Commissioner of Income‑Taxnew Delhi vs M/s. Chuni Lal Moonga Ram

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeals Nos. 39 and 40 of 1960

Decision Date: 05/05/1961

Coram: S.K. Das, M. Hidayatullah, J.C. Shah

In this matter, the Supreme Court of India addressed the appeals filed by the Commissioner of Income‑Tax, New Delhi, against M/s Chuni Lal Moonga Ram. The judgment was delivered on 5 May 1961 by a bench comprising Justice S.K. Das, Justice M. Hidayatullah and Justice J.C. Shah. The petitioner, the Commissioner of Income‑Tax, challenged the assessments made for the assessment year 1946‑47 and for the chargeable accounting period ending on 6 February 1946. The respondent, a Delhi firm carrying on a speculative business in bullion—principally gold and silver—operated chiefly in Chandni Chowk. For the year in question the firm had been levied both income‑tax and excess‑profits tax. The two appeals before the Court, numbered Civil Appeal No. 39 of 1960 and Civil Appeal No. 40 of 1960, respectively contested the income‑tax assessment and the excess‑profits‑tax assessment. The appeals were entertained on certificates of fitness issued by the Punjab High Court pursuant to section 66A(2) of the Indian Income‑Tax Act, 1922. Counsel for the appellant included the Additional Solicitor‑General of India and other representatives, while counsel for the respondent was also appointed. The Court noted that the firm’s business involved speculative transactions in bullion and that it had entered into forward‑type “hedge” transactions with parties located in Bhatinda, which at that time lay within the Patiala State, outside the territories to which British Indian taxation statutes applied.

The Court observed that the respondent claimed losses of Rs 6,366 and Rs 16,615 arising from those Bhatinda transactions and sought to have those losses deducted in computing its taxable income. The assessment officer, however, rejected the claim, reasoning that the losses were incurred in a territory exempt from the jurisdiction of the Excess Profits Tax Act, 1940. The Court examined the third proviso to section 5 of that Act, which states that any portion of a business earning profits in a non‑taxable territory shall be treated as a separate business, thereby excluding such profits and losses from the tax net. Accordingly, the Court held that the losses incurred at Bhatinda could not be taken into account when determining the firm’s income for tax purposes in British India. The language of the proviso was interpreted as expressly excluding the applicability of the Act to profits arising from operations outside the taxable territories. The decision affirmed the earlier authority in Commissioner of Income‑Tax v. Karamchand Premchand Ltd., and ordered that the claimed deductions for the losses incurred in Bhatinda be disallowed.

During the accounting periods in question the firm carried out a series of transactions that it described as “hedge” transactions in the bullion market at Bhatinda, which at that time formed part of the Patiala State and therefore lay outside the taxable territories of British India. The firm asserted that it had incurred losses amounting to Rs 6,366 and Rs 16,615 respectively in those transactions with non‑resident parties, and it contended that those losses should be taken into account when determining its taxable income. The assessment order issued by the Income‑Tax Officer in Delhi on 27 January 1949 revealed that the firm had purchased certain “sillies” – that is, bars of gold and silver – from a party in Bhatinda by means of telephone communication, a purchase that was subsequently confirmed by a letter or a telegram. In the same manner, the firm sold similar bars to a Bhatinda party, again using telephone messages and written correspondence. No physical delivery of the bars was intended or actually effected, and the firm did not maintain any branch or agent at Bhatinda. Consequently, the transactions were essentially forward contracts executed through telephonic, postal or telegraphic messages with counterparties located at Bhatinda, and it was from these arrangements that the claimed losses arose.

The Income‑Tax authorities disallowed the firm’s claim for deduction on the ground that, had the Bhatinda transactions produced a profit, such profit would have been exempt from tax under section 14(2)(c) as it then stood, and that the proviso to section 24(1) of the Act would consequently bar any adjustment of the losses. The firm therefore appealed to the Income‑Tax Appellate Tribunal. Although the Tribunal’s reasons for allowing the deduction were not set out with great clarity, it appears that the Tribunal proceeded on the premise that it was not permissible to divide the transactions of a business situated within the taxable territories into separate categories of “inside‑territory” and “outside‑territory” dealings. Moreover, even if such a division were allowed, the Tribunal held that the Bhatinda transactions would fall within the scope of section 42 of the Act, which deems the income, profits and gains arising from those transactions to have accrued or arisen in British India. The Accountant Member of the Tribunal, delivering the judgment, stated that there was no authority in either section 14(2)(c) or the proviso to section 24(1) to split the business’s transactions in the manner proposed, and that even assuming a split were permissible, the income from the Bhatinda dealings would be deemed to have arisen in British India under section 42 and therefore would not be exempt under section 14(2)(c). Accordingly, the proviso to section 24(1) was held not to apply, and the Tribunal allowed the deduction of the losses claimed by the firm.

