Case: The Commissioner Of Income-Tax, Bombay Circle Ii Vs. The National Syndicate, Bombay

The National Syndicate, Bombay (referred to in this judgment as the respondent) was a firm consisting of three partners. This firm acquired on January 11, 1945, a tailoring business as a going concern from one Chambal Singh for Rs. 89,321/-. Included in this amount was the consideration paid for sewing machines (Rs. 72,000) and a motor lorry (Rs. 8,000). The assessment concerns the year of account of the respondent, January 11, 1945 to February 28, 1946. The business of the respondent was to prepare garments for Government departments, and during the war years, this appears to have been profitable business. Immediately after the respondent acquired this business, the last war came to an end, and the respondent found it difficult to continue the business. It, therefore, closed its business in August, 1945. Between August 16, 1945 and February 14, 1946, sewing machines were sold at a loss of Rs. 41,998/-. The motor lorry was also sold on February 14, 1946, at a loss of Rs. 3,700/-. The respondent closed its account books on February 28, 1946, showing the two losses and writing them off.      2. For the assessment year, 1946-47, the respondent claimed a deduction of Rs. 45,698 under S. 10(2) (vii) of the Indian Income-tax Act. The Income-tax Officer disallowed this deduction, holding that the loss was of a capital nature, and that inasmuch as the business of the respondent was not carried on after August, 1945, S. 10(2) (vii) was not applicable. This order of assessment was confirmed by the Appellate Assistant Commissioner, who also held that the loss represented capital loss, as the machines and the motor lorry were sold after the closure of the business. On appeal, the Appellate Tribunal, Bombay, also confirmed the order, holding that the sales of machines and the motor lorry were made in the course of the winding up of the assessees business after the business had been stopped, and that, therefore, the deduction could not be claimed under S. 10(2) (vii).      3. The respondent asked the Tribunal to refer the questions of law arising from its order, but the request was refused. It then moved the High Court, and obtained an order under S. 66(2) of the Income-tax Act, and the following two questions were referred:      "1. Whether the Tribunal was justified in law in holding that the petitioner had carried on its business only till twenty-eighth day of August one thousand nine hundred and forty-five?      2. Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in not allowing the sum of Rs. 41,998/- (Rupees forty-one thousand nine hundred and ninety eight) on sale of machines and Rs. 3,700/- (Rupees three thousand and seven hundred) on the sale of lorry as a deduction from the total income of the applicant?"      4. The High Court answered the first question in the affirmative, holding that there was evidence on which the Tribunal could reach the conclusion that the business had, in fact, been continued only till August 28, 1945. On the second question, the High Court was of opinion that the business having been carried on for at least a part of the account year, S. 10(2) (vii) was applicable, and that, therefore, this allowance had to be made under that clause. The High Court, therefore, answered the question in the negative. The High Court refused to grant a certificate to appeal to this Court, but the Commissioner of Income-tax applied for, and obtained special leave, and this appeal has been filed.

Reasoning: we may mention that during the course of the argument Mr. S. P. Mehta, counsel for the respondent, sought to re-open the first question. According to him, there was no evidence on which the Tribunal or the High Court could reach the conclusion that the business of the respondent had come to a close in August 1945. We, however, did not permit him to raise this contention, partly because, in our opinion, such a contention could not be allowed to be raised at this stage in an appeal by the Department and partly because, in our opinion, there were adequate materials for the High Court to have based its conclusion. Inasmuch as we were in agreement with the High Court on the question of the applicability of S. 10(2) (vii), we also felt that no useful purpose would be served in examining the matter to find out whether the business had, in fact, closed on August 28, 1945 or had continued till the end of the account year6. The Commissioner contends that an allowance could only be claimed if the sale of machines etc., took place when the business was being continued and not if the business had come to a close. The respondent, on the other hand, submits that S. 10(2) (vii) would be applicable in a case where the business continued for a part of the account year, even though the sale of the machinery, plant etc., took after the closure of the business during the course of the account year1. Counsel differ as to the ratio of the case. The Commissioner contends that the ratio is that no sale, whether at a loss, or at a profit can be said to fall within, respectively cl. (vii) or the second proviso, if it takes place after the closure of business and during the process of winding up, while the respondent contends that the real ratio was that during the account year the machinery and plant were not at all used. No doubt, this Court did give two reasons for its decision, but the primary consideration was the second ratio quoted above7. If the profits or gains of a business for a particular year are to be taxed, they must be computed for the whole year taking into account losses incurred during the same year. Now, the first condition precedent appears to be that the business must have been "carried on by the assessee". This is to be found in the first sub-section of S. 10 The second condition is that the building machinery or plant must have been "used for the purposes of the business". This is to be found in cl. (iv) of the second sub-section of S10. The third condition is that the sale, etc., should have taken place during the year of account. This follows from the nature of the tax which is assessed and levied on the profits of the working of the previous year. The fourth condition is that the loss should have been brought into the books of the assessee and written off. This is provided by the first proviso. There is no other condition to be found expressly in the section or in the Act. It is nowhere stated that the business of the assessee should have been carried on for the whole year, or that the machinery or plant should have been used for the whole of the accounting period. There are no words which would show that, if the assessee works only for a part of the year and then sells out, the loss that he incurs is not a business loss, or that he must pay tax on the small profit that he might have made, and bear the loss in addition. We have shown above that the case of profit referred to in the second proviso stands on a different footing altogether, since profit and loss arise in different ways. The law has thus treated the two subjects differently, and the legislature has amended the proviso but not the clause18. In view of what we have said above, we are of opinion that the judgment of the High Court was correct in all the circumstances of this case, and this appeal must be dismissed with costs.