P.V. Gajapathi Raju vs Commissioner of Income Tax

Ratnam, J.—The assessee is an individual and was carrying on business as a financier advancing mones in respect of hire-purchase

transactions. In respect of the assessment years 1968-69 and 1969-70, he claimed net losses of Rs. 93,579 and 51,063, respectively. Scrutinising

the accounts submitted by the assessee did not make any fresh advance and no hire-purchase transaction were also entered into in the relevant

years. The Income Tax Officer also found that during the assessment year 1967-68, the assessee had almost stopped his business and was merely

engaged in realising the outstandings due from his customers and also interest due from them. Inasmuch as the position continued to be the same

for the assessment years in question, the Income Tax Officer took the view that the loss arising in the provcess of winding up should be

appropriately dealt with under the head ""Other sources"" and he disallowed sums of Rs. 38,329 and Rs. 12,158. Amongst the items so disallowed,

there were amounts paid as salary to one Sri Srinivasa Appa Rao, who was none other than the father-in-law of the assessee. For the assessment

year 1968-69, out of a total salary of Rs. 24,000, a sum of Rs. 18,000 was disallowed in view of the disallowance made in the earlier years and

also keeping in view the rasonableness of the remuneration for purposes of realisation of the outstandings. For the assessment year 1969-70, out

of claim of payment of salary to Sri Srininvasa Appa Rao in a sum of Rs. 10,500, the Income Tax Officer held that Rs. 500 per mensem would be

reasonable and disallowed the balance as paid for other personal considerations. A sum of Rs. 133 towards Income Tax included under salary

was also disallowed totalling to Rs. 4,633. For the assessment year 1969-70, the assessee claimed allowance of a sum of Rs. 30,036 on account

of waiver of interest. On the ground that the business of the assessee was stopped, this claim was negatived and the Income Tax Officer was also

of the view that the interest accrued on parties'' accounts could only be capital loss. While disallowing this amount, the fact that no steps were

taken by the assessee for the recovery of interest, in respect of which claim for waiver was made from the parties, was taken note of and finally the

Income Tax Officer completed the assessment by computing the income of the assessee for the assessment year 1968-69 at Rs. 11,950 and for

the assessment year 1969-70 at Rs. 60,470. On appeal by the assessee before the Appellate Assistant commissioner, it was held that mere

maintenance of an establishment by the assessee for collecting arrears and outstandings, would not amount to carrying on of the business and the

disallowance of portions of salary paid to Sri Srinivasa Appa Rao for the assessment years in question was justified. Regarding the claim of the

assessee in respect of waiver of interest of Rs. 30,036 for the assessment year 1969-70, he held that it was not admissible, as no business was

carried on by the assessee during the relevant year. On further appeal by the assessee before the Tribunal, it was contended that through the

assessee did not make any fresh advance or enter into hire-purchase transactions during the relevant accounting years, yet the assessee was

collecting the outstandings due and that the salary paid to Sri Srinivasa Appa Rao should have been allowed in full. The claim for allowance in a

sum of Rs. 30,036 for the assessment year 1969-70 on account of waiver of interest was also reiterated. The Tribunal found that the assessee

could not be stated to have carried on any business during the assessment years in question and that there was no justification for holding that the

disallowance of salary payment made to Sri Srinivasa Appa Rao was either unreasonable or low and that the disallowance in respect of waiver of

interest for the assessment year 1969-70 did not merit any interference, as the assessee did not carry on any business during the accounting year

relevant to the assessment year 1969-70.

At the instant of the assessee, u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ""Act""), the Tribunal has referred the following

common questions of law for the opinion of this court :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that there was closure of the

business ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the disallowance of a portion of

the salary paid to the manager is without any basis ?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the loss of unrealised interest of

Rs. 30,036 is a capital loss not allowable as a deduction in computing the income ?

