S.N.A. Al. Ct. Chidambaram Chettiar vs Commissioner of Income Tax

Patanjali Sastri, J.—This reference arises out of an assessment to Income Tax for the year 1940-41 made on one S.N.A. Al. Ct.

Chidambaram Chettiar (hereinafter referred to as the assesses), a Nattukottai Chetti moneylender and banker carrying on business at Karaikudi in

British India, his headquarters (Oorkadai), and at Penang and Butterworth in the Federated Malay States.

In the assessment for the year 1939-40 the assessee suffered a loss of Rs. 41,253 at Karaikudi, where he also bought and sold securities on his

own account. After setting off the loss against the profits of the business abroad, there was a net loss of Rs. 21,522, which was carried forward to

the next year. In the assessment for that year (1940-41) it was found that there was again a loss of Rs. 23,125 at Karaikudi, but the business at

Penang resulted in profits. The assessee claimed that not only the loss of Rs. 28,125, but also the unadjusted balance of loss carried forward from

1939-40, viz., Rs. 21,522, should be set off against the foreign profits. The Income Tax Officer disallowed the claim so far as it related to the sum

of Rs. 21,522, but allowed the loss of Rs. 23,125 suffered11 in the year of account and computed the net profits at Rs. 34,109. An appeal to the

Appellate Assistant Commissioner and the Income Tax Appellate Tribunal, Madras Bench, on this point having proved unsuccessful the assessee

applied to the Tribunal u/s 66(1), Income Tax Act, to state the case and refer it to this Court as point of law was involved, and the Tribunal has

accordingly referred the following question for decision by this Court:

Whether in the facts and circumstances of this case the inference drawn by the Bench that the sum of Rs. 21,522, viz., the loss carried forward in

British India in 1939-40, cannot be set off against the profits of the business abroad for 1940-41 u/s 24(2), Income Tax Act, is a correct inference

in law. Section 24(2) (so far as it is material here) runs as follows:

Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for

the year ending on the 31st day of March 1940, under the head ''Profits and gains of business, profession or vocation,'' and the loss cannot be

wholly set off Under Sub-section (1), the portion not so set off shall be carried forward to the following year and set off against the profits and

gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss

not so set off shall be carried forward to the following year, and so on; but no loss shall be so carried forward for more than six years, and a loss

arising in the previous years for the assessment for the years ending on the 31st day of March 1940, the 31st day of March 1941, the 31st day of

March 1942, the 31st day of March 1943 and the 31st day of March 1944, respectively, shall be carried forward only for one, two, four and five

years, respectively.

It will be seen that the right to carry forward and set off loss against the profits of the following year or years allowed under this provision is

subject to the condition that the profits against which the set off is claimed should have arisen out of the same business as the one which resulted in

the loss. The point at issue accordingly is whether the business carried on at the assessee''s headquarters, Karaikudi, which made the loss in

question can be said to be the same business as the one carried on at Penang, which yielded the profits against which the set off is claimed. The

assessee contends that his Penang shop is but a branch of the business carried on by him at Karaikudi, which is his head office, and that the two

together constitute one and the same business. The Income Tax authorities have rejected the contention1 and disallowed the claim holding that the

assessee''s operations at Karaikudi and at Penang are two different trading businesses. Now, whether different trading operations constitute a

single business or different businesses is largely a question of fact, but, as recognized by the referring authority, the proper legal inference from

proved facts is essentially a matter of law. The question really is, in the words Rowlatt J., in Seals v. George Thomson & Co., Ltd. (1929) 13 T C.

83.

was there any inter-connexion, any inter-lacing any inter-dependence, any unity at all embracing the two businesses?

It has been found by the Income Tax Appellate Tribunal that the money-lending and dealing in shares at Karaikudi formed one business and this

is not disputed before us. But it is said that the money lending at Penang is a different business. The only reasons for this conclusion are thus stated

by the Tribunal:

The affairs of the two are not so inter-woven as to constitute one single business; the mere record of the remittances to and from Penang or the

incorporation of the final trading result at the end of the year would not be enough to constitute the two activities one single business.

We cannot accept this as a conclusive finding of fact. The first part of the statement mentions no facts, but only records a conclusion of law, and

the rest is merely concerned with rejecting certain facts relied on by the assessee as ""not enough"" to justify an inference in his favour. If there was

no other material More us we should have referred the case back to the Tribunal for a proper statement of the case, but this course is rendered

unnecessary as the material facts appear in the orders of the Income Tax Officer and the appellate Assistant Commissioner to which our attention

has been drawn. There is no dispute in regard to these facts which are entirely in accordance with the customary features of the usual Nattukottai

Chetti business of banking and money-lending. The business operations abroad are conducted by agents appointed for fixed periods, usually three

years, and the lending of money is left largely to their discretion. A separate set of accounts is maintained there but copies of the day book are

periodically (usually once in a month) dispatched to the headquarters to keep the proprietor informed of the state of the business. There is besides

frequent correspondence between the agent and the proprietor, who asks for particulars and explanations and issues instructions regarding the

conduct of the business. There is a flow of remittances both ways according to the needs, of the business; and the final trading result is brought into

the headquarters accounts at the end of the year. These facts present, in our view, the picture of a trading organization inter-connected as head

office and branch, with financial interdependence and unity of control.