The Tribunal held that the Income‑tax authorities had erred in disallowing the assessee’s claim for adjustment of losses amounting to Rs 6,360 and Rs 16,615, and accordingly allowed those losses. By that order the Tribunal set aside the disallowance and permitted the two appeals. It is necessary to note that both the Income‑tax authorities and the Tribunal confined their consideration to the claim for deduction in relation to the income‑tax assessment only; there was no separate discussion of the provisions of section 5 of the Excess Profits Tax Act, 1940. The assessment of excess profits tax was treated merely as a consequential matter. Subsequently the Commissioner of Income‑tax, Delhi, made two applications asking the Tribunal to refer certain questions of law arising out of its orders to the High Court of Punjab. The Tribunal, finding that no questions of law arose from its orders, rejected those applications. The Commissioner then proceeded under section 66(2) of the Indian Income‑tax Act, 1922, and the High Court heard the two applications together. The High Court directed the Tribunal to state a case on two questions it considered to arise from the Tribunal’s orders: (1) whether the claim of loss in the present case is governed by the provisions of section 10(1) or the proviso to section 24(1) read with section 14(2)(c), or by the provisions of section 42; and (2) whether, on the facts of the case, a loss of Rs 22,981 is allowable in computing the income of the assessee chargeable to the Excess Profits Tax. The Tribunal framed a statement of case on those two questions. By its judgment and order dated 23 January 1957, the High Court answered both questions in favour of the assessee. After that, the Commissioner of Income‑tax, Delhi, obtained a certificate under section 66A(2) of the Indian Income‑tax Act, and on the basis of that certificate the present appeals were brought before this Court. Regarding the first question, the learned Additional Solicitor‑General, appearing for the appellant, conceded that he was not in a position to dispute the correctness of the High Court’s answer, citing the decision of this Court in Commissioner of Income‑tax v. Indo‑Mercantile Bank Ltd. Consequently, Civil Appeal No. 39 of 1960 was disposed of and dismissed.

In Civil Appeal No. 40 of 1960 the second question required determination. In answering it, the High Court based its reasoning on two grounds. Firstly, it referred to section 5 of the Excess Profits Tax Act, 1940, particularly the third proviso to that section, and compared the provisions of that section with section 5 of the Business Profits Tax Act, 1947. The Court expressed the view that neither of those provisions dealt with the question of whether losses incurred in an Indian State could be taken into account in assessing the taxable income of an assessee in British India for the purpose of assessing excess profits tax. Secondly, the Court referred to the decision of the Bombay High Court in Karamchand Premchand Ltd. v. Commissioner of Income‑tax, Bombay, observing that, despite the slightly different language of the Excess Profits Tax Act compared with the Income‑tax Act, no distinction had ever been drawn between the principles governing assessment for income‑tax and those governing assessment for excess profits tax. The Court further noted that it appeared to be the universal practice that decisions of the Income‑tax authorities and High Courts were followed by consequential orders relating to the same assessee’s taxable income for the purpose of the Excess Profits Tax Act, and that counsel for the Commissioner was unable to cite any decision in which different principles had been applied to this particular matter.

The Court noted that the High Court had based its first ground on section 5 of the Excess Profits Tax Act, 1940, specifically the third proviso, and had compared that provision with section 5 of the Business Profits Tax Act, 1947. The High Court then referred to the Bombay High Court decision in Karamchand Premchand Ltd. v. Commissioner of Income‑tax, Bombay (2) and quoted it as follows: “It would seem that in spite of the slightly different language of the Excess Profits Tax Act from that of the Income‑tax Act, no distinction has ever been drawn in this matter between the principles governing assessment to income‑tax and the principles governing assessment to excess profits tax and in fact it would appear to have been the universal practice that decisions of the Income‑tax authorities and High Courts have been followed by consequential orders relating to the same assessee’s taxable income for the purpose of the Excess Profits Tax Act.” The Court observed that the learned counsel for the Commissioner was unable to cite any case where a different principle had been applied to the two statutes. The Court further recorded that, although Chief Justice Chagla, C.J., in his judgment, had mentioned a change in the third proviso of the Business Profits Tax Act as a reason for his decision, that observation was only one of several reasons and the judgment had not addressed whether, under the proviso in the Excess Profits Tax Act, losses incurred in an Indian State could be taken into account when assessing the assessee’s income from business in British India. The Court added that, in the circumstances, it was likely that the same view expressed earlier would have been adopted: that while profits earned in an Indian State could not be considered for the excess profits tax, such profits could be included in the assessment of profits tax if they were brought into taxable territories, and similarly, losses could be considered in assessing business whether they arose in a State or in British India.

The Court further explained that the High Court’s second ground rested on the factual findings. The High Court expressed doubt that the losses in question could be deemed to have occurred in Bhatinda. It observed that “It is not in dispute that the only place where the assessee carries on business is Delhi and that its transactions in other markets are carried out by means of communication by telephone or post. There is no suggestion that the firm has any agent or branch in any native State and it therefore seems to me that whether profits result or losses are incurred as the result of transactions of this kind even with firms in Indian States, the profits accrue or the losses are incurred at the place where the payments are received or from which they are made, namely, the firm’s place of business at Delhi.” On behalf of the appellant, it was contended that both grounds advanced by the High Court for its answer to the second question were unsubstantial. The appellant argued that the first ground was untenable in law and that the second ground relied not on the factual findings of the Tribunal but on new findings made by the High Court, a course that was not open to it. The Court recorded these contentions for further consideration.

