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PETITIONER: WESTERN STATES TRADING CO LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA

DATE OF JUDGMENT18/01/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. (CJ) HEGDE, K.S.

CITATION:  1971 AIR 2274            1971 SCR  (3) 383

ACT: Income  Tax  Act  1922, s.  10(2)(vii)  and  24(2)-Appellant selling colliery after running it for part of the  year-loss on  sale  written  off-if allowable under  s.  10(2)  (vii)- Profits   on  shares  forming  part  of   stock-intrade   of appellant’s share-dealing business-Whether could be set  off against business loss of previous years,

HEADNOTE: The assessee entered into an agreement with another  company on  November 29, 1954 for the sale of its colliery.  It  was provided  in  the agreement that pending completion  of  the sale  or delivery of possession, the vendor was to carry  on business on behalf of the purchaser and run the colliery  as on and    from  September 1, 1954 on the account and at  the cost of the purchaser.   In  the course of  the  appellant’s assessment to income tax for which the  accounting year  was from  September 1, 1954 to August 31, 1955, the  Income  Tax Officer,  after making adjustment for certain  assets  which according  to him were not entitled to depreciation,  worked out the figure of loss at Rs. 11,257.00; however he rejected a  claim to set off this loss against the appellant’s  other income  on the view that the assessee did not carry  on  the business of the colliery during the year since the  transfer took  place  with  effect  from  September  1,  1954.    The Appellate  Assistant  Commissioner upheld  this  order  and, although  the Tribunal, in appeal, accepted  the  assessee’s contention  that  it carried on business till  November  29, 1954,  it  did not allow the loss on the view  that  it  had resulted  from a closing down sale.  In respect of the  same year,  certain dividends on shares received by the  assessee were included in its income under s. 12 but its claim to set off  this  income against the loss in business  for  earlier years brought forward, was disallowed.  The High Court, upon a  reference made to it, held against the appellant on  both these issues.  On appeal to this Court, HELD  :  The Tribunal had, in clear and  unequivocal  terms, upheld the contention of the appellant that it had  actually carried  on  the business till November 29,  1954.   Section 10(2) (vii) provides that profits or gains shall be computed after making the allowances in respect of any such building, machinery  or plant which had been sold etc., the amount  by

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which the written down value thereof exceeds the amount ’for which  the building, machinery or plant is actually sold  or its scrap value. The first proviso requires that such amount should actually be written off in the books of the assessee. It is difficult to see bow all the conditions necessary  for the  allowance  under  the  above  provisions  were  ,   not satisfied.   The  colliery business was carried  on  by  the appellant during part of the relevant accounting year.   The machinery  and  plant had been used for the purpose  of  the business.   The sale of the colliery took place  during  the accounting  year; and the loss of Rs. 11,237.00 was  written off in the books of the appellant. [387 C-F] Commissioner  of  Income  Tax, Bombay City  II  v.  National Syndicate, 41 I.T.R. 225; followed. 384 Once  it is accepted that the colliery business was  carried on for a part of the relevant assessment year, the  assessee would be entitled to get a set off under s. 24(2) of the Act if  the  shares  on  account of  which  the  dividends  were received  formed part of the assessee’s trading assets.   It was  not  disputed  that  the  shares  formed  part  of  the stock-in-trade   of  the  share  dealing  business  of   the assessee.   There  could be no reason,  therefore,  for  the assessee not being entitled to the set off claimed. [388  B- D] C.I.T., Andhra Pradesh v. Cocanada Radhaswami Bank Ltd.,  57 I.T.R.  306;  Commissioner of Income Tax Madhya  Pradesh  v. Shrikishan  Chandmal,  60  I.T.R. 303  and  Commissioner  of Income  Tax, Ahmedabad v. Bhavnagar Trust  Corporation  (P.) Ltd., 69 I.T.R. 278; referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 589 and 590 of 1967. Appeals  by special leave from the judgment and order  dated May  7,  1965  of  the Calcutta  High  Court  in  Income-tax Reference Nos. 183 and 238 of 1961. C.   K.  Daphtary, B. P. Maheshwari and N. R.  Khaitan,  for the appellant (in both the appeals). S.   C.  Manchanda,  S. K. Aiyar, R. N. Sachthey and  B.  D. Sharma    for the respondent (in both the appeals). The  Judgment of the Court was delivered by Grover, J. These appeals by special leave from a judgment of the  Calcutta High Court arise out of certain  questions  of law  which were referred relating to the assessment for  the assessment year 1956-57, the relevant accounting year  being from September 1, 1954 to August 31, 1955. The  assessee  owned a colliery called the  Western  Kajoria Colliery, hereinafter referred to as "colliery".  It entered into an agreement with another company on November 29,  1954 to sell the colliery to it.  According to this agreement the vendor  was to sell and the purchaser was to buy as  on  and from September 1, 1954 all the underground rights etc of the colliery  with the machinery and other articles detailed  in the schedules annexed to the agreement.  It is not necessary to  give  the details of the other stock-intrade  which  the purchaser  was  to purchase.  The sale was to  be  completed within  one  year  from the date of  the  execution  of  the agreement.   According to clause 7 of the agreement  pending completion  of  the sale or delivery of  possession  of  the premises  to  the  purchaser  the vendor  was  to  carry  on business  on  behalf  of  the purchaser  and  run  the  said colliery as on and from September 1, 1954 on the account and

