BRIJLAL GUPTA J. - This is a reference under section 66(1) of the Income-tax Act. The question which has been referred to us for opinion is as follows :
'Whether the litigation expenses incurred by the assessee in defending the civil suits field by its members after the business of the assessee company in speculative transactions in gur was stopped on account of the ban imposed by the Government by notification dated February 15, 1950, published in the Government Gazette is a permissible deduction within the meaning of clause (xv) of sub-section (2) of section 10 of the Indian Income-tax Act ?'
The reference relates to three assessment years 1952-53, 1953-54 and 1954-55. The facts giving rise to the reference are these. The assessee is a company. The business of the company was to act as a clearing house for forward and speculative transactions in gur carried on by its members. The company acted as principal to principal in transactions with its own members and when acting as clearing house for profits and losses incurred the assessee also used to charge certain fees from its members. As there were heavy fluctuations in the prices of gur, the Government, by a notification dated February 15, 1950, banned speculative transactions in gur. After the ban was imposed the members of the company decided that the pending contracts should be squared up at the closing rates of February 14, 1950. This gave rise to several civil suits by the members in defending which the company had to incur certain expenses. One of the members, namely, Mohan Lal & Co., applied for the widing up of the company and for the appointment of a liquidator. Ultimately the widing up application was dismissed by this court. This court held the civil court should give a finding whether Mohanlal was a creditor. In this proceeding also the company had to incur litigation expenses. Certain other suits were filed against the company by some of its constituents. It incurred expenses in defending these suits also.
The question which the Income-tax Officer had consider was whether the expenditure incurred by the assessee in the various litigation was a permissible deduction under section 10(2)(xv) The quantum of the litigation expenses incurred by the assessee in each one of the years in question was not in dispute.
It is admitted between the parties that no speculative dealing in gur were done by the assessee company in any one of the years in question, that no other business whatsoever was done by the company, that in October, 1950, another company called Vijay Veopar Chamber was formed for the purpose of acting as a clearing house for all types of forward transactions between the members of the company, and that the office premises and furniture of the assessee company were made over to the newly formed company. It was according held by the Income-tax Officer that no business was done by the assessee company and the business had been stopped and accordingly the assessee was not entitled to claim a deduction in respect of the litigation expenses under section 10(2)(xv).
Appeals were taken to the Appellate Assistant Commissioner of Income-tax. He disposed them of by a common order. He held that no business was carried on by the assessee in the years in question on account of the ban imposed by the Government. The formation of another company, namely, Vijay Veopar Chamber, and the transfer of the office premises and the furniture by the assessee company to the newly formed company indicated that the assessee never intended to revive its business. Accordingly the Appellate Assistant Commissioner also disallowed the litigation expenses as being not deductible under section 10(2)(xv).
Further appeals were taken to the Income-tax Appellate Tribunal, which also disallowed the litigation expenses on the finding that the assessee had stopped its business in speculative transactions in gur on account of the ban imposed by the Government and that no business whatsoever was done by the company in the years in question. These are the facts that we find from the statement of the case. We may at once state that the statement is not complete and not give a strictly accurate picture of the case as it developed from stage to stage and does not incorporate all the findings recorded by the various authorities.
On application under section 66(1) the case has been referred to us on the question of law which has been stated in the beginning of this judgment.
We have gone through the various orders and in the first place we find that the question that was actually agitated before the Tribunal was not whether the litigation expenses amounting to Rs. 27,380-9-0 were allowable as business expenditure under section 10(2)(xv) but whether the amount could not be allowed to be set off as a loss against the other income of the assessee under section 24(1) of the Income-tax Act. It is true that in begining of paragraph 2 of the appellate order it is stated that the dispute relates to the disallowance of litigation expenses but the last sentence in that paragraph states the finding in the following words :
'Consequently, the question of its setting off under section 24(1) does not arise.'
This means that the question which has been referred to us was not the question raised before and decided by the Tribunal. In this view it is not strictly necessary for us to answer the question which has been referred to us and it would be proper to return the reference unanswered on the ground that the question of law referred of us does not arise out of the appellate order of the Tribunal.
As, however, learned counsel for the department did not raise before us any objection on this ground, and as the case urged before us on the footing that the question referred to us did arise, we proceed to decide it. Before we do so we should like to set out all the findings which have been recorded in the various orders and which have not been fully set out in the statement of the case.
The business of the company consisted of transactions of two kinds, (1) entering into forward speculative transactions in gur with its members as between principal and principal and (2) acting as a clearing house in respect of similar transactions in gur between its members. In the first case all that it did was to enter into such transactions, make a record of them and pay or receive the difference when the time for settlement of the transactions arrived. In the order other case it recorded the transactions between its members and when the date of settlement arrived it debited the difference to one member and credited it to the other. If follows that it could be said to carry on its business only so long as it continued to enter into fresh transactions with its members or to record the fresh transactions between its members inter se. It is admitted that it did not carry on transactions of either kind in any commodity other than gur. It is also admitted that it did not enter into any fresh transactions after February 14, 1950, the day immediately proceeding the day on which the Government banned forward transactions in gur. It is also not the case of the assessee that it settled any transactions already entered into by it, subsequent to February 14, 1950. Having regard to the nature of its business it is doubtful that even if it had settled any of its old transactions, the mere settlement of the old transactions could be called the carrying on by it of its business if it had decided not to carry on the business subsequent to February 14, 1950.
