This is a reference under Section 66(2) of the Indian Income-tax Act by the Commissioner of Income-tax, Central and United Provinces.
The facts of the case are that Hulasilal Ramdayal is an assessee in the capacity of a Hindu undivided family. It carries on business in three mohallas of Cawnpore under the names of (1) Hulasilal Ramdayal, General ganj, Cawnpore, (2) Badridas Beharilal, Collector ganj, Cawnpore, (3) Badridas Beharilal, Halsey Road, Cawnpore. The first shop does business in cloth and spices on commission and so did the third shop, but the second one does business in grain on commission. The question whether all these business are single or separate does not fall for determination in the present case because it is common ground that if all these businesses have been carried on during the accounting year, the loss of one shop can under Section 24 of the Act be set off against the profits of the other two shops.
The assessment year was 1937-38, but as the accounts of the assessee were made up from August to August the accounting year in the present case was from August 19, 1935 to August 21, 1936. The Commissioner has found that the third shop, namely Badridas Beharilal, Halsey Road, Cawnpore, was closed on October 17, 1935, that is within two months of the commencement of the accounting year. The first two shops made a profit and according to the assessee the last shop suffered a loss. The contention of the assessee was that under Section 24 of the Act the loss of the third shop should be set off against the profits of the first two shops.
The Income-tax Officer repelled the contention of the assessee and the question that he put before himself for decision was :
'Whether the business at Halsey Road which was admittedly discontinued prior to the year under question was a branch business of the Collector ganj shop, as is alleged by the assessee, or was a distinct business independent of any other shop'.
The year under question obviously referred to, as is clear from the statement prepared by the Commissioner the assessment year, namely 1937-38. The Income-tax Officer then was of opinion that the two businesses were absolutely separate from each other and the loss or the expenses in respect to the discontinued business of Halsey Road could not be allowed out of the profits of the other two shops. As we read this assessment order, we find that too much importance has been assigned to the fact that the businesses were separate, but, as we have said before, this question is not the vital question in the case.
The assessee appealed and the Assistant Commissioner observed as follows :-
'I have gone into the facts in some details and have examined the accounts and I find that the assessee did some business during the previous year, but it was all done during the first ten days of the year within which a sale of Rs. 496 and Rs. 13 on account of Kirana and cloth was made on which the assessee made a small income of Rs. 2-14 only. The loss of Rs. 10,947 claimed by the assessee is made up of the following items :-
(1) Rs. 1,084 on account of interest.
(2) Rs. 9,394 on account of bad debts.
(3) Rs. 469 on account of miscellaneous items of expenses.'
He finally held that the Income-tax Officer was correct in having disallowed the losses and the appeal was, therefore, dismissed.
The assessee then applied to the Commissioner under Section 33 of the Act for relief and alternatively for a reference to this Court under Section 66(2). No relief was granted by the Commissioner, and although three question were required by the assessee to be referred to this Court, the learned Commissioner held the view that the three questions had not been suitably worded and one question alone was sufficient. The question that has been referred to us is :-
'Whether, in the circumstances of this case, the loss on account of interest and bad debts etc., debited to the books in respect of the discontinued business at shop No. 3 at Halsey Road, Cawnpore, can be set off against the profits made by the assessee at the other two shops'.
We might once more state what the Commissioner has stated any say that the third shop was discontinued on October 17, 1935 about two months after the commencement of the accounting year and the accounts of the assessee were made up in Bhadon and so far as the accounting year in the present case was concerned, the accounts were made up on August 21, 1936. Learned Counsel for the assessee argues that the third shop which sustained a loss was carried on for two months and business was done in any event, even according to the finding of the Assistant Commissioner, for ten days and showed a profit of Rs. 2-14 and therefore Section 10 of the Act did come into play and the tax would have been payable by the assessee under the head businessin respect of the profits or gains of this particular shop which functioned for ten days or for two months. The mere fact that the books showed entries on the credit side only for the first ten days does not necessarily prove that the shop was discontinued after ten days. The shop was discontinued after two months and the shop might well have remained open for the whole of these two months, only that no clients were available for the whole of these two months and no business deal actually operated upon for the whole of these two months. The fact remains that the shop was discontinued after about two months of the accounting year and as such the business was carried on during the accounting year and under Section 24 a set-off is permissible. Learned counsel for the Department, has, however, argued that all the business was done in the first ten days and it is not proper to hold that the business was carried on for any longer period than ten days. We feel inclined to agree with the contention of the counsel for the assessee and hold that the business was continued for two months and was discontinued when it appeared that the business could not profitably be carried on. The benefit of such a state of affairs ought to go to the assessee and not to the Department.
It was then contended on Behalf of the Department that the losses that had been sustained were losses incurred not in the accounting year but in years prior to that, and our attention was drawn to an item of Rs. 9,394 as bad debts. As is well known, bad debts are legacies of years that have gone before but they become bad debts which have to be wiped out in a particular year when all hopes of their recovery are gone. The fact remains that the entire loss of Rs. 10,947 was written in the books as having been incurred in the accounting year and from what the contention of the assessee has been all along and from what has been said by the Commissioner in his statement of fact it is clear that none of these losses were accounted for in any year before the accounting year.
On the whole we have come to the conclusion that the assessee is, In the circumstances of this case, entitled to a set-off of his losses in the third shop against the profits made by the assessee in the other two shops, and our answer to the question formulated by the Commissioner is in the affirmative. Let a copy of our judgment under the seal of the Court and the signature of the Registrar be sent to the Commissioner of Income-tax. The assessee is entitled to the costs of this reference as certified by his counsel. The counsel for the Department is entitled to a fee of Rs. 100.
Reference answered in the affirmative.