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PETITIONER: THE COMMISSIONER OF INCOME-TAXNEW DELHI

       Vs.

RESPONDENT: M/s.  CHUNI LAL MOONGA RAM

DATE OF JUDGMENT: 05/05/1961

BENCH: DAS, S.K. BENCH: DAS, S.K. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1962 AIR 1272            1962 SCR  (2) 823

ACT: Excess  Profits Tax-Income-Assesseecarrying on  business  in taxable  territory-Losses  incurred in  transactionsin  non- taxable  territory-If allowable in  computing  income-Excess Profits Tax Act, 1940 (15 of 1940), s. 5.

HEADNOTE: During  the  assessment  year  1946-47,  the  assessee   was carrying  on speculative business in bullion at  Delhi.   It entered   into  transactions  in  the  nature   of   forward transactions with parties at Bhatinda (in the Patiala  State outside  the taxable territories of British India) in  which it suffered losses.  The assessee claimed deduction of these losses in the computation of its income. Held,  that  the losses incurred in Bhatinda  could  not  be taken  into account in computing the income of the  assessee in  British India.  Under 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 territory could not be  taken into consideration for purposes of Excess Profits Tax.   The language  of the third proviso to s. 5 was one of  exclusion and made the Act inapplicable to profits etc. of the part of the business which arose in non-taxable territories. Commissioner  of  Income-tax v. Karamchand  Premchand  Ltd., (1960) 40 1. T. R. 106, relied on.

JUDGMENT: CIVIL APPELLATE JURISDICTION .- Civil Appeals Nos. 39 and 40 of 1960. Appeals from the judgment and order dated January 23,  1957, 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. 824 1961.  May 5. The Judgment of the Court was delivered by

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DAS, J. These two appeals have been brought to this Court on a  certificates  of fitness granted by the  High,  Court  of Punjab under s. 66A(2) of the Indian Income-tax Act, 1922. The relevant facts are these.  Messrs Chunilal Moonga Ram, a firm of Delhi, carried on a speculative business in bullion, mostly  in ,old and silver, in Chandni Chowk at Delhi.   For the assessment year 1946-47 it was charged to income-tax  on its  income  from the business in  the  relevant  accounting period.  Similarly, it was charged to excess profits tax for the chargeable accounting period ending on February 6, 1946. One of the appeals, Civil Appeal No. 39 of 1960, arises  out of the assessment of income-tax and the other appeal,  Civil Appeal  No.  40 of’ 1960, arises out of  the  assessment  of excess profits tax.  During the relevant accounting  periods the  firm entered into certain transactions  called  "hedge" transactions in the billion market at Bhatinda (then a  part of  the  Patiala  State,  that  is,  outside:  the   taxable territories  of  British  India).  It  claimed-that  it  had incurred  losses to non-residents there in the sums  of  Rs. 6,366/-  and  Rs.  16,615/- in  the  said  transactions  and claimed that these losses should be taken into consideration in determining its ’income.  It appears from the  assessment order  of the Income-tax Officer, Delhi, dated  January  27, 1949 that the firm purchased certain "sillies" (bars of gold and  silver) from a Bhatinda party on the  telephone,  which purchases  were  later  confirmed  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 intended 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 825 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 a. 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 the footing that it was not possible to ,"split up  transactions  of  a  business  located  in  the  taxable territories  into two categories of transactions inside  and outside  such territories" and even if such spliting up  was possible, 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 to 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   as       income,   profits  and  gains,  such   income,

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     profits  and gains are deemed under s.  42  to       have 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(2)(c).  The  proviso  to  s.       214(1) does riot in any case come       826       into  play.  The Income-tax authorities  have,       in  this  view  that we  have,  taken  wrongly       disallowed the assessee’s claim for adjustment       of  losses  amounting to Rs. 6,360/-  and  Rs.       16,615/-.  We allow these losses." The  Tribunal accordingly allowed the two appeals.   We  may here  state  that  the Income-tax authorities  as  also  the Tribunal  considered the claim for deduction in relation  to the  assessment  for  income-tax only.   As  to  the  excess profits   tax  there  was-no  separate  discussion  of   the provisions  of S. 5 of the Excess Profits Tax Act, 1940  and they  dealt with the assessment of excess profits tax  as  a mere consequential matter. The,  Commissioner  of  Income-tax,  Delhi,  then  made  two applications asking the Tribunal to refer certain  questions of  law  arising  out of its orders to  the  High  Court  of Punjab, The Tribunal cam to the conclusion that no questions of   law   arose  out  of  its  orders  and   rejected   the applications.  The High Court was then moved under s. 66 (2) of the Indian income-tax Act, 1922 and the High, Court heard the  two applications together and directed the Tribunal  to state  a case on the following two questions which,  in  the opinion  of  the  High Court, arose out  of  the  Tribunal’s orders.       (1) 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 case 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 judgement  and  order  dated January 23, 1957 the High Court answered both the  questions in favour of the 827 assessee.  Thereafter the Commissioner of Incometax,  Delhi, asked  for and obtained a certificate under s.66A(2) of  the Indian  Income-tax Act 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  conceded that  him ’not in a, position to dispute the correctness  of the  answer given, in view of the decision of this Court  in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. (1). This  disposes of Civil Appeal No. 39 of 1960 which must  be dismissed. In Civil Appeal No. 40 of 1960 the second question falls for decision.  In answering this second question the High  Court has  proceeded on two grounds : firstly, it has referred  to s.5  of the Excess Profits Tax Act, 1940,  particularly  the third  proviss thereto, and contracting the   provisions  of that  section  with s.5 of the Business Profits Tax  Act  of 1947 has expressed the view that neither of these provisions touched  the question whether losses incurred in  an  Indian State  could be taken into account in assessing the  taxable income  of  an  assessee in British India  for  purposes  of

