TaxTMI 
TaxTMI 
1967 (10) TMI 15
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.... to claim a sum of Rs. 2,92,672, transferred after the liquidation of the company, as against the profits of the company ? 5. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to set off the loss of Rs. 3,28,825 suffered in 1948 as against profit of 1949-50 ? " The question No. 1 is the question which covers the entire assessment of the assessee-company and if it is decided in favour of the assessee, then counsel urged that the other questions would be more or less academic. We shall state the particular facts relating to each question separately when we turn to consider those questions, but the general statement of facts will be sufficiently clear when we state the facts upon which question No. 1 falls to be determined. For several years prior to the year 1920, a partnership firm was carrying on business in India in the name and style of E. D. Sassoon & Co. This firm consisted of several members of the Sassoon family and one Mr. Raymond. The firm was carrying on buiness throughout the world and particularly at Bombay, Calcutta, Karachi, Hongkong, Shanghai, London, Manchester, Basra and at places in the Persian Gulf. The business ....
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....other things, in shares, securities and foreign exchange. The financial position of this company can be seen from the following figures : Investments in shares and securities. End of December, 1920. 3,23,404 End of December, 1921. 4,31,32,212 End of December, 1922. 10,43,78,511 The relevance of mentioning these facts about the Bombay Trust Corporation Ltd. here lies in this that the Tribunal has found or has rather suggested in paragraph 7 of its order that after the firm E.D. Sassoon & Co. transferred its business to the assessee, E.D. Sassoon & Co. Ltd., the shares and securities were really handed over to the Bombay Trust Corporation Ltd. Pursuant to its memorandum of association and the agreement dated 30th June, 1921, between the firm and the assessee-company, the assessee-company took over the business of the firm and purchased the shares and securities worth Rs. 1,93,79,521-3-1 at market value as on 31st December, 1920. In the year of account 1920, the income from dividends of the firm is shown at Rs. 2,17,126-3-11 and income from interest on securities at Rs. 4,73,322-12-10. The firm in this year showed that its shares and securities had depreciated in val....
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.... loss in dealings in shares have not been uniform and that it was only from 1938 onwards that they have been treated as a regular dealer in shares and securities, and, as their accounts indicate,. only a portion of the shares and securities represent their stock-in-trade, the rest being treated as investments. The Income-tax Officer also empbasises that in the year 1921 the assessee had shown Rs. 9,76,708 as appreciation in the value of shares and securities but the amount was not offered for tax. On the other hand, in spite of the then examiner of accounts having pointed out that amount was liable to be taxed in the hands of the assessee, it was not so taxed be cause of " the assessee's contention that it was an investor." He held that on the basis of that finding " the business of dealing in shares and securities of this company had not in the aggregate been charged with tax once in respect of every year's income and twice in respect of one year's income " which according to him was the principal condition to the grant of relief under section 25(3). The Income-tax Officer also held that the main activities of the company in the year of its discontinuance were managing agencies of....
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....he then market value of the shares and securities; (v) Over Rs. 9,00,000 of losses were claimed by the said firm as a result of revaluation and allowed by the income-tax authorities in the assessment of the said firm for the year 1920 ; (vi) The said firm was being held by the department to be a dealer in shares and securities and the profit was brought to tax. (vii )the applicant-company neither intended originally to do the business, nor took over the business of dealing in securities from the old firm." It will be noticed from the findings Nos. 2, 3, 4 and 5 summarised above that the Tribunal did not accept the findings of the Appellate Assistant Commissioner that it was clear that the tax was not charged under the Act of 1918, on the income from the share dealings for the account years 1919 and 1920. The Tribunal upheld the order of the tax authorities on the short ground that the business which the assessee-company took over from the firm was not the same business that the firm was doing and at any rate in the year in which the assessee-company took over, it " neither intended originally to do the business nor took over business of dealing in securities from the ol....
