DALMIA JAIN and CO. LTD. vs COMMISSIONER OF Income Tax.

UNTWALIA J. - The assessee in this case is a private limited company. The assessment year in question is 1954-55, the corresponding accounting period being February 1, 1953, to January 31, 1954. During the said accounting period, the assessee climbed to have paid interest to the tune of Rs. 79,265 on borrowed capital utilised in the construction of a houses by the assessee in Calcutta. The construction began in 1950 and was completed in April, 1952. The house was let out to Shri S. P. Jain, his son, Shri Ashok Kumar Jain, and some sister companies of the Sahu Jain group. A sum of Rs. 12,000 was shown as rent received of this building and a set of furniture therein. Deduction one-sixth for repairs, the net income from the building could be determined at Rs. 10,000, if it was chargeable to tax under the head "Income from property". But since the erection of the building was begun and completed between 1st day of April, 1946, and the 31st day March, 1956, its income was not chargeable under the head aforesaid for a period of two years from the date of the completion of the building as provided in clause (xii) of sub-section (3) of section 4 of the Indian Income Tax Act, 1922, hereinafter called the Act. The assessee-company claimed loss of Rs. 69,265 (Rs. 79,265-10,000) under the head "Income from property" and further claimed to set it off against its income from other heads. The claim was rejected by the Income Tax authorities and also by the Appellate Tribunal on the ground that when the income from property in respect of the building in question was not chargeable to tax, there was no question of determining any loss in relation to that building nor could the loss, if any, be allowed to be set off against the income for other heads u/s 24(1) of the Act. On being asked by the assessee, the Income Tax Appellate Tribunal Patna Bench, has stated a case and referred to the High Court u/s 66(1) of the Act, the following question of law :

"Whether, in the facts and circumstances of the case, the sum of Rs. 69,265 being the loss under the head "Property income", which income is exempt from taxation u/s 4(3) (xii), should have been set off against the assessee income under other heads ?"

The fact that income from the building in question, if taxable, was chargeable to tax under the head "Income from property" u/s 9 of the Act and not u/s 10 under the head "Profits and gains of business, profession or vocation", is not in dispute. Section 9(1) of the Act provides :

"9. (1) The tax shall be payable by an assessee under the head "Income from property" ... subject to the following allowances, namely :-....

(iv) .... and, where the property has been acquired, constructed, repaired, renewed or reconstructed, with borrowed capital, the amount of any interest payable on such capital."

Section 4(3)(xii) of the Act says :

"Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :......

(xii) any income chargeable under the head Income from property in respect of a building the erection of which is begun and completed between the 1st day of April, 1946, and the 31st day of March, 1956 (both dates inclusive), for a period of two years from the date of such completion."

One reading the provisions of the Act, extracted above, it is clear that the income from the building in question could not be included in the total income of the assessee either for the purpose of taxing it or even for the purpose of rate. The exemption provided under clause (xii) of sub-section (3) of section 4 is absolute and the exempted income is not to be included in the total income of the assessee even for the purpose of rate, u/s 16 of the Act. In that view of the matter the question of computation or determination of income or loss from the property in question u/s 9 of the Act does not arise. Hence, on a plain riddling of the statute, the claim of the assessee-company was untenable in law.

I shall now read the provisions of section 24(1) of the Act :

"Where any assessee sustains a loss of profits or gain is any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or under any other head in that year."

Section 6 of the Act states :

"Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to Income Tax in the manner hereinafter appearing, namely :-

(i) Salaries.

(ii) Interest on securities.

(iii) Income from property.

(iv) Profits and gains of business, professing or vacation.

(v) Income from other sources.

(vi) Capital gains."

If the income from the property in question is not chargeable to Income Tax under clause (iii) of section 6, it is obvious, the losses, if any, in respect of that property cannot be set off against the income, profits or gains of the assessee under any other head chargeable to Income Tax as provided for in the other clauses of section 6. In my opinion, therefore, looked at from any angle, the claim of the assessee was untenable and the so-called loss of Rs. 69,265 in relation to the property in question has rightly been not allowed to be set off against the assessees income under other heads.

Mr. Pal appearing for the assessee placed reliance upon two decisions of the Supreme Court in Indore Malwa United Mills Ltd. v. Commissioner of Income Tax and Commissioner of Income Tax v. Indian Bank Ltd. In the former case, the question before it merged in the Indian Union could be carried forward and set off against the profits of the assessees business in India after merger. A non-resident, unlike a resident, is not chargeable in respect of income accruing or arising without India and not received in India. In such a situation, it was held by the court :

"Reading the provisions in section 24 with the provisions in section 4(1) (a) and (c) and section 14(2) (c) it seems clear to us that section 24(1) when it talks of profits or gains has reference to taxable profits or taxable gains."

But Mr. Pal laid stress on the words occurring in the judgment of the Supreme Court after the clause which is extracted above, which are to the following effect :

"... in other words, it has reference to such profits and gains as would have been assessable in British India or the taxable territories. It has no reference to income accruing or arising without British India or without the taxable territories which were not liable to be assessed in the case of non-residents."