Learned counsel for the assessee first contended that the view taken by the Tribunal that the assessee did not carry on any business during the

accounting years relevant to the assessment years in question, is not correct and that though it may be true that the assessee did not make any fresh

advance or enter into hire-purchase transactions, he had been realising the outstandings by institution of proceedings against the debtors of the

assessee and that would be sufficient to establish that the assessee had been carrying on his business. Per contra, learned counsel for the Revenue

submitted that the mere collection of outstandings cannot be termed to be continuation of business and placed considerable reliance upon the

decision of the Supreme Court reported in The Commissioner of Income Tax, Punjab Vs. The Lahore Electric Supply Co., and Indraprastha Steel

Industries Ltd. Vs. The Commissioner of Income Tax, Delhi, .

It is not in dispute that during the accounting years relevant to the two assessment years in question, the assessee had not made any fresh

advance or entered into hire-purchase transactions, but that he had been merely collecting or attempting to collect the outstandings due to him by

taking proceedings against his debtors. Factually, therefore, the business transactions of the assessee were at an end during the accounting years

relevant to the assessment years in question. In other words, the assessee had not carried on any activity, which can be described as a business

activity, which was capable of producing profit, which could be charged to tax. The circumstances that the assessee endeavoured his best to

collect the outstandings cannot be characterised as a business activity. It is, in this connection, that the decision of the Supreme Court in The

Commissioner of Income Tax, Punjab Vs. The Lahore Electric Supply Co., , is relevant. The Supreme Court pointed out that it would be laying

down strange law to hold that where a business, in fact, ceased to be run, it must be deemed as continuing because the outstanding liabilities of that

business had not been liquidated and business as contemplated is an activity capable of producing a profit and payment of outstanding liabilities is

not an activity which can ever produce such a result. To similar effect is the decision in Indraprastha Steel Industries Ltd. Vs. The Commissioner of

Income Tax, Delhi, . There also, during the accounting period relevant to the assessment year 1967-68, the assessee did not make any purchases,

nor did it spend any amount on purchase of stores and spares consumed and had no stock in possession, but it was realising its dues and earned

interest on the outstandings from the purhasers of the machinery. Affirming the order of the Tribunal, the court held that merely because the

assessee, during the relevant year, engaged itself in realising its assets and had earned interest, it cannot be said that it had engaged in any business.

The principle laid down in the aforesaid that it had engaged in any business. The principle laid down in the aforesaid decisions would squarely

apply to the facts of this case when it is seen that, during the accounting years relevant to the assessment years in question, the assessee had not

made any advance at all or entered into hire-purchase transactions, but had merely been realising the outstandings. In view of the factual finding

regarding the cessation of business of the assessee during the accounting years relevant to the assessment years in question, it follows that the

Tribunal was quite right in concluding that the assessee had not carried on any business during the assessment years in question.

Regarding the disallowance of a portion of salary payments made by the assessee to Sri Srinivasa Appa Rao taking into account the salary

allowed in the previous years, the allowance made by the authorities below cannot be said to be either unreasonable or unfair or even low. In so

far as stated to have been paid during the accounting year, the authorities had disallowed a sum of Rs. 18,000 on the ground that taking into

account the purpose for which the salary was paid, viz., realisation of the outstandings, it would be fair and reasonable to allow a salary at Rs. 500

per month. Likewise, for the assessment year 1969-70, the authorities had allowed Rs. 500 per month as reasonable remuneration for the services

of Sri Srinivasa Appa Rao and had disallowed the balance and also the Income Tax Rs. 133 included under the salary. We are not persuaded to

hold that the disallowance made by the authorities is, in any manner, unreasonable or unfair.

We now proceed to consider the claim for waiver of interest in a sum of Rs. 30,036 made by the assessee in respect of the assessment year

1969-70. We have earlier held that the business of the assessee had been stopped and that the assessee was making attempts to realise the

outstandings. Further, it is seen that it was admitted before the assessing authority that no action at all had been taken by the assessee for the

recovery of claimed. We are, therefore, of the view that the claim for allowance in a sum of Rs. 30,036 towards waiver of interest for the

assessment year 1969-70 has also to fail. We, therefore, answer the questions referred to us against the assessee. There will, however, be no

order as to costs in this reference.