Indo Mercantile Bank Ltd. vs Commissioner of Income Tax

Vithayathil, J.—This reference is by the Income Tax Appellate Tribunal, Madras Bench ''B'', u/s 66 (1), Indian Income Tax Act, 1922. The Assessee in the case is the Indo Mercantile Bank Limited, a public limited company incorporated in the erstwhile Cochin State. The company has its branches in the erstwhile Cochin State, in the former British India and in the erstwhile Travancore State.

In response to the notice issued by the In-come-tax Officer, Alleppey, u/s 29 (2), Travancore Income Tax Act, 23 of 1131, for the assessment year 1124 M. E" the Assessee filed a return in the Status of ''resident and ordinarily resident'' showing an income of Rs. 11,872/- from business for the year 1947 A.D. covering all the branches in and out of the State of Travancore.

The Income Tax Officer, however, determined the Assessee''s income at Rs. 90,947/- representing profits of the branches in the Travancore State only. He refused to deduct Rs. 79,275/- shown in the return as losses from the branches situate outside the Travancore State. In appeal filed by the Assessee before the Appellate Assistant Commissioner of Income Tax, Trivandrum, the Appellate Assistant Commissioner also held that the losses from the branches outside the Travancore Stale could not be deducted in computing the income of the Assessee.

Reliance was placed on the decision of the Allahabad High Court in the cose of - In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, . The Assessee preferred a second appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal, in its order dated 18-2-1952, held that the business of banking carried on by the Assessee at the head office and all the branches both In and out of Travancore should be considered as one and indivisible and that, therefore, the loss of Rs. 79,270/- incurred by the Assessee outside the Travancore State should be deducted from the profits made within the State.

The Commissioner of Income Tax, Mysore, Travancore-Cochin and Coorg, applied to the Appellate Tribunal to refer to the High Court the following question of law which, according to the Commissioner, arose out of the order of the Appellate Tribunal, viz.,

Is the aforesaid sum of Rs. 79,275/- a loss of the Assessee arising outside the Travancore State for purposes of the first proviso to Section 32 (1), Travancore Income Tax Act?

The Appellate Tribunal allowed that petition and made this reference.

The wording of the question referred, by the Appellate Tribunal is not very happy. The real question of law that arises out of the order of the Appellate Tribunal is whether the Assessee is entitled to have the sum of Rs. 79,275/- representing loss incurred by the Assessee in British India and other Indian States deducted from the profits and gains made in Travancore. We, therefore, re-frame the question as follows:

Is the Assessee entitled to deduct the aforesaid sum of Rs. 79,275/-, loss of the Assessee arising outside Travancore, from the income, profits and gains made in Travancore?

The argument advanced on behalf of the department is this u/s 18 (2) (c), Travancore Income Tax Act corresponding to Section 14 (2) (c) of the Indian Act, an Assessee is not liable to pay income tax

In respect of any income, profits or gains accruing or arising to him within British India or any Indian State, unto such income, profits or gains ere received or deemed to be received in or are brought into Travancore in the previous year by or on behalf of the Assessee, or are assessable u/s 56

There is, therefore, no justification in deducting losses incurred by the Assessee within British India or any other Indian State from the income, profits or gains accruing in the Travancore State in computing the income of the assesses. The first proviso to Section 32 (1), Travancore Income Tax Act Section 24 (1) of the Indian Act) prohibits the Assessee from deducting such losses in computing his assessable Income.

We shall first consider the effect of Section 32 (1). It provides:

Where any Assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 9, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year:

Provided that where the loss sustained is a loss of profits or gains which would but for the losr.es lu.ve accrued or a.-i". ti within British India or any Indian State and would, under the provisions of Clause (c) of Sub-section (2) of Section 18 have been exempted from tax, such loss shall not be set off except against profits or gains accruing or arising within British India or any Indian State and exempt from tax under the said pro visions.

The section only enables an Assessee to set off the loss under one head of Income against the profit under Anr. head and the proviso, also can apply only to such cases. Here there is only one head of Income and, therefore, there is no scope for the application of Section 32 (1) or the proviso to that section.