The appellate Assistant Commissioner has relied on the following facts as supporting his view that the assessee carried on separate businesses at

these places: ""(a) The business in money-lending at headquarters is on the security of documents or entries in the accounts, whereas the business in

Penang is to a large measure on the security of rubber gardens, (b) The income from the headquarters business is derived mostly, if not entirely,

from interest and also from stocks and shares, whereas the income from Penang is stated by the Income Tax Officer to be mostly from the

produce of the rubber gardens, (c) The accounts are made up for these two businesses separately, (d) The staff for each business is separate and

there is no interchange of staff, (e) The great distance between them is a matter of much importance, (f) It is not the appellant''s case that the

foreign business is controlled and managed by the appellant himself and not by a separate agent there, (g) There are no common financial

arrangements and bank accounts.

None of these facts is, in our opinion, sufficient to satisfy the inference that the business at Penang is a separate business. It is to be observed

that the reference to the produce of rubber gardens in (b) is somewhat misleading. It is not disputed that these properties, having formed the

security for loans advanced as stated in (a), had to be taken over from the constituents in realisation of the debts due from them and thus formed

part of the assets of the money-lending business till they are turned over at a profit at a favourable opportunity: see S.L.S. Chettiappa Chettiar and

Others Vs. The Commissioner of Income Tax and Others, , Lakshman Chettiar v. Commissioner of Income Tax, Madras AIR 193Q Mad. 121

and Chellappa Chettiar v. Commissioner of Income Tax, Madras AIR 1937 Mad. 393. It may also be mentioned that the statement in (f) is not

correct. It is true that the business at Penang is actually conducted by a separate agent there. But it is undoubtedly the appellant''s case and it is

indeed conceded that the foreign business is controlled and managed by him from his headquarters. This is why the assessee''s undivided family

was treated in this case as ""resident"" in British India within the meaning of Section 4-A(b) of the Act and the profits accruing abroad were included

in the assessment.

The respondent''s learned Counsel referred to two additional circumstances as tending to show the separate character of the business at Penang:

(1) that separate capital was allotted to the business and (2) interest was charged at Karaikudi, in respect of funds remitted as surplus capital

(menpanam) to Penang. There is no reference to these facts in the record before us, but they are probably true as they are also among the usual

features of a Nattukottai Chetty money-lending business. But, even if true, they represent only book entries designed to show how the branch was

working and whether it was a source of profit or loss and do not lead to an inference that separate business was carried on at Penang. As the

Income Tax authorities did not rely on these facts in support of their finding it is unnecessary to pursue the matter further.

Reference was made in the course of the argument to certain decisions wherein different activities were held to constitute separate businesses or

to form part of the same business as the case may be. These decisions turned on their own particular facts, and can only be regarded as

illustrations of the considerations which are of relevance in such cases. For instance, in Arunachalam Chetti & Co. v. Commissioner of Income

Tax, Madras AIR 1928 Mad. 1229 a Special Bench of three Judges had to deal with a case where a Nattukottai Chetti firm carried on money-

lending and banking business in Madras under the vilasam of A.L.A.R. and also a piece goods business under name of Ramaswami and Co., in a

separate building in another part of the city. Separate sums were allotted as capital and separate sets of accounts were maintained for each of these

businesses. The cloth business was also financed from time to time with the money borrowed by the banking business and interest was charged on

such advances. The cloth business made losses and was finally closed down in 1923-24. In the assessment of the banking business made in the

year 1925-26, a deduction was claimed in respect of the interest paid on the borrowed capital utilized and lost in the cloth business. The Court

allowed the deduction holding that the two businesses were only branches of the same undertaking and riot separate businesses. The present, we

consider, is an a fortiori case. The decision in Commissioner of Income Tax, Burma v. A.L.V.R.P. Firm AIR 1940 Rang, 281 was given on facts

very similar to those now before us, for it related to the assessment of a Nattukottai Chetti family carrying on the usual money-lending and banking

business at Devakottah and at various places abroad. It was held by the High Court at Rangoon (where the assessment was made) that the proper

interpretation of the facts was that the operations of the family in the different places constituted different branches of a single business. On the

other hand, the learned Counsel for the respondent has cited several English decisions in support of his contention. In Seals v. George Thomson &

Co., Ltd. (1929) 13 T C 83 already referred to, an underwriting venture at Lloyd''s carried on by a ship-owning company through its nominees

was held to be a business distinct from that of ship owners, as, ""the two things have nothing whatever to do with one another"", the learned Judge

emphasizing at the same time that it was a question of fact. It is unnecessary to refer to the other cases cited before us as they differ even more

widely from the facts we have before us.

For the reasons indicated we hold that the assessee''s banking and money-lending operations at Karaikudi, and at Penang constitute one and

the same business, and that he is entitled to the set-off claimed. We answer the question referred accordingly in the negative. The respondent will

pay the costs of this reference which we fix at Rs. 250. The reference fee paid Rs. 100 will be refunded to the assessee.