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O. Rm. Om. Rm. Pl. Muthukaruppan Chettiar and Others Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai
Decided On
Case NumberO.P. Nos. 126, 127 and 128 of 1942
Reported inAIR1944Mad58; [1943]11ITR540(Mad)
AppellantO. Rm. Om. Rm. Pl. Muthukaruppan Chettiar and Others
RespondentCommissioner of Income-tax, Madras.
Cases ReferredIn Wilson Box (Foreign Rights) Ltd. (In Liquidation) v. Brice
Excerpt:
- - partnership meant, of course, the winding-up of the subsidiary partnership as well......on' by him. the importance of the words 'carried on' was pointed out by the privy council in income-tax commissioner v. shaw wallace & co. their lordships also pointed out that the english cases did not help here in the interpretation of indian act which was not pair materia. but this does not preclude the court from referring to english cases when deciding whether a loss incurred in the course of the liquidation of a business can be regarded as a trading loss. in wilson box (foreign rights) ltd. (in liquidation) v. brice (h.m. inspector of taxes), it was held that a profit made in the winding-up of a company was not assessable to income-tax. the profit was not made in carrying on the business of the company, but its liquidation. lawrence, j., said that the liquidator of a company.....
Judgment:

(Judgment of the Court was delivered by the Honourable the Chief Justice.)

The assessee was a partner in a firm carrying on a money-lending business at Penang under the style of O. RM. OM. and as such had an interest in the business of sub-partnership trading under the style of OM. PS. The business of the sub-partnership was also carried on at Penang. The firms of O. RM. OM. was dissolved on the January 11, 1939 and between that date and the March 26, 1939 the assets of the business were realised. After the January 11, 1939 no business was transacted beyond that involved in the realization of the assets. One of the assets was sold a stranger; all the other assets were sold to members of the firm. The winding-up of the O. RM. OM. partnership meant, of course, the winding-up of the subsidiary partnership as well.

This reference relates to the year of account which ended one April 13, 1939. The assessee claims that in assessing his income as a partner in these business an aggregate suit of $ 1,38,349 should be treated as representing trading loss. This figure is arrived at by deducting the sums realized in the course of the winding-up from the values of the assets as shown in the books of account.

By order dated the August 24, 1942 this Court directed the Commissioner of Income-tax to state a case on the following question :

'Is the loss claimed by the assessee in this case of capital nature or is it a loss deductible in the year of account ?'

The question was stated in this way as the Court understood that the case of the Income-tax authorities was that the loss should be treated as being of a capital nature.

It is quite clear that the alleged loss cannot for purposes of tax be treated as a trading loss in the shear of account, because the firm ceased carry on business on the January 11, 1939 and all realizations took place after that date. Section 10(1) of the Income-tax Act states that the tax shall be payable by assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of a business 'carried on' by him. The importance of the words 'carried on' was pointed out by the Privy Council in Income-tax Commissioner v. Shaw Wallace & Co. Their Lordships also pointed out that the English cases did not help here in the interpretation of Indian Act which was not pair materia. But this does not preclude the Court from referring to English cases when deciding whether a loss incurred in the course of the liquidation of a business can be regarded as a trading loss. In Wilson Box (Foreign Rights) Ltd. (In Liquidation) v. Brice (H.M. Inspector of Taxes), it was held that a profit made in the winding-up of a company was not assessable to income-tax. The profit was not made in carrying on the business of the company, but its liquidation. Lawrence, J., said that the liquidator of a company might realize the assets of the company without carrying on the business of the company in such a way as to attract income-tax. On the other hand, the liquidator might realize the assets in such a way as to involve the carrying on of a trade, the profits of which would be assessable to income-tax. This decision was upheld by the Court of Appeal.

If a profit made in the course of the liquidation of a business does not represent taxable income it must follow that a loss suffered in realization is not a deductible loss. Of course, just as in the case of a company, the business of a dissolved partnerships may be carried on in order to facilitate the winding-up of the partnership and if profit is made it will be taxable as such. Likewise a loss will be a deductible loss. But in this case the business was not 'carried on'. It stopped completely on the January 11, 1939, after which the partners contented themselves with taking steps to realize the assets. As the loss incurred was not incurred either in or for the carrying on of the business of the partnership it is not deductible under Section 10. The reference will be answered in this sense.

The Commissioner of Income-tax is entitled to his costs which we fix at Rs. 250.

O.P. No. 127 of 1942.

The facts are the same as the facts in O.P. No. 126 of 1942 which we have just decided and the answer given there is the answer which we give to the question referred in this case.

The Commissioner is entitled to his costs which we fix at Rs. 150.

O.P. No. 128 of 1942.

The facts are the same as the facts in O.P. No. 126 of 1942 which we have just decided and the answer given there is the answer which we give to the question referred in this case.

The Commissioner is entitled to his costs which we fix at Rs. 150.

Reference answered accordingly.


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