It was so held by the Bombay High Court in - ''Commr. of Income Tax, Bombay City v. Murlidhar Mathurawala AIR 1948 Bom 403 (B). In In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, , relied on by the department the Allahabad High Court agreed with this view. Referring to the Bombay case, Malik C.J. said:

"The learned Judges held that this proviso can have no application unless the section itself is applicable, and the proviso does not therefore, apply unless the loss under one head is attempted to be set off by a profit under Anr. head" The learned Chief Justice, therefore, held that the proviso to Section 24 (1) did not apply to the case.

We shall next consider the argument based on Section 18 (2) (c), Section 14 (2) (c) of the Indian Act. The argument is as stated already, that If profits arising in British India or in any other Indian State cannot, be taken into account in computing the income of the Assessee the losses incurred there cannot also be taken into account. This is how Malik C.J. dea(sic)t with the question in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45,

It is a well settled principle of law that no Assessee can claim a set-off or deduction unless he can show some provision of law under which the deduction can be allowed. Mr. Dass, on behalf of the Commissioner of Income Tax, has urged that if proviso (1) to Section 24 (1) is not applicable then there is no other provision under the Income Tax Act under which the Assessee can claim a set-off on losses incurred by him outide British India.

In calculating the profits and gains under the fourth head of Section 6 the Income Tax Officer has to prepare a balance sheet of the result of the working of such business with which the Income Tax Officer is concerned and, if he is not concerned with profits of a business carried on in an Indian State, he is obviously not concerned with the losses of that business, so that if the profits of the business cannot be added the losses of the business cannot be deducted either.

This result seems to me to be obvious. Sub-section (1) of Section 24, Income Tax Act, can only apply to set off of a loss in one head against income under Anr. head. Section 10 provides as follows: "The tax shall be payable by an Assessee under the head ''Profits and gains of business, profession or vocation'' in respect of the profit or gains of any business, profession or vocation carried on by him.

Sub-section (2) then goes on to set out the method of computation of such profit or gain and the allowance to be made for the purpose. The other Sub-sections of Section 10 make similar provisions explaining the method of computing the profits and gains and how It is to be done: Section 10, therefore, primarily concerns itself with the income of the Assessee in respect of which Income Tax is payable.

That section must be read along with Clause (c) of Sub-section (2) of Section 14 which exempts the income, profit or gain arising to the Assessee within an Indian State unless such income, profit or gain are received or deemed to be received in British India, in the previous year by or on behalf of the Assessee. If such income becomes taxable by reason of the fact that it is received in British India or brought into British India, in the previous year, to my mind, It would become an income from other sources'' rather than ''an income from business''.

Be that as it may, on the facts stated in the statement of the case that the Assessee had made a profit of Rs. 38,473 from business in British India and has suffered a loss of Rs. 25,391 from his business in Indian States and on the finding that proviso (1) to Section 24, Sub-section (1) is not applicable and in the view that I have taken that neither Sub-section (1) to Section 24 nor Section 10 of the Act helps the Assessee, the reply to the first question must be in the affirmative and the lots of Rs. 25,391 should be ignored in determining the Assessee''s income from business in the previous year.

Seth J. was also of opinion that Section 10 should be read along with Section 14 (2) (c) and said:

It is thus manifest that an Assessee is liable to pay tax on all profits and gains from business carried on outside Indian States, and it is equally manifest that in ascertaining profits and gains from such business, the consideration of losses incurred in business carried on in an Indian State is absolutely irrelevant.

This view was not accepted by the other High Courts in-India, as can be presently seen. But, Mir Allahabad High Court adhered to its view in a recent decision, viz., -- RAGHUNATH PRASAD Vs. COMMISSIONER OF Income Tax, U. P. AND AJMER MERWARA, LUCKNOW., . After referring to the decisions of the other High Court on the point, Malik C.J. observed:

There can be no doubt that in working out the profits under various heads u/s 10 of the Act the Income Tax Officer has to take into consideration the total result of all the business that may have been carried on in the relevant year by the Assessee and it is the result which are the profits or gains of business in the chargeable accounting period.

If the Assessee carries on three types of business and he has made profits in two and loss in the third, the Income Tax Officer cannot ignore the loss in the third and say that in that business there was no profit made and take into account the profits made in the other two businesses. In computing the profits u/s 10 the Income Tax Officer must take into account the result of all the businesses that were carried on by the Assessee and deduct the losses from the profits to determine the figure which can be held to be profits or gains from business.

