BEAUMONT, C.J. - This is a reference made by the Commissioner under Section 66(2) of the Indian Income-tax Act. The question he raises is 'Whether in view of the provisions of Sec. 26(2) to the Income-tax Act, 1922, the Income-tax Officer acted correctly in not taking into account the loss in the cigarette business during the period January 1 to August 31, 1933, on the ground that at the time of assessment the assessee was not carrying on that business, having transferred it to the Zenith Tobacco Co., Ltd., which carried it on from September 1, 1933.'
The facts giving rise to the question are these : The year of assessment is the year 1934-35, and previous year, as defined by Sec. 2, sub-section (11), is the year ending December 31, 1933. The assessee carried on certain business, and had income from other sources. Apart from his normal business he started at the beginning of the year 1933, the business of manufacturing and selling cigarettes, which he carried on under the name of 'The Zenith Tobacco Company'. As from the September 1, 1933, the assessee transferred the cigarette business to a limited company called the Zenith Tobacco Company Limited. It is stated in the grounds of appeal to the Assistant Commissioner that the terms of the sale were that the purchasing company was not to be liable for any losses incurred at the date of the sale as between itself and the vendor. During the 8 months of the year 1933, during which the assessee was carrying on this tobacco business, he incurred a loss in respect of that business of Rs. 47,488; and the question is whether he is entitled to deduct that loss from his assessable income.
Section 24 of the Act provides that - 'Where any assessee sustains loss of profits or gains in any year under any of the heads mentioned in Sec. 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year.' This loss was incurred in respect of a business taken by itself, the assessee would be entitled to set off any loss incurred by him under that head, of business against any income received by him under any other head, such as interest on securities or other sources; and apart from that, in so far as the assessee was dealing with profits under the head of business, he would be entitled to set off the loss incurred in respect of another business. So that I think, apart from Sec. 26, to which I will refer in a moment, the assessee would be entitled to deduct this loss from his assessable income.
Then comes Sec. 26, sub-sec. (2) which is in these terms :- 'Where at the time of making an assessment under Sec. 23, it is found that the person carrying on any business, profession or vocation has been succeeded in such capacity by another person, the assessment shall be made on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for that year.'
Now, at the time of making the assessment on the present assessee, it was found by the Income-tax Officer that the assessee had been carrying on this cigarette business and had been succeeded in such business by the purchasing company, and the section, therefore, provides that the assessment shall be made on the purchasing company, as if it had been carrying on the business throughout the previous year, that is during the whole of the year 1933, and as if it had received the whole of the profits of that year. Where the facts bring a case within Sec. 26(2), Sec. 24 only applies in my opinion to the assessment of the successor.
It is argued on behalf of the assessee that Sec. 26(2) do not apply unless there are profits. In fact there is no evidence in this case as to whether or not there were profits in this business for the whole of the year. We do not know what the position was during the last three months. There is no evidence that there were no profits made, and that therefore no assessment on the purchasing company was necessary; and in the absence of evidence to that effect, it seems to me that the Income-tax Officer has quite right in saying that the section applied. I think the effect of the section is undoubtedly to make the successor to the business liable to the assessment for the whole of the year in question in respect of the business transferred. It is true that the section does not mention losses, but clearly those will have to be brought in for the whole of the year as against the profits of the year. It is not necessary to deal with the question whether Sec. 26, sub-sec.(2), would apply if there were no profits in respect of the business transferred, and therefore no assessments was necessary on the successor, assuming that he had no other source of income. On the facts proved in this case, I think that the Income-tax Officer was right in saying that it is the purchasing company which must be treated as carrying on the business for the whole of the year, and is, therefore, the person entitled to any set off in respect of losses for that year, and that the present assessee is not entitled to set off any losses incurred in respect of this business against his assessable income in the year in question. So that the answer to the question will be in affirmative.
Reference dismissed with costs. Costs to be taxed by the Taxing Master on the Original Side scale.
BLACKWELL, J. - I agree that the question should be answered in the affirmative. It seems to me that having regard to sub-sec. (2) of Sec. 26, where a person carrying on any business has been succeeded in that business by another person, he is not entitled to claim the benefit of Sub-sec. (1) of Section 24 at all. In my view, it is not then open to him to contend that he, as an assessee, has sustained a loss of profits in the business which he has transferred, at the time of transfer.
It has been contended by Sir Jamshedji Kanga that, unless it is shown that the successor in the business had made profits, it would still be open to the predecessor in the business to claim that in such event could be made on the successor. Speaking for myself, I decided on not think that this is true or proper construction to be placed upon sub-Sec. (2) of Section 26. In my view, that sub-section means that where a business has been transferred the Income-tax Officers are entitled to call upon the successor to make return. For the purpose of ascertaining whether the successor has made profit for the year, any loss previously sustained must be taken into account. It seems to me that it would be very strange if, though the successor is to deemed to have been carrying on the business for the whole of the year and is entit led to take into account any losses made in the business before the transfer for the purpose of the return, nevertheless the predecessor in business, another assessee, should be entitled to bring into his return the losses made prior to the transfer. In my judgment, such an interpretation of the section is so unreasonable that unless one is compelled by the words used to place such an interpretation on it, the Court ought to decline to do so.
Accordingly, I think that the Income-tax authorities came to the right conclusion, and that the question must be answered in the affirmative.
Question answered in the affirmative.