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.... is as follows : In the first year after the assessee-company took over the business from the firm E. D. Sassoon & Co. the figure of Rs. 9,76,708-6-7 was shown in the profit and loss account as appreciation on shares and securities. We have already indicated above that this figure consisted of two items shown in the annexure " I-6 " the profit and loss account for the year 1921 of Rs. 6,55,895-14-0 on account of shares and securities (appreciation) and of Rs. 3,20,812-8-7 on account of London investments (appreciation). Mr. Joshi has argued that this amount came under the scrutiny of the examiner of accounts who made the report to the Income-tax Officer in connection with the assessee's assessment for the year 1922-23. That report is exhibit B dated 12th October, 1922. In that report in regard to the amount of Rs. 9,76,708-6-7, the examiner of accounts reported to the Income-tax Officer that company was a habitual dealer in shares and securities and in the preceding year, i.e., 1920, it had been allowed a sum of Rs. 9,26,730-5-3 (the figure is wrongly printed as Rs. 7,26,730-5-3) as a set off against the profit of 1920, on the loss of shares and securities. Therefore, the appreciat....
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....it B) showing the statement of purchases and sales of shares and securities in 1921, by the assessee-company ; 6. another statement (annexure ' I-51 ') also filed before the Tribunal showing how the figure of appreciation of Rs. 9,76,708-6-7 was arrived at as on 31st December, 1921, and giving the figures of profit and loss for the subsequent years ; and 7. the orders of the authorities in past years. " It is not in dispute that the firm whose business was taken over by the assessee-company was, among other things, carrying on business as bankers and as dealers in shares and securities and foreign exchange. When the assessee-company was incorporated, its primary purpose was to " acquire and take over as a going concern the business now carried on.....and all or any of the assets and liabilities of the proprietors of that business in connection therewith " as sub-clause (1) of clause III of the memorandum of association of the assessee will show. Another purpose stated is " to enter into the agreement referred to in clause 4 of the company's articles of association and to carry the same into effect with or without modification." Clause 4 of the company's articles of associa....
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.... and they were documents which were entered into at a time when no one had any idea of the questions that have now arisen in these proceedings. They clearly show that the entire business as it was being carried on by the firm was to be bodily taken over by the assessee-company and the important words are througout emphasised both in the memorandum of association, the articles of association and the agreement that the business was to be taken over " as a going concern". lt does not appear from the order of the Tribunal that the effect of these crucial documents was in any way considered when the Tribunal passed its order, nor is the effect of these documents referred to in the orders of the tax authorities. It is also, in our opinion, important that not only was the business as a going concern taken over, but also the goodwill of the firm E. D. Sassoon & Co. Then we turn to the position as it appears upon the accounts and the other documents. It is not in dispute that in the account year 1920, the firm had shown " depreciation " in shares and securities to the extent of Rs . 9,26,730. This amount is shown in the profit and loss account on the basis that it is a loss sustained on ....
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....s shown as the closing stock as on 31st December, 1921. The same is the case with the purchase of 6% bond of 1931, of the amount of Rs. 42,64,000. At least upon these figures it is clear beyond doubt that the company continued to do the same business which the firm was doing, namely, of purchasing and selling securities. As regards the shares, the figures mentioned in column 1 of the statement (exhibit B) are the figures of the shares taken over from the firm. To those figures were added the number of shares purchased in the market the value of which is shown in column 2. Some of these shares were sold in the account year 1921, to the B.T.C. Ltd. The others were sold in the market and the balance is shown as the closing stock. It does appear, however, as was urged by Mr. Joshi, that most of the shares were in the year 1922 transferred to one of the two accounts. They were either sold to the B.T.C. Ltd. in the year 1922, or were transferred to what has been called " the qualification share account ". Mr. Joshi has, however, urged that even if this statement is taken into account, the purchases of shares were not with a view to doing business but were merely purchased for transfer....