The question, however, arises whether the Income Tax Officer should take into consideration not only the profits or losses in businesses carried on within the taxable territory but also profits or losses from businesses made at a place specially excluded under the Act. The Income Tax Officer has to work out two figures, one, the total income for purposes of rate, and the other, the taxable income on which tax is levied.

After citing Section 6, 10, 14 (2) (c) and 16 (1) (a), the learned Chief Justice proceeded:

If instead of Incurring a loss of Rs. 4,483 in the business carried on in the Jaipur State, the Assessee had made a profit of an equal amount from business there, it must be conceded that In making the computation for tax purposes by reason of the provisions of Section 14 (2) (c) Income Tax Officer cannot take the profit into consideration, the amount not being an income which was liable to tax.

There is, therefore; no reason, why he should in making the computation for tax- purposes, take into account losses incurred at Jaipur. For tax purposes computation of neither the profit nor the loss of Jaipur will be relevant u/s 10 of the Act, though for the purpose of determining the rate such income or such loss may be relevant.

Reading these sections together, the result appears to us to be that in computing the income for rate purposes the Income Tax Officer may have to take into account the profits made in an Indian State and may also have to deduct the losses sustained there, but in computing the income for tax purposes neither the profits made nor the losses incurred In an. Indian State can be taken into account....

Having considered the matter, we see no reason to differ from the opinion expressed by this Court in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, , though we do so with great diffidence in view of the fact that a contrary view has been taken by the learned Chief Justice of Bombay and by several High Courts in India.

The Bombay case referred to is AIR 1948 Bom 403 (B). In that case the Assessee was carrying on business in Bombay and Anr. business in Indore. The Assessee claimed that the loss sustained in the Indore business should be deducted from the profits realised in the Bombay business. Chagla C.J. observed:

To my mind the scheme of the Act is perfectly clear. When you turn to Section 10 which deals with business it is a self-contained head. Different businesses do not constitute different heads under the Income Tax Act. All the businesses wherever carried on constitute one head which falls u/s 10 of the Act and in order to determine what are the profits and gains of a business u/s 10 an, Assessee is entitled to show all the profits and set off against such profits losses incurred by him in the same head.

It is only when he proceeds to set off a loss under business against a profit under some other head that Section 24 comes into operation and various considerations will arise, whether he is entitled to such a set off or not.

This view was re-affirmed by Chagla C.J. in Trikamlal Girdharlal Vs. Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Baroda, . Referring to the earlier case, the Chief Justice said:

To re-affirm the principle which we enunciated in that case, and that principle really comes to this that if an Assessee carries on a business in the taxable territories and Anr. business in a Part B State, for the purposes of Income Tax both the businesses constitute one business and the Income under the head ''business'' must be computed by either totalling the profits made by both the businesses or if there is a loss in one business by setting off the km in one business against the profit of the other.

The learned Chief Justice also held that Section 14 (2) (c) would not stand in the way of losses incurred in the business in any Part B State being deducted from the profits made within the taxable territory.

In - V. Ramaswami Ayyangar and K.R. Subramania Ayyar, Receivers to the Estate of late Rm. A.R.A. R Rm. Arunachalam Chettiar Vs. The Commissioner of Income Tax, , the Madras High Court held as follows:

Under Section 6 various sources of taxable income are intended and Section 10 provides that the Assessee is liable to pay tax upon the head ''profit and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.

Under Sub-clause (2) of that section such profits gains have to be computed after making the allowances enumerated in that clause. Nowhere in this section or in Section 6 is there any basis for restricting the words ''business, profession or vocation'' to business, profession or vocation carried on only in British India and not outside it.

In that case, however, the business that was carried on outside the taxable territory was not la an Indian State but was in Ceylon.

The Nagpur High Court considered the question in two cases, i.e., - ''Commr. of Income Tax v. C.P. Syndicate'' AIR 1953 Nag 77(F) and - ''Mohanlal Hiralal v. Commr. of Income Tax, C.P. and Berar'' AIR 1953 Nag 173 (G). Referring to the observations of Malik C.J. in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, , the learned Judges observed in AIR 1953 Nag 77 (F):

The assumption underlying these observations is that the income from business in an Indian State is to be excluded for all purposes in view of Section 14 (2) (c). With the greatest respect we observe that this is a misapprehension probably due to the fact that the attention of the learned Chief Justice was not drawn to Section 4 (1) and Section 16 (1) (a) of the Act which provide for the inclusion of such income in the total income of the Assessee.

