1. On an application under Section 66 (2) of the Income Tax Act by the Commissioner of Income-Tax my Lord the Chief Justice and I required the Income Tax Appellate Tribunal to state the case and refer the following two questions to this Court:--
'(1) Whether the claim of loss in this case is governed by the provisions of Section 10 (1) or 24 (1) proviso read with Section 14 (2) (c) or by the provisions of Section 42?
(2) Whether on the facts of the case a loss of Rs. 22, 981/- is allowable in computing the income of the assessep chargeable to the excess profits tax?
2. The case arises out of the assessment of the respondent firm Messrs. Chum' Lal Hansa Ram for the year 1946-47 to income-tax, and to excess profits tax for the period ending 6-2-1946. The assessee firm carries on a speculation business at Delhi. Forward transactions are entered jn various bullion markets, and on certain transactions entered into with firms at Bhatinda in the then State of Patiala certain losses of Rs. 6,366/- and Rs. 16,615/- were incurred. The question arose whether in view of the fact that according to the provisions of Section 14 (2) (c) of the Income-tax Act, as it then stood, anyprofits resulting to the assessee from business an Indian State would be excluded in assessing the taxable income of the assessee unless such profits were brought into British India, the assessee was entitled to deduct the losses incurred on business in a native state.
The appellate Tribunal held that there was no warrant either in terms of Section 14 (2) (c) or in terms of the proviso to Section 24 (1) to split up the transactions of a business located in the taxable territories into transactions in taxable territories and transactions without taxable territories and that nothing in the provisions of Section 14 (2) (c) or the proviso to Section 24 (1) debarred the taking into account of the losses incurred in this way by the assessee firm. The assessee's appeal was accordingly allowed and the losses deducted from the assessee's taxable income.
3. When the application was made under Section 68 (2) by the Commissioner of Income-tax he not only raised this point but also raised the question of these losses in connection with the assessment for excess profits in spite of the fact that this matter had never been separately raised or considered at any stage, the orders passed regarding the excess profits being consequential on the orders of the Income-tax officer, the Appellate Assistant Commissioner and the Appellate Tribunal. At the time when the application was heard it was agreed that the first matter arose, but the assessee objected to the framing of the second question. His objections on this point were, however, overruled.
4. It appears that the point raised in the first question is virtually settled law, since it is admitted that the only High Court in India which row takes the view that losses incurred)by an assessee in British India on business transacted in an Indian State could not be taken into account in assessing his income from business by virtue of the provisions of the Income Tax Act relied on by the Commissioner, is the Allahabad Court, and the other Courts, including our own, have taken the contrary view.
The latest decision of this Court by my lord the Chief Justice and myself on this point is in Commr. of I.T. Delhi v. Gajjanand Gobind Ram (A) in which we followed the two earlier decisions of this Court in Commr. of I.T. Punjab v. Hira Mal Narain Dass (B), and in Commr. of LT. Punjab v. Partab Singh (C). In the earlier of these decisions Kapur J. and I expressly dissented from the view of the Allahabad High Court in Mishri Mal Gulabchand v. Commr. of I.T. : 18ITR75(All) (D). The answer to the first question must accordingly be that the claim of losses in this case is governed by the provisions of sectioa 10 (1) of the Income Tax Act and not by the sections relied on by the Commissioner.
5. The second question, however, raises a more difficult point in view of the fact that the provisions of the Excess Profits Tax Act of 1940 (now defunct) were not identical with those of the Income-tax Act. Section 5 of this Act during the relevant period read -
'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 (1) or Sub-clause (ii) of Clause (b) of Sub-section (1) of Section 4 of the Indian Income tax Act, 1922, or of Clause (c) of that, sub-section.
Provided that this Act shall not apply to any business the whole of the profits of which accrue or arise without British India where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in British India unless the business, is controlled in India;
Provided further that where the profits of a part only of a business carried on by a person who is not resident in British India or not ordinarily so resident accrue or arise in British India or are deemed under the Indian Income Tax Act, 1922, as to accrue or arise, then except where the business being the business of a person who is resident but not ordinarily resident in British India is controlled in India, this Act shall apply only to such part of the business, and such part shall for the purposes of this Act be deemed to be a separate business:
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.'