This brings us to the question of its intention whether or not to carry on its business. It has been found that during the course of its active career the company never carried on any business in any commodity other than gur. After the coming into force of the Government notification banning the transactions in gur it did not start business in any other commodity. On the other hand the members of the company formed themselves into a new company, namely, Vijay Veopar Chamber, for carrying on business in other commodities. Its office premises and its furniture were let out to this new company. The ban was lifted by the Government in 1954 but the company did not revive its business. On the coming into force of the Government ban all the members of the company jointly decided that pending contracts should be squared up at the closing rates of February 14, 1950. If the intention of the company was to continue its business there was no occasion for such a decision by the members of the company, which is consistent only with the view that the Government having prohibited transactions in gur, in which alone the company had been doing business, whether on its own account or on behalf of its members, it was felt that this business had come to an end and could no longer be done and that it only remind to square up pending transactions. The decision to square up pending transactions in this manner was in the nature of realisation of assets and closing up of a business or of winding up of a company. It is not clear whether the decision was arrived at by all the members of the company in regular general meeting of the company or otherwise. However, even if this decision was arrived at by all the members otherwise than in a regular meeting it certainly indicates the intention of the members of the company to discontinue the business and to wind up the company, particularly when one of its members did file an application for wind the members of this company for carrying on transactions in commodities other than gur and when the office premises and the furniture of the company were made over to the newly formed company. If the intention of the company was not to discontinue its business but merely to suspend the business in gur, it is difficult to understand why it did not start business in other commodities during the continuance of the ban, and why it did not re-start the business in gur after the ban was lifted in 1954. There was thus ample material before the Tribunal for its finding that the company had decided to discontinue its business altogether.
All the facts relating to the litigation between the company and its members are not before us. We only know that the members wanted the pending contracts to be squared up at the closing rates of February 14, 1950. We are informed by learned counsel for the assessee that the stand which the company took in the litigation with its members was that the pending contracts should be canceled by reason of the imposition of the Government ban. We are not concerned with the merits of the stand taken by the contending parties, namely, the members and the company, but we cannot help observing that the stand of both the parties is consistent only with the intention to terminate and to put an end to all pending and outstanding transactions on some particular basis and not to allow these transactions to continue and to be carried out on maturity in the hope that the ban might be lifted at some time and it may be possible to effectuate these transactions. This also leads to the conclusion that the business of the company was discontinued on February 14, 1950, and was not only not carried on thereafter, but there was also no intention to carry it on at any time future. For our purpose it is not necessary to go so far. It is sufficient for the disallowance of the assessees claim under section 10(2)(xv) that the business of the company should not have been carried on in the previous years corresponding to the assessment years in question : vide the full bench decision of the Bombay High Court reported in B.M. Kamdar, In re.
It has been argued before us by learned counsel for the assessee on the basis of a decision of the House of Lords reported in Commissioners of Inland Revenue v. South Behar Railway Co. Ltd. that so long as trade debts remained undischarged would be a presumption that a company continued to carry on business as long as it is engaged in collecting periodically debts falling due to it in the course of its former business. Business is not confined to being busy; in many businesses long intervals of inactivity occur. The facts in the above House of Lords case have been summarized in the head note as follows :
'Down to 1906 the South Behar Railway was held by the Respondent Company, namely, the assessee (subject to an option to purchase by the Secretary of State for India) and worked by another company on behalf of Secretary of State, the Respondent Company being entitled to a share in the profits in consideration of having supplied funds and materials for the construction of the railway. In 1906 the Respondent company relinquished the possession of the railway to the Secretary of State, and it was arranged that, until the option to purchase was exercised, a fixed annuity of Pounds 30,000 should be paid in lieu of the share of profits. After 1906 the Company did nothing but receive and distribute the said annuity to its shareholders, its only other income being small sums from National War Bond interest, deposit interest, and transfer fees.'
In those circumstances the House of Lords held that the company was carrying on a trade or business or undertaking of similar character, and was, therefore, liable to corporation profits tax.
It will at once be clear that this decision cannot be of any help to the assessee in the case before us. Even in the House of Lords case it was held that the company was not carrying on its original business but was a carrying on another business though of a similar character. Another feature of this case is that even prior to 1906, the company was not working the railway itself but the railway was being worked by another company and the assessee in that case was entitled to a share of profits. All that happened after 1906 was that in lieu of a fluctuating share in the profits it was granted a fixed annuity of Pounds 30,000. It may further be stated that in its decision at page 712 the House of Lords only held that so long as trade debts remained undischarged there was a presumption that a company continued to carry on business. The presumption is rebuttable and it is a question of fact whether it stands rebutted or not. The facts in the case before us rebut the presumption, if any. The settlement of outstanding transactions was not with a view to carrying on the business of the company but was only with a view to wind up the business of the company. It has been held by our Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax that where no business operation is carried on but there is only a realisation of assets there can be no carrying on of business, and that the question whether a business has or has not been carried on is a question of fact. Another decision of the Supreme Court to the same effect is Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax.
Two other English decisions, viz., Elliott v. Guastavino and the Merchiston Steamship Co. Ltd. v. Turner, were cited before us. We have examined them but the facts there were entirely from the facts before us. We do not, therefore, consider it necessary to deal with these cases specifically.
Another argument advanced before us was that the business of the company was in a dormant state or a state of suspended animation during the three years in question. In the face of the clear finding that no business at all was carried on by the company subsequent to February 14, 1950, and that the company had no intention of carrying on any business, no question of the companys remaining a dormant state or a state suspended animation can possibly arise.
The question referred to us must, therefore, be answered in the negative, as we do.
The department shall be entitled to the costs of this reference, which we assess at Rs. 200.
Question answered in the negative.