Prior to the addition of Section 14 (2) (c) in the year 1941 the tax was payable by a resident on his total Income which included the income, profits and gains in an Indian State minus certain exemptions allowed by the Act, and the income

from business had to be computed in the manner provided by Section 10 of the Act.

It would, therefore not be correct to say that the profits and gains from an Indian State are not to be computed in the manner provided by Section 10 of the Act. With the utmost respect we do not agree either with the conclusion or with the reasoning in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, ." In AIR 1953 Nag 173 (G), the learned Judges observed as follows:

It is next contended that there is no provision in the Act for bringing any loss incurred out of British India into British India as the Assessee (sic) to do. The contention is f(sic)acious. As already observed, the Assessee is not seeking to bring any lass into British India, but the Income Tax Authorities have to determine his total Income having regard to the several provisions of the Act to which reference has been made by its, and in doing so the Income Tax Officer is bound to take into account the share loss suffered by the Assessee out of British India.

Reference may also be made in this connection to the following observation of Bose J. in - ''Anglo-French Textile Company v. Income Tax, Commr., Madras'' AIR 1953 SC 111(H):

Next, a set off u/s 24 (1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arises tinder the same head, of course, the loss can be deducted. But, that is done u/s 10 and not u/s 24 (1). See the decision of the Privy Council in - AIR 1936 133 (Privy Council)

In - Commr. of Income Tax, Punjab, Pepsu, Himachal Pradesh and Bilaspur, Simla Vs. Hira Mall Narain Dass, , Kapur J. expressed himself unable to agree with the view taken by the Allahabad High Court in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, and said that there was no reason why in computing the income u/s 10 business carried on by the Assessee should be read only as business in British India.

After referring to the decisions of the various High Courts on the point the learned Judge came to the following conclusion:

The weight of authorities, therefore, is in favour of the view that in computing the tax under the head "business" reference has to be made only to Section 10 and neither Section 24 (1) as it stood before 1944 nor Section 24 (1) with the proviso, is applicable.

This view was re-affirmed by the Punjab High Court in - COMMISSIONER OF Income Tax, DELHI Vs. S. PARTAP SINGH., .

The Hyderabad High Court also has taken the same view in -''Commr. of Income Tax, Hyderabad v. Baliram Santhoba'' AIR 1954 Hyd 34 (L). The learned Judges refused to follow the view taken by the Allahabad High Court in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, .

Upon a consideration of the relevant sections of the Income Tax Act and in the light of the decisions referred to above, we find ourselves unable to agree with the view taken by the Allahabad High Court in In Re: Income Tax Assessment of Misrimal Gulabchand of Beawar for the year 1944-45, and RAGHUNATH PRASAD Vs. COMMISSIONER OF Income Tax, U. P. AND AJMER MERWARA, LUCKNOW., . We prefer to adopt the view taken by the Bombay, Madras, Nagpur, Punjab and Hyderabad High Courts.

We are clearly of opinion that the proviso to Section 32 (1), Travancore Income Tax Act, corresponding to Section 24 (1) of the Indian Act, has no application to the case and that Section 18 (2) (c), Section 14 (2) (c) of the Indian Act, also does not affect the question. That is a special provision by which income, profits or gains accruing within the former British India or Anr. Indian State is excluded from liability for Income Tax in Travancore except under certain circumstances.

In the absence of a similar provision to the effect that losses incurred within British India or any other Indian State should not be taken into account in computing the Income of an Assessee u/s 13 of the Act (Section 10 of the Indian Act), there will be no justification in not deducting those losses when computing the income of the Assessee.

We, therefore, hold that, in computing the income of the Assessee, the sum of Rs. 79.275/- representing loss incurred by the Assessee in the erstwhile Cochin State and the former British India should be deducted from the profits made by the Assessee in the erstwhile Travancore State.

The reference is answered accordingly. The Assessee will get his costs of the reference including advocate''s fee Rs. 100/- (one hundred only), from the Commissioner of Income Tax, Mysore. Trayancore-Cochin and Coorg.