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....ing intention to do so when it took over the business of the firm E.D. Sassoon & Co., nor has the Tribunal said that the transfer of the shares and securities to the Bombay Trust Corporation Ltd. in 1922, supported the conclusion that in the first year of assessment the assessee did not hold the shares and securities as its stock-in-trade, though that seems to be the suggestion. We are unable to see how the subsequent transfer of the shares and securities to the Bombay Trust Corporation Ltd. in 1922, can have anything to do with the intention of the assessee-company when they took over the business of the firm E. D. Sassoon & Co. in January, 1921. The question of the transfer of the shares and securities to the Bombay Trust Corporation Ltd. being put out of consideration, it is clear upon the other circumstances that the assessee-company continued to do the business and the same business that the firm did, even after the taking over in December, 1920/January, 1921. The whole trading of the assessee-company after its formation shows that it was doing business in shares and securities. Its issued and subscribed capital as shown in the balance-sheet for the year ending 31st Decembe....
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....ly shows that the Income-tax Officer cannot be too careful in making statements of this kind. Both in the years 1920 and 1921, the assessee-company was taxed on the profits of shares and securities as will appear from the assessment order for the assessment years 1921-22 and 1922-23, dated 10th January, 1923. The provisional assessment was confirmed and the final tax for 1921-22, levied was Rs. 1,733-13-0. Similarly the tax due for 1922-23, was shown for the same amount at Rs. 1,733-13-0. The tax for the two years thus amounted to Rs. 3,467-10-0 and the company on its part debited the amount in its profit and loss account for the year ending 31st December, 1922, (annexure " I-15 " ) to " super-tax account ". All these facts and circumstances, in our opinion, show beyond any doubt that the company was trading in shares and securities in the year 1921, immediately after it took over from the firm E. D. Sassoon & Co. In fact the company was incorporated with that object and that object was its principal object as will appear from the memorandum of association and the articles of association. It took over large quantities of shares and securities from the firm and was earning in ....
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....rned, that case is wholly distinguishable. The Supreme Court, however, accepted the principle in the case of Ahmuty & Co. The exemption granted by section 25(3) is in the following words: " Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918 (VII f 1918), is discontinued, then, unless there has been succession by virtue of which the provisions of sub-section (4) have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assesssee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period ........" In order, therefore, to be entitled to the exemption under sub-section (3), four requirements have to be fulfilled: (1) that there should be a business carried on on which tax was charged under the provisions of the Indian Income-tax Act, 1918; (2) that the business should be discontinued in the year of account under the Act of 1922. Undoubtedly this suggests that it must ....
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....legislature has made no such express reservation and there is no warrant for reading into sub-section (3) such a restricted meaning. " A further contention was raised before the Supreme Court in Chugandas' case on the basis of section 26(2) which imposes liability upon a successor to a business to pay tax on behalf of his predecessor. The Supreme Court held that this provision did not affect the operation of section 25(3), as interpreted by them. The reason for the exemption granted by section 25(3) was explained by the Supreme Court in a recent decision in O. RM. M. SP. SV. Firm v. Commissioner of Income-tax. Under the Income-tax Act of 1918, the mode of assessment was for the assessment to take place in each year of account. There used to be first of all a provisional assessment and after the scrutiny by the department and acceptance of the returns or after settling the items a final assessment used to be made, but under the Act of 1922, the notion of the previous year to the assessment year was introduced and, while the accounting year is always the previous year to the assessment year, the assessment year is the succeeding year in which the income profits or gains are bro....
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....department that since this claim of the assessee was held correct in the year 1921, the income of the assessee was first of all not subject to double taxation in the assessment year 1922-23 for the account year ending 1921. Therefore the very basis of the exemption under section 25(3) was taken away. If the basis were as explained by the Supreme Court that the amount in the first year of its business should be liable to double taxation, then it was urged on behalf of the department that the income of the assessee in the first year of its existence had not been subjected to double taxation and, therefore when it discontinued its business the assessee was not entitled to claim exemption under section 25(3). The other contention also advanced in this connection was that the representation which the assessee made to the tax authorities at that time resulted in a definite benefit to the assessee and therefore the assessee could not now turn round and say that the amount of Rs. 9,76,708-6-7 was really a business profit. The assessee in other words must be held bound by its representation whereby it had gained an advantage for itself. The basis of this argument is to be found in annexu....
