Commissioner of Income Tax vs Dalmia Cement (Bharat) Ltd.

Ramanujam, J.—The assessee herein is a public limited company incorporated in 1945, under the name of Messrs. The Magnesite

Corporation of India Limited, which later merged with Messrs. Dalmia Cement (Bharat) Limited, the respondent herein. The assessee owned

2,500 acres of magnesite bearing land in Salem District. In 1947, it was felt that there was a great demand for calcined ore, i.e., ore heated in a

rotary kiln up to 900�C to 1000�C. The assessee mined the ore and sold them as such or after calcining them during the period from 1945 to

1956. In the course of those operations, the assessee incurred losses during that period.

In 1955, the assessee leased out the mines for a period of 5 years to one Amalgamated Commercial Traders Private Limited. The lessee

undertook the mining operations in respect of the magnesite ore and dispose of them. But subsequently, taking note of the potential demand for

raw magnesite, the assessee-company sought the cancellation of the lease granted in favour of Messrs. Amalgamated Commercial Traders Private

Limited, the lessee, and actually terminated the lease after paying compensation to the tune of Rs. 3,15,000 to the lessee and obtained the

surrender of the lease on August 7, 1958. In the meanwhile, the assessee-company entered into a partnership with effect from April 1, 1956, with

Orissa Cement Company Limited and Dalmia Cement Company Limited under the name and style of Dalmia Magnesite Corporation. The object

of this partnership was the manufacture of dead-burnt magnesite where the process of calcination is carried out at higher temperature. The said

sum of Rs. 3,15,000 which was paid as compensation to the lessee by the assessee for getting the surrender of the lease, had been borrowed from

Dalmia Cement (Bharat) Limited. In addition, a further sum was also borrowed from them for settling the assessee''s liabilities to others. Out of the

borrowings made by the assessee, a sum of Rs. 1,00,000 was deposited in call deposits with banks.

The assessee-company, for the first time, filed its returns for the previous years relating to the assessment years 1950-51 to 1955-56 on April

23, 1956. The Income Tax Officer issued a notice u/s 23(2) and the matters were posted for hearing on May 7, 1956, But, later, the Income Tax

Officer informed the assessee that no cognisance can be taken of the said returns as they had been filed beyond the period stipulated u/s 22(1) or

Section 22(2A) of the Income Tax Act.

For the assessment years 1955-56, 1956-57, 1957-58, 1958-59 and 1959-60, the Income Tax Officer found that the assessee had suffered

losses and had determined the same for each of the years.

For the assessment year 1960-61, as per the balance-sheet, the share of profit of the assessee-company in the firm of Dalmia Magnesite

Corporation was determined at Rs. 1,47,984.30 and the stock of ore was valued at Rs. 47,676. The expenditure by way of establishment

charges, interest charges, etc., came to Rs. 51,695. The assessee-company filed a return of its income for this assessment year showing an income

of Rs. 1,00,136 which was based on the profit disclosed in the profit and loss account for the same year. However, the assessee-company filed a

revised return showing a loss of Rs. 60,351 after bringing forward and setting off the losses of the earlier assessment years from 1950-51. The

Income Tax Officer rejected the claim of the assessee-company for bringing forward and setting off the losses of the earlier years as against the

profit of this year on the ground that the assessee was getting only the share income from the partnership and that the business in which the losses

arose in earlier years had not been carried on by the assessee in the previous year and that, therefore, the assessee-company was not entitled to

claim any set-off. The Income Tax Officer also rejected the assessee''s claim for deduction in relation to establishment charges, interest charges,

etc., in a sum of Rs. 51,695. This was on the ground that those expenses were not allowable from the share income and that it could not be said

that the interest paid was the money borrowed for the purposes of investment as capital in the partnership firm

In relation to the assessment year 1961-62, the assessee-company again claimed deduction in respect of the establishment and interest charges

as also the relief by way of set-off in relation to the losses incurred in the earlier years. The Income Tax Officer again rejected the claim for the

same reasons as set out by him in respect of the assessment years 1960-61.

For both the assessment years 1960-61 and 1961-62, the firm, Dalmia Magnesite Corporation, of which the assessee is a partner, claimed that

it was a new unit of industrial undertaking and, therefore, it claimed the relief u/s 15C. This claim has been allowed in the assessment of the firm for

those years. Based on this, the assessee claimed that it was entitled to an exemption u/s 15C in respect of its share income from the firm. But this

claim came to be made at the appellate stage when the assessment orders for the years 1960-61 and 1961-62 were pending in appeal before the

Appellate Assistant Commissioner.

