaning of s.4A of the Indian Incomo-t1J.x Act, HJ22. For tho aSB~ssment years 1950-:jl, and 1951-5~ which are two assessment years under consideration, the accow1t years were the calendar years 1946 and 1950 rsspec· tively.

Indore became a part of the taxable territories within the meaning of the Indian Incomo· tax Act is the two assessment years and the assesseo company was held to be "resident and ordinarily res;dent" with the meaning of that Act. Upto tho a.asossment year HJ49-50 that part of its profits which Wad received in British India was subj!'cted to tax together with it& other incomo which accrued in British India, namely, interest on sec:urities and intereet on bank accounts. In the assessmcnta made for the assessment years Hl48-49 and 19!9-50 the s s.c.R: position of the assessee company was stat~d to be as follows: 1948-49 Income under 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. l,992/-. Balance of loss Hs. 729/- carried forward. 1949-50 Interest on securities Bank interest Less : loss of 1948-49 set off Tota.I income Rs. J,023 Rs. Rs. 1,236 Rs. '129 Rs. 507 In ma.king 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 a.ssessee 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 1950-5 l, shows clearly how the calculation was ma.de. J96B Indore Malwa Unit1d Mills Ltil, The Commis.5ioner of 1 ncome-tax (Central) Bombay Das J, Net profit Deprccia- Jlusi- Total Sales for Business profit Other Total inof the tion as per neas turnover which considered as income come for Assess• company the Indian income of the proceeds having been accruing the purpose r:n ment before al- Incomeof the company wero received in the in the of assess- Cl year lowance tax Act comreceived taxablo t.erl'itaxable ment under :;;; of deprcpany in the tories(by apporterritbo Indian l:tj ciation (Col. 2 taxable tioning tho tories Income-tax ..... l:tj minus territories amount in Act.(Col.7 8 ool.3) col- 4 in the plui; col. 8) Cl proportion of col 5 : col. 6) l 2 3 4 5 6 7 8 9 Rs. Rs. Rs. Rs. Rs. Rs. Ra_ Hs. 0 :;;;

1946-47 1,81,71,152 52,68,048 5,05,296 1,854 5,07,lfiO 1947-48 1,45,22,377 5,46,322 ~l,028 1,467 22,495 "" w 1948-49 Loss - I ,57,82,905 60,000 1,992 I ,21i3 Cl (loBs) (loss) D11ring the course of the assessment proceedings for 1950-5 l the assessee company claimed lhat it was en titled to a set off of the entire losses of the assessm.ent 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 assrssee 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, Hl27. 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 aud the other at the instance of the Commissioner, dealing with the aforesaid two claims of the asseessee company.· These two questions were: "

1Whether 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 assessment years 1950-51 and 1951-52 ?

2Whether the unabsorbed depreciation of the years 1948-49 and 1949-50 is liable to . 1962 Indore ~1 afwa Ui:ited i:ll tl ls Ltd. The Commissioner of Incame-tax ( Genfrill) Bombay Das J. ln~rt JI alu~a Uniltd .Mi/Ir U<l. Tiu CommisJiontr of lnccmt-tox (Ctt1traJ) Bombay Dtu J. 316 SUPRE.'.IIE COURT REPOWrs (1962] SUPP. he set• off against the income of the assessee for the assessment years 1950-51 and HliH-52." On being satisfied that aforesaid two questions arose out of its order, tho income-tax Appellato 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 assesseo company and· the second question in its favour by its judgmont and order dated September 23, 1958. The assessee company then moved the High Court for a certificate under s.

66A(2) of tho Indian Incomn-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 foe High Court to the first question; the second question does not fall for our consideration. On behalf of the assessce company s. 24(2) of the Indian Income-tax Act has been relied on in support of the claim that the assessoe 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 assesseo company's business income for tho asse~sment yea.rs 1950-51 and 1951-52. .Mr. Kolah appearing on behalf of the assessce company has put his argumfnt in the following way.