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at the cost of the purchaser.  The purchased was to get  all the  profits  and was liable for all the  losses  from  that date. 385 The  price  fixed for the colliery was  Rs.  3,50,000.   The book,  value  of  the assets was  Rs.  4,80,290/-.   In  the relevant  assessment  year  the loss  of  Rs.  70,290/-  was claimed  by the assessee.  The Income tax  Officer  rejected the  claim  for deduction of the loss  from  the  assessee’s other  income  on  the- ground that  during  the  accounting period  the  assessee  did  not carry  on  the  business  of colliery  since  the transfer took place  with  effect  from September  1,  1954.  After making  adjustment  for  certain assets which, according to the Income tax Officer, were  not entitled to depreciation he determined the figure of loss to be  Rs.  11,257/-.   This loss  was  also  disallowed.   The Appellate  Assistant  Commissioner upheld the order  of  the Income   tax  Officer.   The  Appellate  Tribunal,   however accepted  the contention of the assessee that it carried  on business  till November 29, 1954 but did not allow the  loss as the Tribunal was of the view that it had resulted from a closing down sale. There  was another item of dividends received  from  certain shares  held by the assessee during the relevant  accounting year.   The Income tax Officer included these  dividends  in the  Company’s  income under S. 12 of the  Income  tax  Act, 1922, hereinafter called the "Act".  The assessee failed  to satisfy the authorities that the income received on  account of  the  dividends  could be set off  against  the  loss  in business  of  earlier years brought forward.   The  Tribunal made  a  reference of the following two questions  under  s. 66(1) of the Act :               "(1)   Whether  on  the  facts  and   in   the               circumstances  of  the  case the  sum  of  Rs.               11,257/-  being  a claim for loss on  sale  of               assets on which depreciation was allowable  in               earlier  years is allowable under  Section  10               (2) (vii) in computing the total income of the               assessee?               (2)   Whether   on  the  facts  and   in   the               circumstances of the case dividend income  was               to  be taken as income, profits and  gains  of               business  of the company and set  off  against               losses  brought  forward  from  earlier  years               under section 24(2)?" Since certain other questions had been sought to be referred by the assessee in respect of which the Tribunal declined to make  a reference the assessee moved the High Court and  the High Court directed that the following questions be referred               "(3) Whether in the facts and circumstances of               the  case,  the interest income  from  Western               Kajoria  Collieries  Ltd.  is  income  taxable               under Section 10 of the Indian Income tax  Act               or under Section 12 of the said Act ? 11-L807SupC.1171 386 (4)  Whether  on the facts and circumstances of I  the  case there  was  any material to hold that the loan of  M/s  Shri Vijoy  Corporation  Ltd.  was  an  accommodation  loan   not advanced during the normal course of money lending business? (5)  If  the answer to question (4) is that the loan  was  a business loan whether the debt had become bad in the year of account and deductible in computation of the total income? (6)  Whether in the facts and circumstances of the case  the Tribunal  was right in refusing to allow set off of  earlier

