Ram Pratap Ramdeo vs Commissioner of Income Tax, Bombay South

Chagla, C.J.—This reference will require a supplemental statement of the case before we can answer the question referred to us. The question relates to the remittances made by the assessee from Jalna, which was in an Indian State at the relevant date, to the taxable territories, and the assessment years with which we are concerned are 1948-49 and 1949-50. Now, it was found as a fact that the assessee made profits in the Hyderabad business of Rs. 42,333 in the year 1947-48, Rs. 64,000 in 1948-49 and Rs. 28,000 in 1949-50. Remittances were made into the taxable territories of Rs. 42,333 in the assessment year 1948-49 and Rs. 28,000 in the assessment year 1949-50. These remittances will only be taxable if they were made out of the profits of the business, and in order to decide this question the Tribunal considered the profits made, not in the previous year, but in the year previous to that, i.e., the profits in 1947-48, and as there were profits of Rs. 42,333 for the assessment year 1947-48 and Rs. 64,000 for 1948-49 the Tribunal took the view that the remittance of Rs. 42,333 for 1948-49 and Rs. 28,000 for 1949-50 were from profits.

Now it is well settled that it is for the Department to establish that there were profits in the hands of an assessee in the Indian State out of which remittances could have been made to the taxable territories; and once that fact is established, then the presumption arises that the remittances are from those profits and not from capital. It is on this basis that remittances are taxed u/s 4(1)(b)(iii). Now there is one fact here which the Tribunal has not either considered properly or has not appreciated the legal implications of that fact, and that fact is that there was a loss at the commencement of the assessment year to the extent of Rs. 90,000. This loss was the loss of previous years, and if the assessee was entitled to set off the profits of Rs. 42,333 against this loss of Rs. 90,000, then there would be no profit from which a remittance of Rs. 42,333 could be made in the assessment year 1948-49. Dealing with this aspect of the matter the Tribunal in its order says : "when a person suffers a loss in a particular year in a State it means that his capital investment in the business has been reduced by the amount of the loss as on a particular date. There is no provision under the Income Tax Act under which losses outside India are allowed to be carried forward. When profits are made in the following year they can either go to increase the capital in the State or they may be remitted to India." With respect to the Tribunal, this is not the correct view of the matter. In every case it is a question of fact as to whether the person doing business in an Indian State treats his loss as reduction of capital or carried it forward so that the profits of the succeeding year or years should be set off against that loss. It is, therefore, not a question of law, but a question of fact. Unfortunately, the attention of the Tribunal was not drawn to a judgment of this court reported in Sarupchand Hukumchand v. Commissioner of Income Tax. In that judgment it is mentioned as follows :

"Now I can well understand the position where an individual or a firm carried forward losses from year to year and in any particular year the profits of that year may be set off against the losses which have been carried forward to that year. However, it may be that an individual or a firm may adjust at the end of each year its profits and loss and transfer it to the accounts of the partners and the profits and loss of the next year may be determined irrespective of what the position was at the end of the last year."

Now, when we try and see what the finding of fact is with regard to this matter, it is not clear what the Tribunal has found. At one place the Tribunal says : "It is urged by the assessee''s counsel that the profit and loss account in the State is carried forward from year to year." The Tribunal perhaps did not think it necessary to give a finding on this because it took the view and, with respect, erroneously that notwithstanding the carrying forward of losses from year to year, the losses must be deemed to have been utilised for the purpose of repleting the capital. They also say in their order that "it is admitted that the State after 1st April, 1933, and prior to the accounting year under reference there was a debit balance in the profit and loss account of about Rs. 92,000." Now, it is not clear whether this balance of Rs. 92,000 is the result of losses being carried forward from year to year in the books of account of the assessee or this has been arrived at merely from a consolidated statement which the assessee submitted and which is annexure A to the statement of the case; and when we turn to the statement of the case, the statement of fact on this question is rather equivocal. This is how that statement is worded :

"........ As a matter of fact there was a carry forward of loss as at the commencement of the year of account exceeding a sum of Rs. 90,000. A statement filed by the assessee is annexure ''A'' and forms part of the case".

Now what is relevant and material is to consider what the position is having regard to the books of account of the assessee. How has the assessee dealt with the loss in his books of account ? Has he carried it forward or has he adjusted it at the end of each year in such manner as to draw the inference that to the extent of the loss the capital has been reduced ? Before we can answer the question, therefore, it is necessary that we should have a clear finding on the part of the Tribunal in the light of this judgment.

We, therefore, direct the Tribunal to submit a supplemental statement of the case and to find whether the losses of the assessee referred to in the statement of the case were carried forward in the books of account of the assessee. If they were not, they will also tell us how they were adjusted.

With regard to costs, Mr. Palkhivala has drawn our attention to the fact that the requirement of a supplemental statement of the case has been occasioned entirely by the Department not seeing to it that the proper facts were established and that the proper statement of the case was drawn up by the Tribunal. We will bear this contention in mind when we ultimately deal with the costs of the reference.

Case remanded.