In this appeal, the submission was that both reasons offered by the High Court for its answer to the second question were without merit. The first reason was said to be untenable in law, and the second was said to rely on new factual findings that the High Court was not authorised to make, because those findings did not arise from the Tribunal’s record. The Court agreed with those submissions. Regarding the first reason, the Court observed that the third proviso to section 5 of the Excess Profits Tax Act, 1940 provides that when a portion of a firm’s business generates profits or accrues in Bhatinda, that portion must be treated as a distinct business for the purposes of the section. Consequently, any loss that arises in Bhatinda must also be regarded as the loss of a distinct business. The Court then read the relevant provision, which states: “s. 5. This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income‑tax by virtue of the provisions of sub‑clause (i) on sub‑clause (ii) of clause (b) of subsection (1) of section 4 of the Indian Income‑tax Act, 1922, or of clause (c) of that sub‑section: Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State and where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business.” The Court referred to the decision in Commissioner of Income‑tax v. Karamchand Premchand Ltd. (1) and noted that the Supreme Court had earlier examined section 5 of the Business Profits Tax Act, 1947 and distinguished the third proviso of that act from the third proviso of section 5 of the Excess Profits Tax Act, 1940. The Court also quoted with approval the judgment in Commissioner of Excess Profits Tax, Bombay City v. Bhogilal H. Patel Bombay (2), holding that the language of the third proviso to section 5 of the Excess Profits Tax Act, 1940 is one of exclusion and that the Act does not apply to profits, etc., of that part of the business which arose in an Indian State. If that part of the business must be treated as a separate business for the purposes of the Excess Profits Tax Act, it is difficult to see how losses incurred in an Indian State could be taken into account for the same purpose. Accordingly, the Court concluded that the High Court erred in its view that the third proviso to section 5 of the Excess Profits Tax Act did not address the question that the High Court was required to answer.

The Court observed that the provisions of the Profits Tax Act did not address the specific issue that the High Court was required to resolve. In support of its analysis, the Court cited earlier authorities, namely (2) (1952) 21 I.T.R. 72 and (1) (1960) 40 I.T.R. 106. Contrary to the view expressed in those authorities, the Court held that the relevant proviso actually answered the question against the assessee.

Turning to the second ground raised by the High Court, the Court found no doubt that the assessing authorities had proceeded on the assumption that the losses for which the assessee firm sought a deduction had arisen and been incurred at Bhatinda, even though the firm’s principal place of business was Delhi. Both the Income‑Tax Officer and the Appellate Assistant Commissioner relied on section 14(2)(c) of the Income‑Tax Act, 1922, a provision that deals with income, profit or gains accruing or arising in an Indian State. The assessing authorities argued that, because the firm could claim exemption under section 14(2)(c), any losses incurred outside the taxable territories could not be taken into account.

The Tribunal, however, did not rely on section 14(2)(c) nor on the proviso to section 24(1) of the Income‑Tax Act, 1922. Instead, it based its decision on section 42, indicating that it treated the income as having arisen within the taxable territories by reason of the firm’s business connection there, even though the income actually originated outside those territories. The High Court was required to answer the second question on the basis of the facts already found and was not permitted to make fresh findings of fact. Consequently, the High Court could not revisit the factual matrix.

Although the Tribunal had stated that the firm’s transactions could not be divided, its final decision proceeded on the premise that even if the transactions were separable, section 42 would deem the income that actually arose at Bhatinda to have arisen within the taxable territories, and therefore the related losses must be accounted for in computing the taxable income. The Tribunal’s analysis was confined solely to the assessment of income tax; it did not consider the third proviso to section 5 of the Excess Profits Tax Act, 1940, or its effect on the assessment of excess profits tax.

The Court agreed that if none of the income had arisen or accrued in Bhatinda and the entire income had arisen in Delhi, the third proviso would have no application. However, where a portion of the income did arise in Bhatinda, that portion of the business constituted a separate business for the purposes of the Excess Profits Tax Act, and the losses incurred at Bhatinda could not be taken into account. On the basis of the facts established, the Court concluded that the answer to the second question must be in favour of the appellant and against the assessee. Accordingly, Civil Appeal No. 40 of 1960 was allowed. The two appeals were heard together, and because of the divided success, each party was ordered to bear its own costs.

In the final portion of its order, the Court held that each of the parties involved in the two appeals would be required to bear its own legal costs. The Court therefore stipulated that no party would be required to pay the costs of the other side in either appeal. After addressing the question of costs, the Court proceeded to dispose of the two appeals on their merits. It dismissed Civil Appeal No. 39, indicating that the relief sought in that appeal was not warranted. Conversely, the Court allowed Civil Appeal No. 40, granting the relief requested by the appellant in that proceeding. The judgment thus concluded with a clear allocation of costs and the respective outcomes for the two appeals, with the first appeal being rejected and the second appeal being granted.