The Appellate Assistant Commissioner dealt with the three claims put forward by the assessee-company. In relation to the claim for exemption

u/s 15C, the Appellate Assistant Commissioner took the view that as the relief has been granted to the firm, the same relief is not available to the

partners in respect of their share income and in that view, he directed the Income Tax Officer to find out whether the firm had been granted the

exemption and that if the firm had not been given the exemption, the assessee may be granted the relief u/s 15C. As regards the deduction claimed

in relation to the establishment expenses and interest payments, he took the view that as those expenses had not been incurred by the assessee for

earning the income as a partner of the firm, the deduction cannot be allowed in respect of those expenses. Regarding the losses incurred by the

assessee-company in the earlier years, he held that the share income of the assessee-company came from a new business run by the partnership

which has no interconnection, interlacing and interdependence with the business that the assessee was carrying On before the constitution of the

partnership and, therefore, the assessee was not entitled to claim a set-off of the losses of the earlier years.

The matter was taken to the Appellate Tribunal. So far as the relief of exemption based u/s 15C of the Act in respect of its share income from

Dalmia Magnesite Corporation, the Tribunal held that the assessee-company is entitled to claim the relief of exemption under the said section in

view of the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat Vs. Arun Industries, . As regards the claim for deduction

towards interest and establishment expenses, it held that the business carried on by the firm was to be considered as the business carried on by the

individual partners and that as the business of the firm being the same as the one carried by the assessee in the earlier years, the expenses incurred

in connection with the said business which is a continuing one, have to be allowed as against the share income of the partners. As regards the

assessee''s claim for the set-off of the losses of the earlier years, the Tribunal held that the assessee-company would be entitled to bring forward

the losses of earlier years and set-off against its share income during the assessment years 1960-61 and 1961-62, for the reason that the losses

have been incurred in the same business which was originally run by the assessee-company as a proprietary concern but, later, run by the

partnership of which the assessee is a partner. In this connection, the Tribunal rejected the contention put forward on behalf of the department that

since the losses have not been quantified for the assessment years 1952-53 to 1954-55, the assessee-company was not entitled to carry forward

the losses of these years and to set off, and that the Tribunal dealing with the appeals relating to the years 1960-61 and 1961-62 cannot direct the

quantification of the losses in respect of those three earlier years.

One other issue raised by the assessee before the Tribunal was as to whether a sum of Rs. 41,676 which is the quantum of loss arising out of

the depreciation in the value of stock-in-trade of magnesite ore for the assessment year 1961-62 is deductible as against the share income from the

firm. Though this claim was negatived by the authorities below, the Tribunal upheld this claim on the ground that the said losses have been incurred

directly from the business of the assessee and that the assessee''s business from which the share income has been received is the same in respect of

which the loss also has arisen.

Aggrieved by the decision of the Tribunal, the revenue sought a reference to this court and the following six questions have been referred in

respect of the said two assessment years :

Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of interest and other expenses from its

share income from the partnership firm of Dalmia Magnesite Corporation for the assessment years 1960-61 and 1961-62 ?

Whether, on the facts and in the circumstances of the case, the assessee was entitled to have the losses for the assessment years 1952-53 to

1954-55 quantified and set-off against its share income from the partnership firm of Dalmia Magnesite Corporation for the assessment years 1960-

61 and 1961-62?

Whether the Appellate Tribunal has jurisdiction to direct the Income Tax Officer to quantify the losses for the assessment years 1952-53 to

1954-55 and allow the set-off against the share income from the partnership firm for 1960-61 and 1961-62 ?

Whether, on the facts and in the circumstances of the case, the assessee was entitled to have the losses of the assessment years 1955-56 to

1959-60 set off against its share income from Dalmia Magnesite Corporation for the assessment years 1960-61 and 1961-62 under the provisions

of Section 24(2)(iii) of the Indian Income Tax Act, 1922 ?

Whether, on the facts and in the circumstances of the case, the assessee, as a partner in the firm of Dalmia Magnesite Corporation, was entitled

to the relief u/s 15C of the Income Tax Act for the assessment years 1960-61 and 1961-62 ?

Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Rs. 41,676 in the assessment year

1961-62 against its share income from Dalmia Magnesite Corporation ?

As regards question No. 5, the learned counsel for the revenue represents that the revenue is not pressing for a decision on that question. In

view of this representation we consider it unnecessary to deal with that question and give our opinion thereon. We, therefore, refrain from

answering that question.

In relation to the first question, the contention advanced on behalf of the revenue is that the interest and other expenses cannot be claimed as an

allowance as against the share income. But the Tribunal without specifically deciding that question left it to the Income Tax Officer to consider the

question of deduction in respect of interest and other expenses subject to adjustment for inadmissible items of expenditure as normally understood.

