The Commissioner of Income-Tax New Delhi v. M/S. Chuni Lal Moonga Ram

Das.J. The relevant facts arc thes'" Messrs Chunilal

l\Ioonga Ram, a firm of Delhi, carriPcl on a specula-tive 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 tele-phone. 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 1961 Bhatinda. This was the nature of the transactions The OommUlio-which resulted in the losses for which the firm ner of l?ICOtllt· claimed deduction. The Income-tax authorities tax, New Delhi. disallowed the claim on the ground that if the v. Bhatinda transactions had resulted in profits, such MIB. Ghu1ti Lal profits would have been exempt from tax in terms Moonga Ram of s.14(2)(c) as it then stood.and if the profits were Da8 J. 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 trans-actions 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 terri-tories 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

826 SUPllEME COURT REPORTS [l!J62] 1%1 into play. 'fhe Income-tax authoritio& have in this view that we have taken wrongly The Oonttnissio. disallowed the asscssee's ulaim for adjustment ner of l ncoine-of losses amounting to Its. 6,3tiu/- 1rnd tax, New Delhi.

v. Rs. lti,615/-. We allow these losses."

M /s. Chuni Lal The Tribunal anmrdingly allowed the two .Moonga Ram

appeals. We may here state that the Income-tax Das J. 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 Tribu-nal 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) 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 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 Income-1961 tax, Delhi, asked for and obtained a certificate under s.66A(2) of the Indian Income-tax !\et and The Oomini&'Jio· on that certificate the present appeals have been ner of I '11CO'Tlie• tax, New Delhi. brought to this Court. v. M/s. Ohuni Lal As to the first question the learned Additional Mrxmga. Ram Solicitor-General, appearing on behalf of the appel-lant, has eonccd!'d that hr is not in a position to DasJ. 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 1961 practice that decisions of the Income· tax authorities and High Courts have been follow-The 0 ommiasio· ed by consequential orders relating to the

mr of ] 'll()()mt• same assessee's taxable income fort.he purpose tax, New Delhi. of the Excess Profits Tax Act and the learned

v.

Mjs. Chuni La I counsel for the Commissioner has not been

l!foonga Ram ablP to cite anv decision in which different principles have bPen applied in this particular DIU J. 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

Delhi and that its transactions in other 1961 markets are carried out by means of commu-The Oommi$•io· nication hy telephone or Post. TherP is no 11er of Iricome-suggestion that the firm has any agent or t az, New Delhi. hra.nch in any native 8tatP ancl it therefort' v. se<·ms to mP that wlwthPr profits result or M /8. Ohuni La I losses an· incurred as tlw result of transac-Mon'Tlga Ram tionH of this kirn 1 r•ven with firms in Indian Das J. SlaleH, the prnfits accrue nr the loRses are in-curred 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 cor-rect. 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 pur-pose 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 busi-ness. We may here read s.5 and the third proviso thereto :

"s. 5. This act shall apply to every busi-ness 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

830 SUPREME OOURT REPORTS [1962]

1961 Indian Inc.ome-tax Act, 1922, or of clause The Oommissio· (c) of that sub-section :

ner of l ncome· . ................................. . tax, New Delhi.

v. .

M /s. Ohuni Lal Moonga Ram Provided further that this act shall not

Das J. 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. Karam-chand 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 ques-tion whieh the High Court hiid to answer. On the

(I) (1960) 40 l.T.R. 106. (2) ( 1952) 21 I.T.R. 72, contrary, we think that the proviso answers the 1961 question against the assessee.

The Now, as to the second ground given by the High Oommiasiofler of Income-tax, Court. It seems to us that there can be no doubtthat New Delhi the assessing authorities proceeded on the footing v. that the losses for which the assessee firm claimed M/s. Ohuni Lal a deduction arose and were incurred at Bhatinda, Moonga Ham even though the firm's place of business was Delhi.

The Income-tax Officer, as also the Appellate Assis-DasJ. tant 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 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 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 tri-bunal proceeded on the basis that even it the tran-sactions could be split up, s.42 applied and the in-come 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

832 SUPREME COUR'l' REPORTS (1962)

1961 did not arise or accrue in Rhatinda but the whole of it n rose in Delhi, the third proviso would have Th, no application. If however, part of the income etc. Commissioner arose in Bhatinda., then that part of the business of Income-tax, was a separate business for the purposes of the

New Delhi.

\'. Excess Profits Tax AC't and the losses incurred at .IL<. Ghuni Lal Bhatinda could not bP taken into account. \Ve

,lfoonga Racn ar•' of the view that on the facts found, the answer to l he seroml queHtion must be in favour of the Da• .I. 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.