First of all, ho has submitted that the Income-tax Officer wrongly proceeded 011 the footing as though the assessec company was carrying on two separate businesses, 011e within the taxable tPrritories and the other outside them. lift'. Kolah has contended that the business was one business within the m(·aning of s. 1\1 of the Indian Income-tax Act and in the two assessment years in question Indoro having become a. part of the taxable territories. the provisions in sub-s. (2) of s. 24 came into operation; therefore, the losses whioh the asseSBee 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.(l) 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, t.he contention on behalf of the respondent has been that s.24 has no application in thll 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 gains which are assessable under the Indian Income-tax Act and in the case of nonresidents 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 non-residents under any of the heads mentioned in s. 6, and 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.

It is contended that in the case of non-residents, income accruing or arising without British India or without taxable territories is not liable to be assessed and t.he 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. "

4(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 Indore M alwa United Mills Ltd. The Commi8sioner of IncomeaTax (Centra{) Bamba~ Das J. J9Gt lndort Malu·a Uniftd M i//s LJd Tht Comn1ij.iionrr 11f ln<Omt-Ttu. : C'tn'ral) Bomiay Vas J. which- ( a) aro received or deemed to be receivod in British India in such year by or on behalf of such perRon, or (h) x x x x if Auch person is not resident in Briti8h India during suoh yeur, accrue or arise or are deemed to accrue or arise to him in British India dnring such year: 14, (I)

(2) x x x x x x The tax shall not be payable by an asscssee~ (al x x x (b} x x x (cl in respect of any income, profits or gains 1tccruin!! or 1trising to him within an Tn<lian State, unless such income, profitA or gains are received or decmPcl to be rPceived in or are brought intn Rritish India in the previous year by or on behalf of the nssessce, or arc asseBBable unrl<'r section 12R or8cction 42. 24. (I) Where any assessec sustains loss of profits or gains in any year under any of the heads mentioned in Bectiou (i, hn shall be entitled to ha v<' the amount of tho loss set off against his income, profits or gains under any other head in that year :

Provided that, where tho loss sustained is a loss of profit,; or gains which would but. for the loss hnvc accrued or arisen within an Indian State and woulcl, under the prcn·i8ions of elause (c) of eub- Rection (2) of section 14, have been exempted from tax, such lo8S sh~ll not be set off except against profits or gains accruing or arising within an Indian 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 <lay of March, 1940, under the head "Profits and gains of business, profession or vocation", and the loss 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 carrie.d forward to the following year, and so on; but no loss shall be so carried forward 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 Joss 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) \Vhere depreciation allowance is, under . clause (b) of proviso to clause (vi) of sub-section (2) 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 placBd no reliance on the provisions of the Taxation Laws (Part B States) (Removal of 1!62 Indore Motwa United Mill< Ltd The Commiss1"ont" of Income-Tax (Cent1ol) Bombay Das J. 19~2 lndort Jtarwa UnitJrf. .\Ii/ls fJd.

Tf.1 Commfs_rinflt' o/ fnC{)mt· rax (~ntral) Bombay D~sJ. Difficulties) Order, 1950. Clause 3 of the said Order provides that losses suffered in Indian States oan bo carried forward and set off only if under the 8t~te 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 lossPs; therefore, cl. 3 of the Taxation Laws (Part R States)(Removal of Difficulties) Order, l!lGO was of no assistance to the assessce company. This view of the High Court has not been contested before us and wo 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 !\lld 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) rcRident but not ordinarily resident, and (c) not resident..

We are concerned in the prPsent case with an assessee who in the year in which the loss which is sought to be carried forward occurred, was a non-resident. Sub-section (l} of s. 4, the material port inn of which we have quoted earlier, states that pc1s1_,ns who are not resident in India are liable t.o charge ullller cl. (a) or cl.(c} of the said sub-section. Thoy may be taxed under cl. (a} on income received or deemed to be received in India even if it acrrues elsewhere, or under rl.( c) on income which accrues or arises or is deemed to acoruo or arise in India oven if it is receiv<'d elsewhere. The liability to t.ax in rnopect of income received in India is common to both resident;i and non-residents 11nd is imposed by the general clause (a). A non-resident, unlike a rcsi<lent, is not chargeable in r<'spect of incorn<> accruing or arising without India and not receh·ed in India.