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.... has been stated is " these securities are being taken over by the new company B.T.C. Ltd., Bombay ". As we have shown, in the next year a large part of the shares and securities were undoubtedly transferred to the B.T.C. Ltd., but the representation is only as regards securities and not as regards shares. We cannot, however, find that the representation has affected the decision of the Income-tax Officer. Quite apart from this, it is now settled by a decision of the Supreme Court in Commissioner of Income-tax v. V.MR. P. Firm, Muar that the doctrine of "approbate and reprobate ", which is a species of estoppel, only applies to the conduct of parties and cannot bring to tax and income which cannot otherwise be taxed under the law. At page 74 the Supreme Court observed : " The contention is that the assessees having opted to accept the scheme, derived benefit thereunder, and agreed to have their discharged debts excluded from the assets side in the balance-sheet subject to the condition that subsequent recoveries by them would be taxable income, they are now precluded, on the principle of "approbate and reprobate", from pleading that the income they derived subsequently by rea....
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....e to excess profits tax in the United Kingdom shall be taxed as income of the previous year during which any repayments were made. The assessee in that case received a refund for the chargeable accounting periods which ended on 31st of August, 1941, 1942, 1943 and 1944 and on the 31st of March, 1946, and at that stage contended that it had in fact no profits assessable in the United Kingdom and that therefore the provisos to section 10(1) and section 11(11) would not apply. What was argued in that case was a point of construction of the proviso to section 10(1) and not a question such as has been raised in the present case as to any estoppel on a question of fact. The Supreme Court held in that case that the proviso to section 10(1) and section 11(11) cannot be so construed that an assessee who got the benefit of refund of excess profits tax without incurring the obligation of making the deposit should also have the benefit of having the refund distributed in the relevant accounting years and not having to pay the tax on the whole of that amount in the previous year to the year in which the refund was made. We do not think, therefore, that the principle of the decision in the Army ....
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..... 1, contrary to the findings of the Tribunal, that the assessee-company was entitled to claim the exemption under section 25(3) of the Act. The question No. 1 must be answer in the affirmative. Then we turn to the other questions involved in this reference each represented by a separate question framed. The question No. 2 is as follows : " Whether, on the facts and in the circumstances of the case, the loss suffered on the sale of property in Shanghai was allowable as a revenue deduction out of profits of the year ? " This question as also the questions Nos. 3, 4 and 5 are really concerned with individual items claimed as deductions against the profits of the year of account. Since we have held upon the first question that the assessee would be entitled to exemption under section 25(3), in regard to the whole of its income, these questions really do not arise for determination, but since each one of these questions has been framed and the matter may not rest with this court, it seems to us that it would not be proper to deal with the reference partially in the present circumstances. We would, therefore, indicate our answers upon these questions also, especially since coun....
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....tly given. Quite apart from the circumstances referred to by the Tribunal, the fact remains that the business of the assessee, as its memorandum and articles of association show, was that of carrying on managing agency of various mills, financing, commission agency, dealing in shares and securities and dealings on the stock-exchange. Even having regard to the fact that the business was a very large business and spread over the world, we cannot conceive of an amount of over Rs. 1,52,00,000 being invested in immovable property for the purpose of business. In the past, the assessee never carried on any business in immovable property or any dealing in relation to immovable property and, obviously therefore, if it suddenly purchased immovable properties in a big, city like Shanghai, it could only be for the purposes of having an office and accommodation for its business and not with a view to make any income from profits out of the purchase or sale of the land and buildings. There is no proof that the company ever dealt in the buying and selling of immovable properties or in promoting housing schemes as was suggested by Mr. Kolah. No doubt, the amount invested was a large amount but it ....
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....rade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions, several factors are treated as relevant: (1) Was the purchase a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. (2) What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold ? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. (3) Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby make it more readily resaleable ? (4) What were the incidents associated with the purchase and resale ? (5) Were they similar to the operations usually associated with trade or business ? (6) Are the transactions of purchase and sale repe....
