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Popular Kuries Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 77 of 1980
Judge
Reported in[1986]159ITR519(Ker)
ActsIncome Tax Act, 1961 - Sections 36 and 37
AppellantPopular Kuries Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate T.C. Karunakaran and; V.M. Kurian, Advs.
Respondent Advocate P.K.R. Menon, Adv.
Cases ReferredB.R. Ltd. v. V.P. Gupta
Excerpt:
.....and 37 of income tax act, 1961 - assessee carried on business of banking and kuries - transferred banking business - high court passed decree in favour of assessee in respect of sum misappropriated by employee before transferring business of banking - assessee claimed deduction in respect of decretal amount as judgment debtor died - loss of banking business cannot be claimed as deduction in computing profits of kuri business - held, assessee not entitled to claim deduction. - - 20,838 as a bad debt in the course of the assessment proceedings for the assessment year 1963-64. that claim was, however, disallowed both by the income-tax officer and the appellate assistant commissioner. 20,748 as bad debt, that being the amount due from the judgment-debtor in their appropriation case...........held that the loss in question had been incurred by the assessee while it was carrying on the banking business and that since the assessee had stopped such banking business long before the assessment year under consideration, such loss incurred in such business could not be claimed as a deduction in computing the profits and gains arising to the assessee from the kuri business. the appeal was accordingly allowed. 2. the following questions of law said to arise out of the order of the tribunal, annexure 'e', are referred to this court by the income-tax appellate tribunal, cochin bench, pursuant to the direction given by this court in the judgment dated march 30, 1979, in o.p. no. 1119 of 1977 : '(1) whether, on the facts and in the circumstances of the case, the appellate tribunal is.....
Judgment:

Bhaskaran, C.J.

1. The Cochin Union Bank, Trichur, was a company registered under the Companies Act and was carrying on the business of banking and kuries. It stopped its banking activity, making it over to the Federal Bank Limited, on August 17, 1964, ; some selective assets and liabilities also were transferred to the Federal Bank Limited. Subsequently, the owners of the business of the Cochin Union Bank carried on business, confining themselves to kuries only under the name and style 'The Popular Kuries Limited'. Before the transfer of the business of the Cochin Union Bank, one of the employees had misappropriated certain sums. Ultimately, the High Court gave a decree for Rs. 28,185 payable from out of the assets of the employee, who had, in the meantime, died. The assessee, the Popular Kuries Limited, wrote off a sum of Rs. 20,838 as a bad debt in the course of the assessment proceedings for the assessment year 1963-64. That claim was, however, disallowed both by the Income-tax Officer and the Appellate Assistant Commissioner. For the assessment year 1971-72, the assessee filed a return disclosing an income of Rs. 34,007. In doing so, the assessee, inter alia, claimed Rs. 20,748 as bad debt, that being the amount due from the judgment-debtor in their appropriation case. The Income-tax Officer rejected the claimbthat the requirements of Section 36(2) of the Income-tax Act, 1961, were not satisfied. The Income-tax Officer also held that the deduction claimed by the assessee could not be allowed under Section 37 of the Act. Annexure 'A' is the copy of the order of the assessing authority dated June 25, 1973. True copy of the memorandum of appeal filed by the assessee before the Appellate Assistant Commissioner is annexure 'B'. The Appellate Assistant Commissioner disposed of the appeal by his order, annexure 'C', dated October 3, 1974. In annexure 'C', the view taken by the Appellate Assistant Commissioner was that even though the assessee was not entitled to relief under Section 36(2) of the Act, it being a loss sustained by the assessee in the course of the carrying on of the business, the deduction could be allowed. Aggrieved by the decision of the Appellate Assistant Commissioner, the Revenue filed an appeal to the Income-tax Appellate Tribunal, Cochin Bench, a copy of the memorandum of appeal being annexure 'D'. Annexure 'E' is the order of the Appellate Tribunal dated January 8, 1976, wherein, in reversal of the decision of the Appellate Assistant Commissioner in annexure 'C', the Tribunal held that the loss in question had been incurred by the assessee while it was carrying on the banking business and that since the assessee had stopped such banking business long before the assessment year under consideration, such loss incurred in such business could not be claimed as a deduction in computing the profits and gains arising to the assessee from the kuri business. The appeal was accordingly allowed.

2. The following questions of law said to arise out of the order of the Tribunal, annexure 'E', are referred to this court by the Income-tax Appellate Tribunal, Cochin Bench, pursuant to the direction given by this court in the judgment dated March 30, 1979, in O.P. No. 1119 of 1977 :

'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in allowing the appeal on a point which was not taken up as a ground at any stage of the hearing

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in entering the finding that 'the loss, if any, is in the business of banking 'as if the banking business is different from the business carried on by the assessee and accordingly the assessee is not entitled to claim deduction

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the assessee is not entitled to claim a sum of Rs. 20,748 by way of deduction while computing the profits and gains of the business ?'