It is by now well-established that any expenditure incurred by a partner in earning the share income is an allowable deduction in the hands of the

partner as against his share income Commissioner of Income Tax, Bihar Vs. Ramniklal Kothari, and Commissioner of Income Tax Vs. A.M.

Kaithan, . Therefore, the extreme contention of the revenue that the entire expenditure in respect of which the deduction is claimed cannot be

claimed as against the assessee''s share income from the firm cannot straightaway be accepted without a scrutiny as to whether the expenses had

been incurred in connection with the earning of the share income by the assesses from the firm. As already stated, the Tribunal having left the

question of deduction to be considered by the Income Tax Officer, we think it is sufficient to say that the Income Tax Officer, while considering the

assessee''s claim for deduction in respect of interest and other expenses, will consider as to what are the actual expenses incurred by the assessee

for earning the share income and to allow the same u/s 10(2)(xv) following the decisions above referred to. We, therefore, answer the first

question, technically, in favour of the assessee but subject to the observations made above.

Question No. 3 relates to the jurisdiction of the Tribunal to direct the Income Tax Officer to quantify the losses for the assessment years 1952-

53 to 1954-55 and to allow such loss as is determined to be set off against the assessee''s share income from the firm for 1960-61 and 1961-62.

It is contended on behalf of the revenue that the Tribunal had no jurisdiction to direct toe Income Tax Officer to quantify the losses and to give

relief to the assessee by way of set off against the share income of the assessee for the years 1960-61 and 1961-62. It is pointed out that under

the Income Tax Act, each assessment year is a unit by itself and that while dealing with an appeal in relation to a particular assessment year, the

Tribunal cannot travel outside the scope of the appeal and deal with matters relating to other assessment years. According to the revenue, the

effect of the order of the Tribunal, is this case, is that they have granted relief to the assessee in relation to the assessment years 1952-53 to 1954-

55 while they were dealing with the assessment for the years 1960-61 and 1961-62. Reliance is placed in this connection on the judgment of the

Supreme Court in Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, and Commissioner of Income Tax,

Kerala Vs. Manick and Sons, . In Income Tax Officer v. Murlidhar Bhagwan Das, while dealing generally with the jurisdiction of the Tribunals and

the authorities as constituted under the Act, the court observed that it is confined only to the subject-matter of the appeal and that any direction that

may be given by them must necessarily relate to the assessment of the year in question. In Commissioner of Income Tax v. Manick Sons the

question was whether a Tribunal had jurisdiction in the appeal relating to the assessment years 1953-54 to reopen the assessment for the year

1952-53 which had become final. The court held that the Tribunal had no powers while deciding an appeal before it to deal with matters which are

not covered by that appeal. Dealing with the question, the Supreme Court observed (at page 5):

Under Section 33(4) of the Indian Income Tax Act, 1922, the Income Tax Appellate Tribunal may, after giving both parties to the appeal an

opportunity of being heard, pass such orders thereon as it thinks fit The power conferred by that sub-section is wide, but it is still a judicial power

which must be exercised in respect of matters that arise in the appeal and according to law. The Tribunal in deciding an appeal before it must deal

with questions of law and fact which arise out of the order of assessment made by the Income Tax Officer and the order of the Appellate Assistant

Commissioner. It cannot assume powers which are inconsistent with the express provisions of the Act or its scheme.

But we are of the view that this general observation of the Supreme Court relating to the jurisdiction of the Tribunal may not be of much

assistance for deciding the questions before us. On the facts of this case, it cannot be said that the Tribunal has exceeded its jurisdiction in directing

the Income Tax Officer to quantify the losses in relation to the assessment years 1952-53 to 1954-55 and to allow a set-off of the losses for those

years in relation to the assessment years 1960-61 and 1961-62. The Tribunal while disposing of the appeal relating to the assessment years 1960-

61 and 1961-62 has to actually determine the taxable income of the assessee for these years and for this purpose it has necessarily to find out

whether the assessee is entitled to carry forward the losses and set them off against the profits of the years in question. If, in law, the assessee is

entitled to carry forward and set off the losses of the previous years in the assessment years in question then the Tribunal cannot refuse to consider

that question on the ground that the losses in respect of which the set off has been claimed relate to some earlier years. As a matter of fact, an

identical question came to be considered by the Supreme Court in The Commissioner of Income Tax, Madhya Pradesh Vs. Seth Khushal Chand

Daga, . The question there was whether the Tribunal could direct the quantification of the losses for the earlier years while dealing with an appeal

relating to the subsequent assessment year. The Supreme Court held that the assessee is entitled to have the losses redetermined in the subsequent

year if the Income Tax Officer had not duly followed the provisions of the statute in determining the quantum of losses in the earlier years. Though

that case did not relate to the jurisdiction of the Tribunal the principle of the said decision has to be applied to the facts of this case.