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...., 1948.) The company had during the years in which it was doing business started a fund called the E. D. Sassoon Co. Ltd. superannuation fund, which had come into force from the 30th November, 1944. By the rules framed by the company, the fund was vested in trustees who were to be appointed by the board of the company from time to time. The scheme envisaged that in respect of every eligible worker a policy of insurance was to be taken out with the Prudential Assurance Co. Ltd. or other insurance company as the board may decide. The company was to pay premia on the policy amount equivalent to one month's salary of each employee " current at the date of retirement for every one year of his total uninterrupted service with the company if such employee retired from service at the maturity of the policy or policies". The idea was that, on retirement, the employee was to get the benefit of that policy amount for his subsistence after retirement. The policies were, therefore, endowment policies payable at the age of 55 or at the expiration of ten years whichever was later. Now, it is clear that the amount of these policies would not, in given cases, give to the workers the same benefit wh....
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....ontinuing from day to day but only arose when the events contemplated in rule 29 transpired. In fact, the accounts of the company show they very small amounts were from time to time paid by the company in the case of particular workers. This large amount had to be paid in the year of account because of the extraordinary circumstance that the company went into liquidation in the account year, with the result that a large number of employees became suddenly affected by those circumstances which are contemplated in rules 29 and 30. On a plain reading of the rules, one thing is clear that the liability only arose in the year of account because the liquidation gave rise to a large number of claims of employees for the additional amounts guaranteed by the company under rule 30. A mere perusal of the rules, therefore, would show that the conclusion reached by the Tribunal was incorrect. The error is clearly one of law in so far as the rules have not been correctly read and applied. In fact, in the finding of the Tribunal there is no reference whatever to the rules. The further argument that the assessee keeps its accounts on a mercantile basis and, therefore, the liability must be deemed ....
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....r of the business in that case and in regard to such a case, specific provision is made in section 25FF that, " ...every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched " (the underlining is ours). This liability, therefore, under section 25FF was by a fiction of the law approximated with the liability to pay compensation. Now, it is well known that the liability to pay retrenchment compensation only arises upon the severance of the relationship of master and servant, that is to say, that it arise after the business relations between the employer and the employee cease. That is not the case here, for the liability is undertaken by rule 30 to make good the amount even during the period of the service of the employee. The Supreme Court itself made this clear at page 647 by observing : " But until there is a transfer of the undertaking resulting in determination of employment, the workmen do not become entitled to retrenchment compensation. So long as the ownership of the busin....
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.... the company in such manner and in such a way from time to time for the benefit of all or any of the members of the fund, or for the benefit of the wife or widow or the children or any of them are relatives or dependants of the member whose interest lapses or is forfeited, or any of them as the company in their absolute discretion think fit and determine. " At the end of the account year 1947, the amounts standing to the credit of the provident fund lapse and forfeiture account is shown in the balance-sheet of the company as on 31st December, 1947, at Rs. 2,87,524-3-6. In the next year the amount was as mentioned in the reference. On 5th August, 1948, the attorneys on behalf of the employees of the company served a notice upon the company reminding them of the Provisions of the Provident Fund Rules and pointing out that under rule 17, the amount standing to the credit of the lapse and forfeiture account " shall be used and applied by the company in such manner and in such a way from time to time for the benefit of all or any of the members of the fund..." It was pursuant to this demand on behalf of the employees of that company that the amount was paid by the company on the 20th....
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....t assessment years. As and when the company did not pay any protion of its contributions to its employees who might have left service, such portion was transferred from the unrecognised provident fund account to the credit of ' provident fund lapse and forfeiture account. ' Any actual payments subsequently made to employees from his account were also allowed as a deduction against profits of the years in which the payments were actually made. From records I find that the unrecognised provident fund account had ceased to exist since a number of years. The Income-tax Officer found that this amount was paid by the company to the official trustee in the year 1951 by a court order passed in the year 1952, that is, the fund was handed over to the official trustee immediately a suit was filed by the employees who were members of the provident fund, though the court order was passed subsequently in the year 1952. The Income-tax Officer, therefore, rightly came to the conclusion that neither did the liability to pay tax arise in the year under appeal nor was the payment made in the year under appeal." Now it is not exactly correct to say that the liability to pay tax did not arise in the....