3. In our opinion, the matter is quite simple and admits of no doubt. The assessee's admitted case was that misappropriation took place in 1953in the course of the banking business, that the banking business was madeover to the Federal Bank Limited on August 17, 1964, and that it wasthereafter that the business confined to kuries was continued under thename and style of 'Popular Kuries Limited'. Assuming that the amountmisappropriated in 1953 by the employee would be deemed to be a businessloss, in order to obtain the benefit of carry forward under Section 72(1)(i)of the Income-tax Act, 1961, two conditions are to be fulfilled : (1) the set-off sought should be against the profits and gains of any business or profession carried on by the assessee and assessable for the assessment year ; and(2) the business or profession for which the loss was originally computedcontinued to be carried on by him in the previous year relevant for thatassessment year. The Income-tax Appellate Tribunal, in a brief order,annexure 'E', points out:

'The loss, if any, is in the business of banking. Now, it carries on only the business in kuries. So, the loss in banking business cannot be claimed as a deduction in computing the profits and gains of the kuri business...... ''

4. It has not been shown how in this approach on the facts and circumstances of the case, the Appellate Tribunal was in error. On the othor hand, in his order, annexure 'C', the Appellate Assistant Commissioner has committed a serious mistake in concluding in para 5 as follows :

'This is not a debt which was owing to the appellants and the disallowance cannot, therefore, be made because the conditions laid down in Section 36(2) of the Act had not been complied with. This is a loss which the appellants have incurred because of the fact that an employee who was appointed as the manager of a branch had discounted bogus bills and misappropriated some funds. Such a loss must be regarded as a loss arising in the course of the carrying on of the business and as being incidental to the business. This loss has arisen: in the course of the previous year for this assessment year because it was during the year that they decided to come to a settlement in regard to the claim they had against their employee. I, therefore, consider, that the appellants are entitled to the deduction of this amount......'

5. There could be no doubt that, if at all, the claim for deduction of Rs. 20,748 could have been allowed as trading loss alone. For that, conditions stipulated in Sections 36(2) and 37 should be satisfied. For that purpose, the debt or part thereof should have been taken into account in computing the income of the assessee of that previous year, or of an earlier previous year ; or it should have been written off as irrevocable in the accounts of the assessee for that previous year. Here, the assessee has no case that the debt had been taken into account in computing the incomeof the assessee of the previous year. As a matter of fact, the banking business itself had ceased to exist as early as in the year 1964 when it was made over to the Federal Bank Limited. For the application of Section 37, it should have been an expenditure laid out or expended wholly and exclusively for the kuri business that was being carried on by the assessee during the year material for the purpose of assessment.

6. The counsel for the assessee placed reliance on the decision of the Supreme Court in B.R. Ltd. v. V.P. Gupta, CIT : [1978]113ITR647(SC) , to contend for the position that the company owned by the assessee was carrying on banking and kuries business ; and the business relating to kuries having been carried on by the assessee, who had initially control over both, should be deemed to have been under a common management and control, and, therefore, entitled to set off the loss against the profits and gains of the assessee's business during the year in question. We do not find any substance at all in these contentions. On the facts, we find that there was a complete cessation of the banking business and also that of the Cochin Union Bank ; and the kuri business was subsequently carried on by a company known as 'The Popular Kuries Limited, Trichur', which was owned by the assessee. This ruling, we find, has absolutely no relevance to the facts of the case.

7. Lastly, it was contended by the counsel for the assessee that the Appellate Tribunal was in error in having allowed the Revenue to urge grounds not set forth in the memorandum of appeal. We do not find any substance in this argument also. Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, provides as follows (see [1963] 49 ITR 65) :

'The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule :

Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.'

8. The question before the Tribunal was whether the Appellate Assistant Commissioner was justified in treating the deduction claimed by the assessee as loss arising in the course of the carrying on of the business and as being incidental to the business. The Appellate Tribunal found on the facts and in the circumstances that neither Section 36 nor Section 37 would apply to the case. The Appellate Tribunal went further and pointed out that :

'The loss, if any, is in the business of banking. Now, it carries on only the business in kuries. So the loss in banking business cannot be claimed as a deduction in computing 'the profits and gains of the kuri business.'

9. We do not find any error committed by the Tribunal. The Tribunal has only exhausted all the possible arguments which Would have been put forward by the parties.

10. The result, therefore, is that we answer all the three questions in the affirmative, that is, in favour of the Revenue and against the assessee.

11. A copy of this judgment under the signature of the Registrar and seal of the High Court will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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