Section 14(2} (c), which is now deleted, had great importance when Rritif'h Ind\a was distinct from Indian States, because it exempted income which accrued :3 s.c.R. or was received in the Indian Stcttes but was not brought into British fnrlia. Tim deletion of this clause became inevitable upon the m<·rger of the Indian States. This clause which waH inHerted in 194 l exempted income accq1ing or arising withiu the Indian States; but the exemption did not apply if the income was received or deemed to be reee;v<d 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 ors. 42.

The position, therefore, was that losses made in British India could not ·be reduced by adjusting against them the profits in the Indian 8tates 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 tho purpose of determining the ra.te applicable to his . taxable income. But so far as a non-resident was concerned the clause had no application, because a non· resident was not chargeable in respect of income accruing or arising without India and not received in India. Now, we come to s. 24, subss.(l} and (2) with the provisos appended thereto which we h,ave.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 ors. 42.

The first proviso to sub-s.(l) as it stood at the relevant time dealt with losses accruing in the quondam 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. Similarly, cl.(R.) of the proviso to sub-s. (2) enacted that losses incurred in an Indian State could be I96t Ind ire Ma/wo Uni e Milla Lti. The C ommi.ssioner n f lncome:..1·ox (CentrdJ) Bombay l.Jas J. /nd-0r1 ,,falwa ffnittd Mills Ltd. Tht Commisjione•.nf lricomt'" Tox (Ct11halj Bomba)· DuJ. carried forward and set off only againRt profits accruing in 11.n Indian State from the same business in a subsequent yrac.

Tht· aqrnment on behalf of the rrspondent is that so far as a non-rrsidcnt is eonccmcd, he is not durgeabl<> in respect of inC'ome accruing or arising without India and not received in India. The1efore, in his case it is unnecessary to go to the provisos, buts. 24 itself has no appi'ication because sub-s. ( 1) of s. 24 when it rcforn to loss of profits or gains, has reference to taxable profits er taxable gains and sub-s.(2) of s. 24 can only Le applied in a case where the loSB cannot be set off under sub-s.( I) because of the absence or inadequacy of profits t'tc. In other words, the argument is thats.

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 t.he case of non-resident;;, income accruing or arising without British India or without the taxable territories not being liable to Le assessed, the loss of such profits and gains is not contemplated to be set 0ff within the provisions of s. 24, su b-ss. (I) and (2) • . . \fr. Kolah has pointed out that sub-s.(2) of s. 24 as also sub-s.( I) talk of "any assessee" and he has argued that there is no reason why the provisions of sub-a.( 2) of s. 24 should not be applicahlP to a non-resident assessee. He has fur.ther argued that whatever might have been the effect of the provisos in l!J48-49, in 1950-51 Indore becam0 part of the taxable. territories and the asse~ee company became entitled to carry forward the losses up to six years and there is nothing ins. 24(2) to prcYrnt. him from making the claim.

We are unablt· to accept this argumc~t as corre_c~. R'. ading the provisions in s. 24 with the provrn10ns m s.4( I )(a) ands. l4(2)(c) it seems clear to us thats. (24)(1) when it talks of profits or gains has reference to • .Ji r 3 s.C.R. stiPREME couRT REP61its taxable profits or taxable gctins; in other words, it has reference to such profits and gains as would have been assessable in British India or the taxable territories. It has no reference to iucome 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-H.( l) of s. 24.

We agree with the .view expressed by the High Court that the loss amounting 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 appoals fail and are dismissed with costs, one hearing fee. Appeals di,smissed. luJort Malwa United Millr Ltd, The Commissio1t1r oj !neorne .. tax (Central) Bom6ay D«s J.