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....section 10(1) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom--whether the expenditure is actually incurred or the liability in respect thereof has accrued, even though it may have to be discharged at some future date. That is precisely the case here. The accounts show the liability of the company for the entire amount of the lapse and forfeiture account of the privident fund and, as and when actual payments were made, the working out of that liability was shown in the accounts. The practice followed, therefore, also was to allow such payments as expenditure and we can see no reason, therefore, why simply because in the year of account the expenditure was incurred under an order of the court and the expenditure was large, it should be treated on a different footing. This amount, in our opinion, ought to have been allowed as a legitimate item of expenditure. Accordingly we answer question No. 4 in the affirmative. The fifth and last question relates to the claim of the assessee to set off an amount of R....
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.... died in 1919 and the other in 1920 whereupon the underwriting business of the assessee ceased. The company claimed that the underwriting business was a business separate from their other activities and that it should be regarded as a separate business in computing their liability. Mr. Justice Rowlatt decided the question upon a principle which he stated at page 89 and which we find quoted in most of the subsequent cases: " That method of book-keeping does not seem to me to throw any light upon this matter at all. I think the real question is, was there any inter-connection, any interlacing, any interdependence, any unity at all embracing those two businesses; and I should have thought, if it was a question for me, that there was none. " The Income-tax Officer relied upon the earlier passage in which the learned judge merely observed that the company can carry on two businesses, although it may, for the purposes of convenience, if it wishes, amalgamate the proceeds before paying the shareholders. Scale's case was decided upon its own facts and so far as the facts are concerned can have no similarity with the present case. In that case, though for the purpose of their final....
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....important, though not a conclusive, test in determining the question whether one of the two businesses conducted by the assessee could be stopped without affecting the texture or framework of the other. In a decision of the Supreme Court given last year in Commissioner of Income-tax v. Prithvi Insurance Co. Ltd. the question was whether the life insurance business and the general insurance business carried on by an assessee was one and the same business and referring to the important test laid down in Scales case the Supreme Court observed at page 637 : " We are unable to agree with counsel for the Commissioner that the test, whether one of the businesses can be closed without affecting the conduct of the other businesses, is a decisive test in determining whether the two constitute the same business within the meaning of section 24(2). If one business cannot conveniently be carried on after the closure of the other, there would be a stong indication that the two businesses constitute ' the same business ', but no decisive inference may be drawn from the fact that after the closure of one business another may conveniently be carried on. ...... We are unable to agree with t....
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.... down in the Scale's case , observed : " These principles have to be applied to the facts, before a legal inference can be drawn that a particular business is composed of separate businesses and is not the same. No doubt, findings of facts are involved, because a variety of matters bearing on the unity of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the inter-relation of the businesses, the employment of same capital, the maintenance of common books of account, employment of same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of the other and so forth. When, however, the true facts have been determined, the ultimate conclusion is a legal inference from proved facts, and it is one of mixed law and fact, on which depends the application of section 24(2) of the Act. This court in Manilal Dahyabhai's case had also observed with reference to the same point : " Normally where the assessee carries on two different lines of business, it is a question of fact whether they constitute two separate and distinct busin....
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....sessee from the same business, profession or vocation for that year... " The emphasis of counsel for the department has been on the words " same business". The words were subsequently dropped at the time of the amendment. Counsel urged, therefore, that at the relevant time the criterion was that it must be " the same business ", and the decisions to which we have adverted would not be attracted. Now, undoubtedly, the words " same business " did occur in sub-section (2) of section 24 for the relevant year with which we are concerned, but we do not think that because there was the word " same " specifically used, the position in law would be at all different, for the question even after the amendment is still the same, whether the assessee is carrying on one and the same business or two or more businesses. The criteria, therefore, which the authorities have now laid down would be equally applicable under the unamended section. Indeed the decision in Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. specifically dealt with the unamended section and at page 309 the Supreme Court held: " The crucial words, therefore, are 'profits and gains of the assessee from the sam....