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assessing  excess profits tax or business profits tax  ;  it then  referred to the decision of the Bombay High  Court  in Karamchand  Premchand  Ltd. v. Commissioner  of  Income-tax, Bombay (2) and said:       "It  would seem that inspite of  the  slightly       different  language of the Excess Profits  Tax       Act  from  that  of  the  Income-tax  Act,  no       distinction has ever been drawn in this matter       between the principles governing assessment to       income-tax   and  the   principles   governing       assessment  to excess profits tax and in  fact       it would appear to have been the universal  (1)  (1959) 36 I.T.R, 1. (2) (1956)30I.T.R.849, 828       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 for the purpose  of       the  Excess  Profits Tax Act and  the  learned       counsel for the Commissioner has not been able       to  cite  any  decision  in  which   different       principles   have   been   applied   in   this       particular  matter.   Admittedly  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  changed       in  the Business Profits Tax Act  as  compared       with the Excess Profit-, Tax Act, but this  is       only  one  of  a number  of  reasons  and  the       questions  has  not  been  considered  at  all       whether  under  the  proviso  in  the   Excess       Profits Tax Act losses made in an Indian State       could  have  been computed  in  assessing  the       assessee’s  income  from business  in  British       India.    I   can  only  say   that   in   the       circumstances  it seems to me likely  that  if       the  point  had arisen the same view  that  I.       have  expressed above would have  been  taken,       namely,  that whereas for the  excess  profits       tax  profits earned in an Indian  State  could       not  be taken into consideration at all,  such       profits could be taken into account if brought       into taxable territories for assessing profits       tax  and that is regards losses. they I  could       be   taken  into  account  in  assessing   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 the facts found it was doubtful if the losses in question  could be deemed to have occurred in Bhatinda. It said       "It  is  not in dispute that  the  only  place       where the assessee carries on business is                            829       Delhi  and  that  its  transactions  in  other       markets  are  carried out by means  of  commu-       nication  by telephone or Post.  There  is  no       Suggestion  that  the firm has  any  agent  or       branch  in any native State and  it  therefore       seems  to  me that whether profits  result  or       losses are incurred as the result of  transac-       tions  of this kind even with firms in  Indian       States,  the profits accrue or the losses  are

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     incurred  at the place where the payments  are       received or from which they are made,  namely,       the firm’s place of business at Delhi." On  behalf  of the appellant it is contended that  both  the aforesaid  grounds  given by the High Court for  the  answer which  it  gave to the second  question  are  unsubstantial. The, first ground, it is contended, is untenable 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 course was not open to the High Court to take. We  consider that these contentions are correct.  As to  the first  ground,  it seems clear to us that  under  the  third proviso to s.5 of the Excess Profits Tax Act, 1940 where the profits  etc., of a part of the firm’s business  accrued  or arose it Bhatinda, that part of the, business shall for  the purpose  of  the  said section be deemed to  be  a  separate business.  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 : .lm15 " 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) on sub-clause (ii)  of  clause (b) of subsection (1) of section 4 of the 830 Indian Income-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 Indian State  and       where  the  profits of a part  of  a  business       accrue or arise in an Indian State, such  part       shall, for the purposes of this provision,  be       deemed to be a separate business the ",hole of       the  profits  of which accrue or arise  in  an       Indian  State and the other part of the  busi-       ness shall, for all the purposes of this  Act,       be deemed to be, a separate business." In  Commissioner  of  Income-tax  v.  Karamchand   Premchand Ltd.(1). This Court considered s.  5.   of   the    Business Profits  Tax  Act,  1947 and  pointed  out  the  distinction between  the third proviso thereto and the third proviso  to s.  5  of  the Excess Profits Tax  Act,  1.940.  This  Court quoted. with approval the decision in Commissioner of Excess Profits  Tax, Bombay City v. Bhogilal H. Patel Bombay  (2  ) and held that the language used in the third proviso to S. 5 of the Excess Profits Tax Act, 1940 was one of exclusion and that  Act did not apply to profits etc. 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  business  for the purposes of the Excess Profits Tax Act, it is  difficult to  see  how the losses incurred in an Indian State  can  be taken  into consideration 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 which the High Court had to answer.  On the (2)  (1952) 21 I.T.R. 72, (1) (1960) 40 I.T.R. 106. 831 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 doubt that  the  assessing authorities  proceeded  on the footing that the  losses  for

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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, profit-,  or gains accruing or arising in an  Indian  State. The  assessing authorities proceeded on the footing that  as the  proof  its  we  are 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  territories.   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’  excess profits tax.  We agree that if the income 832 did  not  arise or accrue in Bhatinda but the  whole  of  it arose in Delhi, the third proviso would have no application. If however, part of the income etc. arose in Bhatinda, there that  part of the business was a separate, business for  the purposes  of  the  Excess Profits Tax Act  and  the  losses’ incurred  at Bhatinda could not be taken into  account.   We are  of the view that on the facts found, the answer to  the second  question  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 parties must bear  their own costs in both appeals. Civil Appeal  No. 39 dismissed. Civil Appeal No   40 allowed,  833