Ram Saran Das and Bros. vs Commissioner of Income Tax

Suhas Chandra Sen, J.—The Tribunal has referred the following question of law u/s 256(1) of the income tax Act, 1961 (''the Act''): "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss of Rs. 4,57,844 arising to the assessee on the nationalisation of the coal industry was not an admissible deduction being a capital loss."

In this proceeding the assessment year involved is 1974-75 for which the relevant year of account is the year ended on 30-9-1973.

The facts found by the Tribunal are as under :

The assessee is a firm which maintains accounts under the mercantile system of accounting. In respect of the previous year ending on 30-9-1973 relevant to the assessment year 1974-75 the assessee submitted initially a return showing a loss of Rs. 1,08,139 which was subsequently revised showing enhanced loss of Rs. 2,09,091. Along with the revised return the assessee submitted copies of revised profit and loss account and balance sheet. The ITO on scrutiny of the balance sheet found that the assessee debited an amount of Rs. 4,57,844 in the profit and loss account being loss sustained by the assessee on compulsory acquisition of collieries owned by it. The ITO held that the loss debited in the accounts to the tune of Rs. 4,57,844 was in the nature of capital loss and, hence, disallowable in computing the business income of the assessee. On appeal, the Commissioner (Appeals) in allowing the assessee''s appeal directed the ITO to treat the loss as arising from business and the reasoning given in that regard vide paragraph 7 of his order is as follows :

"Section 28(ii)(d) enacts that any compensation paid for or in connection with the resting of the management of any property or business in the Government or a Government controlled corporation shall be deemed to be business profits. In such cases therefore the question whether the compensation is a capital or income receipt cannot now arise. In the present case the management of the appellant''s coal mines was taken over initially on 31-3-1973 followed by complete nationalisation or take over from 1-5-1973. Since the loss of Rs. 4,57,844 arose apropos of the compensation in pursuance to the taking over or nationalisation it should be deemed to be business loss and treated as such."

The department being aggrieved with the Commissioner (Appeals) order came up in appeal before the Tribunal and the only contention raised was that the Commissioner (Appeals) was not justified in holding that the sum of Rs. 4,57,844 was a business loss and not a capital loss as held by the ITO. The Tribunal reversed the order of the Commissioner (Appeals) by observing, inter alia, that section 28(ii)(d) of the Act had no application to the assessee''s case and it was held that the loss of Rs. 4,57,844 was a capital loss and not a business loss. The reasoning given by the Tribunal may be found in paragraph 2 of their order which reads as follows :

"The Commissioner of income tax (Appeals) held that as there was a provision for treating the compensation received as business income if there was a loss in the matter of take over of the business by the Government, the loss would be a business loss on the same analogy. The Departmental representative argued that here not only the management was taken over but all the assets were taken over and compensation given for the same. It was argued that section 28(ii)(d) which has been relied upon by the Commissioner of income tax (Appeals) would operate only if merely the management had been taken over by the Government and not the property or business (sic) only the management but all the assets and business were taken over and hence the provisions of section 28(ii)(d) are not applicable. The Authorised Representative argued that the order of the Commissioner of income tax (Appeals) was correct and he referred to the Memorandum pertaining to the said amendment of section 28 vide Finance Bill 1973. We have gone through the said memorandum and we do not find that there is anything therein which would support the case of the assessee. We have given our due consideration. The Authorised Representative has also referred to page 1093 of Sampath Iyenger (7th Edition). We have gone through even the said book and we do not find that there is anything anywhere to support the view that even where assets and business were taken over by the Government, section 28(ii)(d) would come into play. We hold that the order of the Commissioner of income tax (Appeals) was not a correct order at all and that section 28(ii)(d) was not applicable. The appeal of the Department is allowed and the loss of Rs. 4,57,844 is held to be a capital loss and not a business loss."

It has now been contended on behalf of the assessee that there is a further question of section 32(1)(iii) of the Act. The assessee''s case is that what the assessee received by way of compensation was less than the depreciated value of some of the assets, which were taken over by the Government. It has been stated that in such a situation the assessee was allowed to claim depreciation on the loss. A part of the loss was on account of compensation paid on the depreciable assets.

It has further been contented by the assessee that this point was actually agitated before ITO when the ITO disallowed the claim on a number of grounds. On behalf of the assessee a prayer was made to remand the case back to the Tribunal to consider this aspect of the matter.

We are unable to accept this prayer made by the assessee. The point was decided by the ITO against the assessee. Thereafter it appears that the point was abandoned by the assessee. The assessee could have raised this point before the Tribunal but the assessee did not do so. The difficulty in this case is that the only appeal that was before the Tribunal was the department''s appeal. The point that has been held against the assessee could have been raised by the assessee only by taking cross-objection or a separate appeal before the Tribunal. The assessee could have filed cross-objection under rule 22 before the Tribunal. This the assessee failed to do. Section 253(4) of the Act gives the assessee right to file cross-objection in the prescribed manner. The only order that the Tribunal passed was in the department''s appeal dealing with the questions raised by the department. The question of law that has been referred arises out of the order passed by the Tribunal in the department''s appeal.

The point that the assessee now seeks to raise was not argued before the Tribunal nor was the same considered by the Tribunal. In fact the Tribunal could not consider without any cross-objection being filed by the assessee. The question is a mixed question of facts and law. The question that has now been sought to be raised regarding depreciation was not considered and decided by the Tribunal and does not arise out of the order of the Tribunal. It has not been shown how the Tribunal has erred in not considering this question. In fact in the department''s appeal the Tribunal could not have considered this until and unless the assessee took this point before the Tribunal.

We are unable to accept the assessee''s prayer for remanding the matter back to the Tribunal to consider the case. The question is answered in the affirmative and in favour of the revenue. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.

I agree.