Counsel submitted that the ratio of this decision is based upon the fact that the profits and gains were not assessable in British India or the taxable territories and hence the loss could not be set off but if they would have been assessable British India, the loss could be set off although the income for a certain period, in view of the special provisions contained in clause (xii) of sub-section (3) of section 4 of the Act, was exempt from taxation. I do not find any force in this argument. For the purposes of allowing a set-off u/s 24(1) or 24(2) of the Act, in principle, the case of resident or non-resident makes no difference nor does the fact as too whether the profits and gains would have been assessable in British India or not assume any importance. The point of significance is that section 24(1) talks of profits or gains which are taxable. This case has been followed recently by a Bench of the Allahabad High Court in Ramjilal Rais v. Commissioner of Income Tax, upon which reliance was placed by Mr. S. N. Datta, learned standing counsel for the department. In that case, the question was as to whether loss in business during the year April 1, 1948, to March 30, 1949, could be set off u/s 24(1) against profits under other heads in the assessment year 1949-50. The assessee, a Hindu undivided family, was deriving income from business which was assessed to tax under the Indian Income Tax Act, 1918, and had also income from property and interest on securities. The business passed out of the hands of the family on March 30, 1949. During the period aforesaid, the assessee suffered a loss of Rs. 13,277 in the business and claimed in the assessment year 1949-50 to substitute this loss for the under other heads u/s 25(4) and set off against the profits under other heads u/s 24(1). The disallowance of the claim was maintained by the High Court on the ground that :

"If as it seems to us, the income of the broken period is exempt altogether from the operation of the Income Tax Act, then there is no basis for applying the provisions of section 24(1) to that sum. If the assessee has earned a profit during the broken period, it is not liable to be considered for any purpose in respect of the assessment year to which the broken period relates. If the assessee has suffered a loss, then equally it cannot be considered for any purpose in proceedings for that assessment year. For section 24(1) to apply, loss of profits must be a loss of taxable profits."

The facts of the case of the Indian Bank Ltd. were these. The bank, in the course of its business, invested a large sum in securities including Mysore Government Securities, the interest on which was exempt from tax. The profits and losses on the purchase the income of the bank under the head "Business". For the assessment year 1950-51 it claimed a deduction of Rs. 25,91,565 as interest paid to various depositors u/s 10(2) (iii) of the Act. The Income Tax Officer, the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal disallowed interest amounting to Rs. 28,01,194. This amount was arrived at by calculating the proportionate interest which would be payable on money borrowed for the purchase of the securities, the interest income of which was exempt from tax. The following question was referred to the High Court for determination.

"Whether, on the facts and circumstances of the case, the bank was entitled to claim the deduction of the entire interest paid by it on fixed deposits either u/s 10(2) (iii) or 10(2) (xv) ?"

The High Court answered the question in favour of the assessee on the ground that the entire paid by the bank was a permissible deduction u/s 10(2) (iii) of the Act. It was common ground among the parties that section 8 of the Act, which deals specifically with assessment of income under the head "Interest on securities" did not apply to the case. The argument put forward on behalf of the department that if a part of profits of a business is not taxable, no expenditure incurred for the purpose of earning those profits can be allowed as deduction was not accepted by the Supreme Court on the ground that profits and losses accruing from sale and purchase of securities were capable of producing profits and losses. It was further pointed out by the Supreme Court that :

"... there is nothing in the language of section 10 from which it can be fairly implied that an expenditure or allowance falling within the section must fulfill some other condition before it can be allowed."

The Supreme Court, in the earlier portion of the judgment, also observed that the allowance of the expenditure u/s 10(2) of the Act does not depend upon the fact whether it has the quality of directly or indirectly producing taxable income. Most types of expenditure which are laid out wholly and exclusively for the purpose of the business would directly or indirectly produces taxable income and it is not worth the administrative effort to go further and trace expenditure to some taxable income. The case of Indore Malwa United Mills Ltd. was distinguished on the ground that the decision therein did not imply that there was general principle that if a part of the income of a business is tax-free, expenditure incurred for the purpose of earning this income is outside the preview of section 10. In my opinion the decision, of the Supreme Court in the case of Commissioner of Income Tax v. Indian Bank Limited does not support the assessees contention put forward with reference to the facts of the instant case. Here it is not a question of determining as to whether a part of the activities capable of producing taxable income chargeable under a particular head is of computation of profit or loss chargeable under a different head and allowing set off against the income, profits or gains under any other head. It is because of that reason that it was pointedly mentioned in the judgment of the Supreme Court in the case of Indian Bank Limited that section 8 of the Act was not applicable to the case.

On a careful consideration of the matter, I am definitely of the view that the question of law referred to this court must be answered in favour of the department and against the assessee. I accordingly hold that, on the facts and in the circumstances of this case, the sum of Rs. 69,265, being the loss under the head "Income from property." which income is exempt from taxation u/s 4(3) (xii), could be set off against the assessees income under other heads. The assessee must pay the cost of this reference. Hearing fee Rs. 250 only.

G. N. PRASAD J. - I agree.

Question answered in favour of the department.