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H. Narayana Reddy Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1985)11ITD67(Hyd.)
AppellantH. Narayana Reddy
Respondentincome-tax Officer
Excerpt:
.....as returned by the assessee.hence, the net loss of rs. 10,540 as per the assessment order is a business loss. it was on this ground that the assessee has claimed set off of this loss of rs. 10,540, as determined for the assessment year 1979-80, against the income from the same source for the assessment year 1981-82 (now under dispute). this assessment for the assessment year 1979-80 is not now before us and has become final in the sense that it is not the subject-matter of a revision.3. for the assessment year 1980-81, the assessee had claimed a similar loss on the same basis and this loss was also accepted, though it was described by the ito in the order as 'salary loss', the net loss being computed as at rs. 14,320 on the assessment made on 28-7-1982. since it was described as.....
Judgment:
1. These two appeals have been filed by Shri H. Narayana Reddy of Adoni against the common order of the AAC for the assessment years 1980-81 and 1981-82.

2. The assessee is an individual and is a director in Rayalaseema Mills Limited. There was an unusual agreement between the assessee and the company by which the assessee was to look after the production of the mill run by the company and was to be paid commission at 2.5 per cent on the net profits of the company not exceeding Rs. 1,20,000 per annum without, however, a stipulation as regards any minimum remuneration that is ordinarily provided for an executive director. The assessee claimed expenditure against that income and it was in this context that the nature of relationship as between the assessee and the company became subject-matter of this Tribunal's decision in IT Appeal Nos.

1485 and 1486 (Hyd.) of 1977-78 and 197 (Hyd.) of 1978-79, dated 15-3-1979, in ITO v. H. Narayana Reddi [1979] 2 Taxman 75 (Mad.) for the assessment years 1973-74, 1975-76 and 1976-77. This Tribunal held, after considering the provisions of the agreement, that there was no employer-employee relationship and that the expenditure is allowable, whether the income is itself assessable either under the heads 'Profits and gains of business or profession' or 'Income from other sources'. In those years, there were no losses incurred by the assessee and it was for this reason that this problem, which we are now facing, did not come before this Tribunal. Since the company suffered a loss, the assessee did not receive any share or profit but incurred expenditure.

It was on this basis that the assessee had claimed a loss of Rs. 16,816 for the assessment year 1979-80. Net loss after adjustment of other income came to Rs. 10,540. The ITO had assessed the assessee's loss from the agreement with the mill at Rs. 16,816 under the head 'Profits and gains of business or profession' as returned by the assessee.

Hence, the net loss of Rs. 10,540 as per the assessment order is a business loss. It was on this ground that the assessee has claimed set off of this loss of Rs. 10,540, as determined for the assessment year 1979-80, against the income from the same source for the assessment year 1981-82 (now under dispute). This assessment for the assessment year 1979-80 is not now before us and has become final in the sense that it is not the subject-matter of a revision.

3. For the assessment year 1980-81, the assessee had claimed a similar loss on the same basis and this loss was also accepted, though it was described by the ITO in the order as 'salary loss', the net loss being computed as at Rs. 14,320 on the assessment made on 28-7-1982. Since it was described as 'salary loss', the assessee was apprehensive that it may not be allowed to be set off in a later year of profit and, therefore, filed an appeal claiming that it should be treated as business loss. The first appellate authority dismissed this appeal on the ground that the income or the loss on the basis of the agreement can be assessed only as 'Income from other sources' and, hence, the question of carry forward would not arise. In other words, he charged the source from 'salary' to 'other sources', which had the same result as far as the assessee was concerned. This decision is in dispute before us. For the assessment year 1981-82, the assessee had a positive income. The gross income was Rs. 80,442, while the expenditure claimed was Rs. 27,458. The assessee also claimed carry forward of the losses determined for the assessment years 1979-80 and 1980-81 to be set off against this income. The ITO declined to do so on the ground that the assessee was only receiving a salary from his employer. However, he had allowed the deductions relating to this year apparently following the Tribunal's decision for earlier years. The first appellate authority confirmed the assessment for this year as well in the common order for the same reasons for 1980-81, treating the part losses as losses under 'other sources'. The assessee is in appeal asking for the set off.

4. The learned Counsel took us over the relevant papers. He pointed out that the assessment order for the assessment year 1979-80 accepted the assessee's stand that the income should be assessed as business income.