On behalf of the Commissioner reliance is placed on the third of these provisos, the meaning of which, it is contended, is that any business done in a native state is to be treated, for the purpose of assessment to excess profitstax, as a separate business, and that neither profits nor losses resulting from such business are in be taken into consideration in the assessment of the assessee in British India.
6. Reliance is also placed on the fact that in the Act which has more or less taken the place of the Excess Profits Tax Act, the Business Profits Tax Act 21 of 1947, Section 5 which relates to the application of the Act is in more or less similar terms to Section 5 of the Excess Profits Tax Act except that before the third proviso a new proviso has been subs, tiluted which reads:
'Provided further that this Act shall not apply to any income, profits or gains of business accruing or arising within a Part B State unless such income, profits or gains are received or deemed under the provisions of the aforesaid Act to be received in or are brought into the taxable territories in any chargeable accounting period, or are assessable under Section 42 of that Act.'
7. It is, however, clear that neither the old nor the new proviso mentions losses, and it would appear to me that the only real difference is that whereas under the Excess Profits Tax Act profits made on business in an Indian State were on no account to be taken into consideration, in the assessment of excess profits tax in British India, whether such profits were allowed to remain where they were or were brought by the assessee into British India, the proviso in the Business Profits Tax Act has been amended so as to incorporate the principle of Section 14(2) (c) of the Income-tax Act, so as to make profits accruing from business in a Part B State assessable to the tax in the taxable territories if brought there in any chargeable accounting period, or if deemed to have been brought there under any provision of the Income-tax Act. It does not seem to me that either of the provisos touches the question whether losses Incurred in an Indian State or Part B State could be taken into account in assessing the taxable income of an assessee in British India or the so-called taxable territories for the purpose of assessing excess profits tax ot business profits tax, as the case may be.
8. This very question has, however, arisen in a case before the Bombay High Court in connection with the Business Profits Tax Act in Karamchand Premchand Ltd. v. Commr. of I. T. Bombay North etc (1956) 30 ITR 849 (E) and it has been held by Chagla C. J., and Tendolkar J., that an assessee is entitled under the third proviso to Section 5 of the Business Profits Tax Act, 1947, to deduct the losses incurred by him in a Part B State and set them off against the profits made by him in the taxable territories, even though the income profits or gains made by him in such state are not assessable to tax unless they are received in or are brought into the taxable territories. In other words, the decision on this matter has been on the same lines as the decisions of the Bombay and other High Courts on the provisions of the Income-tax Act and on the effect in a matter of this kind of Section 14(2) (c).
9. It would seem that in spite of the slightly different language of the Excess Pro-jiits Tax Act from that of the Income-Tax Act, no distinction has ever been drawn in this jmatter 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 universalpractice that decisions of the Income Taxauthorities 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, and the learned counsel for the Commissioner has not been able to cite any decision in which different principles have been applied on this particular matter.
Admittedly, one of the reasons given in his judgment by Chagla C. J. for coming to the decision mentioned above was that the third proviso had been changed in the Business Profits Act as compared with the Excess Profits Tax Act, but this is only one of the number of reasons, and the question has not been considered at all whether under the proviso in the Excess Profits Tax Act losses made in an Indian state could have been computed in assessing the assessee's income from business in British India. I can only say that in the circumstances it seems to me likely that if the point had arisen the same view that I have expressed above would have been taken, namely that whereas for the excess profits tax profits earned in an Indian State could not ba taken into consideration at all. such profits could be taken into account if brought into taxable territories for assessing business profits tax, and that as regards losses they could ba taken into account in assessing the income from business whether they occurred in a State or in what was British India.
10. Apart from this, it was argued on behalf of the assessee, and to my mind with some force, that it is doubtful in a case of this kind whether the losses could be deemed to have been incurred in an Indian State, since 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 hag 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 accrued 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 It was the case of a similar firm with which my Lord the Chief Justice and I were dealing in the Commr. of I. T. Delhi v. Gajja Nand Gobind Ram (A) and we held that in such circumstances no question arose of the application of Section 14(2) (c) of the Income-tax Act. The result is that I would answer the second of the questions framed in the affirmative. The Commissioner is directed to pay the costs of the assessee respondent. Counsel's fee Rs. 250/-
Bishan Narain, J.
11. I agree.