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years business losses under section 24(2)?" The  two  references were dealt with together  by  the  High Court. On  the first question the High Court was of the  view  that the sale was a closing down sale and the net result of  the transaction  was that the assessee was working the  colliery from September 1, 1954 for and on account of the  purchaser. While recognising that the coal business was not stopped  as from September 1, 1954 the High Court came to the conclusion that  it was on account of the purchaser that the  business was  carried on and any profits ,or losses which might  have resulted  until  the  actual sale were to be  those  of  the purchaser  and  the vendor was to get only the  price  fixed together  with  interest.  The first question  was  answered against the assessee.  The second question was also answered against  the assessee on the view that no colliery  business in  the relevant year was carried on by it and therefore  no question  of set off could arise.  The third and the  fourth questions  were answered in accordance with the findings  of fact  given by the Tribunal and against the  assessee.   The fifth  question was not pressed and was not  answered.   The sixth  question  was  covered by  the  second  question  and therefore no answer was returned with regard to it as well. In  the present appeals we are concerned with the first  and the second question.  It has been submitted on behalf of the appellant that the loss of Rs. 11,257/- was allowable  under s.  10(2) (vii) of the Act in computing the total income  of the  appellant.  The Tribunal had recorded a  finding  which was-one  of fact; that in the relevant accounting  year  the appellant  did carry on the colliery business.  The  finding of the Tribunal had not been challenged by the department by raising  an  appropriate question and therefore it  was  not open  to  the High Court to go against the  finding  of  the Tribunal  and hold that the business was carried on for  and on account of the purchaser.  At any rate it was an un- 387 disputable  fact that the appellant carried on the  business upto  November  29, 1954 and it was only by  virtue  of  the agreement  made  on  that day that it agreed  to  treat  the business  as having been transferred to the  purchaser  with effect from September 1, 1954.  By means of the agreement it was  not  possible to alter the actual  state  of  affairs, namely, the carrying on of the business by the appellant. In  our  judgment there is a good deal of substance  in  the above  contentions  urged on behalf of the  appellant.   The Tribunal  had,  in clear and unequivocal terms,  upheld  the contention of the appellant that it had actually carried  on the  business till November 29, 1954.  Section  10(2)  (vii) provides  that  profits  or gains shall  be  computed  after making  the  allowance  in respect  of  any  such  building, machinery  or plant which had ’been sold etc. the amount  by which the written down value thereof exceeds the amounts for which  the building, machinery or plant is actually sold  or its  scrap  value.   The first provise  requires  that  such amount  should actually be written off in the books  of  the assessee.   It is difficult to see how all the  conditions necessary for the allowance under the above provisions  were not satisfied.  The colliery business was carried on by  the appellant during part of the relevant accounting year.   The machinery  and  plant had been used for the purpose  of  the business.   The sale of the colliery took place  during  the accounting  year.  The loss of Rs. 11,275/- was written  off in the books of the appellant The present case appears to be covered  by  the decision of this Court in  Commissioner  of Income tax, Bombay City II v. National Syndicate(1) in which

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all  the above conditions for the applicablity of  S.  10(2) (vii) were held to be, present.  It was said that there  was no other condition to be found in the section Dr in the  Act which  had to be complied with.  There was nothing  to  show that  the business of the assessee should have been  carried on for the whole year or that the machinery or plant  should have been used for the whole of the accounting period or  if the  assessee  worked only for a part of the year  and  then sold out the loss that lie incurred was not a business loss. The  decisions which were relied upon by the High Court  are hardly   of   much  assistance  in  the   matter   and   are distinguishable  on facts.  The first question  should  have been answered in favour of the assessee. On the second question once it is accepted that the colliery business  was  carried  on  for  a  part  of  the   relevant assessment year the assessee would be entitled to get a  set off  under s. 24(2) of the Act if the shares on  account  of which  the  dividends  were  received  formed  part  of  the assessee’s  trading  assets.   It is  well  settled  by  the decisions  of  this  Court (see  C.I.T.  Andhra  Pradesh  v. Cocanada (1)  41 I.T.R. 225. 388 Radhaswami Bank Ltd.(1) that S. 6 of the Act classifies  the taxable  income  under the several heads but the  scheme  is that  income  tax is one tax and s. 6  only  classifies  the taxable  income  under different heads for  the  purpose  of computation  of the net income of the assessee.  While  sub- s.(1)  of S. 24 provides for setting off the loss under  one of  the heads mentioned in s. 6 against the profits under  a different  head in the same year sub-s.(2) provides for  the carrying  forward of the loss for one year and  setting  off the  same against the profits or gains of the assessee  from the  business  in  the subsequent year  or  years.   It  was emphasised  in the aforesaid decision that sub-s. (2) of  S. 24 in contradistinction to sub-s. (1) is concerned only with the  business and not with its heads under s. 6 of the  Act. Dividends are included in the meaning of income under sub-s. (1A)  of  s. 12 which is the residuary head.   Applying  the principles adverted to before the amount of dividends  would form  a part of the income from business of the assessee  if the shares were a part of the assessee’s trading assets  and the  assessee  would  be entitled to a  set-off  as  claimed against  the  loss  from its business  incurred  during  the previous years.  It does not appear to have been disputed at any stage that the shares formed part of the  stock-in-trade of  the share dealing business of the ass,see.  There  could be no reason, therefore, for the assessee not being entitled to  the set off claimed.  The High Courts have  consistently taken  the  view  that business loss  carried  forward  from earlier years can be set off against dividend income derived from  shares held as stock-in-trade. (vide  Commissioner  of Income  tax  Madhya Pradesh v.  Shrikishan  Chandmal(2)  and Commissioner  of  Income tax, Ahmedabad v.  Bhavnagar  Trust Corporation  (P)  Ltd.(,") The second  question,  therefore, ’should have been answered in favour of the assessee. In  the  result the appeals are allowed with costs  in  this Court  and the decision of the High Court is set aside  only with  regard to questions 1 and 2, the answers to which  are returned as already indicated.  One hearing fee. R.K.P.S.                 Appeals allowed. (1) 57 I.T.R. 306. (3) 69 I.T.R. 278. (2) 60 I.T.R. 303. 389

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