Admittedly, the assessee, in this case, applied for extension of time for the submission of the returns for the assessment years 1952-53 to

1954-55 and in fact obtained the required extension from the Income Tax Officer himself. It is also seen that after the submission of the returns

within the extended time, the matters were posted for enquiry and the assessee was asked to produce materials in support of the said returns. But,

somehow, the Income Tax Officer chose to close the proceedings saying that he will not take cognisance of those returns as they had not been

filed within the time provided in Section 22(1) or Section 22(2A). But it has been held by the Supreme Court in Commissioner of Income Tax,

Punjab Vs. Kulu Valley Transport Co. P. Ltd., , that though a return disclosing the loss is not filed in time as fixed in the general notice u/s 22(1) or

Section 22(2A), the provisions of Section 24(1) and (2) of the Act should be taken into account for the purpose of granting relief to the assessee,

in relation to the assessment for the subsequent year. It has, therefore, to be taken that the non-consideration of the returns and the non-

determination of the losses in relation to the years 1952-53 to 1954-55 by the Income Tax Officer cannot be said to stand in the way of the

assessee getting the relief u/s 24(1) or Section 24(2) in relation to the assessment years 1960-61 and 1961-62, We have to, therefore, hold that

the Tribunal, in this case, while dealing with the assessment for the years 1960-61 and 1961-62 is justified in directing the Income Tax Officer to

determine the losses in relation to the assessment years 1952-53 to 1954-55 for the purpose of granting relief to the assessee u/s 24(1) and

Section 24(2) in relation to the assessment years in question. The third question is, therefore, answered in the affirmative and against the revenue.

Questions Nos. 2 and 4 relate to the merits of the assessee''s claim to have the losses of the earlier years 1952-53 to 1959-60 set off against the

assessee''s share income from the firm, Dalmia Magnesite Corporation, for the assessment years 1960-61 and 1961-62. According to the

revenue, the losses incurred by the assessee for the assessment years 1952-53 to 1959-60 and the share income of the assessee are not from the

same business and, therefore, the claim for carry forward and set-off of the losses is not admissible. In support of its plea that the losses have been

incurred in connection with a different business, the revenue urged before the Tribunal that the earlier proprietary business carried on by the

assessee was of mining the ore and subjecting the magnesite won to a process of calcination up to a temperature of 1000�C and that the

business carried on by the firm during the years 1960-61 and 1961-62 was subjecting the magnesite won to a higher temperature and that,

therefore, the process adopted by the firm being a different one, the business of the firm should be treated to be a different one from the one

carried on by the assessee earlier. The Tribunal held that merely because there is a change in the process of calcination of the magnesite won, it

cannot be said that there is a change in the business. This finding of the Tribunal, which is based on facts. cannot be challenged before us. The

learned counsel for the revenue advanced a new plea that in view of the fact that the assessee bad, admittedly, leased out the mining lands to a

third party, it should be taken that there is discontinuity in the business and the business carried on by the firm cannot be said to be a continuation

of the assessee''s earlier business. In this case, the assessee is the owner of the lands and carried on the mining operations between the years 1945

to 1955. It is true that in the year 1955 the lands were leased to a third party and the lessee was carrying on the mining operations for a short

while. Bat, later, the mining fields have been resumed from the lessee and the assessee is carrying on the mining operations along with two others as

a partnership firm. The fact that the mining lands were leased for a short while cannot be taken as establishing that the business of mining had been

discontinued. As a matter of fact, the assessee had stocks of magnesite ore which has been won earlier and which had to be sold and the assessee

has- been maintaining those stocks for want of a favourable market right through and it is only in relation to those stocks, it claimed the loss of Rs.

41.676 during the assessment year 1961-62. It is not in dispute that the assessee continues to be the owner of the mining lands right through and

the realisation by way of lease amounts during the period when a third party was carrying on the mining operations as a lessee has to be taken as

the income of the assessee from the same business. In our view, the conclusion of the Tribunal that the same business continues right through and

that the losses incurred for the years 1952-53 to 1959-60 were in relation to the same business from which the share income has been received by

the assessee is correct on the materials on record. We have to, therefore, answer questions Nos. 2 and 4 in the affirmative and against the revenue

and we answer accordingly.

As regards question No. 6, in view of our answers regarding questions Nos. 2 and 4, this question has also to be answered against the revenue

and it is answered accordingly.

There will be no order as to costs.