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

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. ·

312 SUPltE~IE COURT HEPORTS [1962] SUPP.

1~6t l!J(i2. February 19. The Judgment of the Court /ndurt .~!alu:a L·n:·rcd was dclivt·re<l by. ·

v. S. K. D.i.s, J.-These are two appeals on a ·rhe < ... :-:i:11mi11,iot;!r 01 certific'l.te of fitness granted by the High Cour• of /1,(//Tn(-lt,X (c /11:r'1l.

Bombay ' Ju<lica tu re at Bombay under s. ti6A(2) of the Indian

J, Income-tax Act, 19:!2. The relernnt facts which lJa•

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 com-pany 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 in-tegration 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 position of the assessee company was stat~d to be J96B as follows: Indore Malwa Unit1d Mills Ltil, 1948-49 v.

The Commis.5ioner of 1 ncome-tax (Central) Income under the head 'Interest on Bombay

securities' Rs. 1,032 Das J, 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 Rs. J,023 Bank interest Rs. 213 Rs. 1,236 Less : loss of 1948-49 set off Rs. '129

Tota.I income Rs. 507 '·'' ---- In ma.king the calculation of business profits or loss received or arising in the taxable territories, a pro-portion 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.

°'° .... Net profit Deprccia-Jlusi-Total Sales for Business profit Other Total in-of 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-Income-of the company wero received in the in the of assess- "' Cl year lowance tax Act com-received taxablo t.erl'i-taxable ment under :;;;

of deprc-pany in the tories(by appor-terri-tbo Indian l:tj ciation taxable tioning tho tories ..... ~ (Col. 2 Income-tax l:tj minus territories amount in Act.(Col.7 8 ool.3) col-4 in the plui; col. 8) proportion of :;:;; Cl col 5 : col. 6) ""3 - :;:;; l 2 3 4 5 6 7 8 9 ,-,

Rs. Rs. Rs. Rs. Rs. Rs. Ra_ Hs. 0 "" :;;; ---- ·--·- ""3 r:n 1946-47 1,81,71,152 52,68,048 5,05,296 1,854 5,07,lfiO ,..-, '"' C> 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 729 "" Cl (loBs) (loss) ;:i D11ring the course of the assessment proceedings for . 1962 1950-5 l the assessee company claimed lhat it was Indore afwa Ui:ited ~1 en titled to a set off of the entire losses of the i:ll tl ls Ltd. assessm.ent year· 1948-49 which, it was common v. The Commissioner of ground before the Tribunal, came to Rs. 5,19,590/-, Incame-tax ( Genfrill) and not merely the proportionate loss. The asses-Bombay see company also claimed that the depreciation Das J. 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 enti-tled 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:

"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 ?

¶2Whether the unabsorbed depreciation of the years 1948-49 and 1949-50 is liable to

316 SUPRE.'.IIE COURT REPOWrs (1962] SUPP.

1962 he set• off against the income of the assessee ln~rt alu~a for the assessment years 1950-51 and HliH-52."

JI Uniltd .Mi/Ir U<l. On being satisfied that aforesaid two questions arose

v.

Tiu CommisJiontr of out of its order, tho income-tax Appellato Tribunal, lnccmt-tox (Ctt1traJ) Bombay Bench A. referred them to the High Court

Bombay

of Bombay under s, 66( 1) of the Indian Income·tax Dtu J. Act. The High Court answered the first question

against the assesseo company and· the second ques-tion 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 ques-tion 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 agai-nst 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(·an-ing 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 terri-tories. 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 1162 not earlier than the previous year mentioned in the Indore M alwa United sub-section and the losses not having been set off Mills Ltd. v. under sub-s.(l) of s. 24, the assessee company was The Commi8sioner of entitled to carry forward the losses and set them IncomeaTax (Centra{) Bamba~ off against the profits and gains of the assessee company from the same business under any other Das J. 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 applica-tion in thll facts of the present case inasmuch as in the year 1948-49 in which year the losses had occur-red, the assessee company was treated as a non-resident. 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 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 in-curred 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 asses-sed 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 Income-tax 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, pro-fits and gains from whatever source derived

J9Gt which-lndort Malu·a .. Uniftd ( a) aro received or deemed to be recei-

M i//s LJd vod in British India in such year by Tht Comn1ij.iionrr 11f or on behalf of such perRon, or ln<Omt-Ttu. : C'tn'ral) (h) x x x x

Bomiay Vas J. (c) 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:

x x x 14, (I) x x x (2) 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 with-in 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 pre-vious year by or on behalf of the nssessce, or arc asseBBable unrl<'r sec-tion 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 pro-1!62 visions. Indore Motwa United x x x Mill< Ltd v. (2) Where any assessee sustains a loss of The Commiss1"ont" of profit .or gains in any year, being a previous Income-Tax (Cent1ol) Bombay year not earlier than the previous year for the assessment for the year ending on the 31st Das J. <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 follow-ing 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 voca-tion to which the first proviso to sub-section (1) is applicable and the profits and gains of that busi-ness, profession or vocation are, under the provi-sions 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, pro-fession 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

19~2 Difficulties) Order, 1950. Clause 3 of the said Order lndort Jtarwa UnitJrf. provides that losses suffered in Indian States oan

.\Ii/ls fJd. bo carried forward and set off only if under the

v. law they could be so carried forward or set Tf.1 Commfs_rinflt' o/ 8t~te fnC{)mt· rax (~ntral) off. Admittedly, under the Indore Industrial Tax

Bombay Rules, 1927 there was no provision for the carrying D~sJ. 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 else-where. 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 impor-tance when Rritif'h Ind\a was distinct from Indian States, because it exempted income which accrued :3 s.c.R. -~-

SUPREME COURT REPORTS

or was received in the Indian Stcttes but was not I96t brought into British fnrlia. Tim deletion of this Ind ire Ma/wo Uni clause became inevitable upon the m<·rger of the Milla Lti. Indian States. This clause which waH inHerted v. The C ommi.ssioner n in 194 l exempted income accq1ing or arising withiu lncome:..1·ox (CentrdJ) the Indian States; but the exemption did not apply Bombay if the income was received or deemed to be reee;v<d l.Jas J. 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 pur-pose 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, sub-ss.(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 accru-ing 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 1962 carried forward and set off only againRt profits accru- /nd-0r1 ,,falwa ffnittd ing in 11.n Indian State from the same business in a

Mills •• Ltd. subsequent yrac. Tht· aqrnment on behalf of the Tht Commisjione•.nf rrspondent is that so far as a non-rrsidcnt is eon-lricomt'" Tox (Ct11halj ccmcd, he is not durgeabl<> in respect of inC'ome

Bomba)· accruing or arising without India and not received DuJ. in India. The1efore, in his case it is unnecessary

to go to the provisos, buts. 24 itself has no appi'i-cation 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 terri-tories 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 provi-sions 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 3 s.C.R. stiPREME couRT REP61its taxable profits or taxable gctins; in other words, it has reference to such profits and gains as luJort Malwa United would have been assessable in British India or the Millr Ltd, taxable territories. It has no reference to iucome v. The Commissio1t1r oj accruing or arising without British. India or without !neorne .. tax (Central) the taxable territories which were not liable to be Bom6ay assessed in the case of non-residents. We are D«s J. 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 r 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 ques-tion which was referred to it. Accordingly, the appoals fail and are dismissed with costs, one hear-ing fee.

Appeals di,smissed.