This, according to him, cannot now be undone. He claimed that though the Tribunal had left the question as to whether the income is from 'business' or 'other sources' open, there is no reason why it should not be 'business income'. 'Income from other sources', he pointed out, is only a residuary source. When the assessee himself claims the source to be business, he contended that it is not open to the ITO to dispute this claim, unless there are some very strong facts to controvert such a claim. The learned departmental representative found that he had to face the Tribunal's decision which held that the assessee's income from the agreement cannot be assessed as 'salary income'. He, however, referred to certain passages in the said decision which, according to him, indicated that the income would be assessable as 'Income from other sources'. He claimed that the said passages should lead us to accept the revenue's claim that the loss was from 'other sources'. He pointed out that the Tribunal has been consistently taking the view that it is open to the taxpayer to canvass the quantum and the nature of the amount to be set off in the year of set off, following the rationale of the various decisions of the High Courts in Addl. CIT v.Sheetalaya [1979] 117 1TR 658 (All.), Indian Aluminium Co. Ltd. v. CIT [1980] 122 ITR 660 (Cal.) and CIT v. Bluemount Ceramics Ltd. [1980] 123 ITR 385 (Mad.). He contended that there cannot be any 'business' agreement as between a director and the company and that there is no periodicity in respect of the income so as to justify the inference of 'business'.

5. We have carefully considered the facts as well as the arguments. The agreement between the assessee and the company had received elaborate consideration at the hands of the Tribunal for earlier years in the common order referred to. This Tribunal had come to the conclusion that there is no employer-employee relationship. Nothing further has been stated before us to justify any different conclusion in respect of the same agreement for the two years under consideration. The only further question is whether the surplus or the loss has to be assessed as income from 'business' or under 'other sources'. We agree with the department that it is open to the revenue to canvass this issue afresh for the assessment year 1981-82, when the question of set off has come up for consideration for the first time. In other words, the revenue is not inhibited by the order passed by the ITO for the assessment year 1979-80, declaring the loss as 'business loss'. The issue can, no doubt, be considered afresh on merits. We are, however, not impressed by the argument of the learned departmental representative that certain passages in the common order pointed out to the conclusion that the income was assessable as 'Income from other sources'. The question has specifically been left open in the said order. Even otherwise, we cannot possibly avoid the responsibility of deciding the issue on merits. 'Business' has been defined in Clause (13) of Section 2 of the Income-tax Act, 1961 ('the Act'), in an inclusive definition to include 'any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture'. The definition is exhaustive. It has 'extending' force and does not limit the meaning of the term even as spelled out in a number of cases as for example in Lala Indra Sen, In re. [1940] 8 ITR 187 (All.). As observed by the learned authors of Kanga and Palkhivala's Law and Practice of Income-tax, "the trend of the judicial decisions has been in the direction of enlargement rather than restriction of the connotation of trade and business". All that is required is 'real, substantive and systematic or organised course of activity or conduct with the said purpose'. In the assessee's case, there is systematic activity with a view to make profit. What is required is not periodicity of income, but continuity and repetition of the activities. It is present in the assessee's case. Again the latter part of the definition includes even a 'concern' in the nature of trade, commerce or manufacture as 'business'. It has been held by the House of Lords in Scott v. Russell 30 TC 394, 421 that the word 'concern' is a very wide word and appears to imply an adequate degree of business organisation for the purpose of carrying on the undertaking. In the assessee's case, the assessee keeps an establishment for the purpose of his obligation under the agreement with the mill. The assessee has consistently claimed that he is in business. Hence, we have no doubt that there is no ground for rejecting the assessee's claim that the profit or the loss should be assessed as business income or business loss. In this context, we may also refer to the fact that 'Income from other sources' cannot be treated as an independent source by itself. It comes into operation only after exhausting the earlier sources. Section 56(1) of the Act dealing with the 'Income from other sources' clearly stipulates that it will be chargeable under this head 'if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E'. It is only a residuary head. Where there is a specific head, the residuary head cannot be called in aid even as repeatedly pointed out by the Supreme Court as for example in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114, in S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 and Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428. Hence, any controversy as to whether any particular income falls under one or the other head has to take this fact into consideration and not proceed as though there is a choice between the one and the other. One has to consider whether it would fall under the head 'Profits and gains of business or profession'. If it does not so fall, Section 56 will automatically come into operation, if the receipt is in the nature of income. In the assessee's case, we have to come to the conclusion that the assessee is in business in respect of his obligation under the agreement as such obligation is a continuous and contractual one over the years. In fact, he is carrying on some sort of joint venture with the company sharing the profits without even minimum remuneration for the services rendered by him. Even if it is not strictly comparable to a joint venture, the fact remains that his activity is in the nature of business. Section 56 is, therefore, ruled out. The assessee is entitled to succeed. However, we will remit the computation of income to the ITO for the assessment year 1980-81 on the basis that the assessee is in the business. The ITO will compute the same as business income in accordance with law. For the assessment year 1981-82, the net losses computed for the earlier years, namely, 1979-80 and 1980-81, will have to be set off.

6. The appeals are treated as allowed in the manner indicated in the immediately preceding paragraph.


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