1965-VIL-202-ALH-DT

Equivalent Citation: [1966] 61 ITR 214

ALLAHABAD HIGH COURT

Date: 08.07.1965

MAKHANLAL RAM SWARUP

Vs

COMMISSIONER OF INCOME-TAX, LUCKNOW

BENCH

Judge(s)  : M. C. DESAI., S. C. MANCHANDA.

JUDGMENT

The judgment of the court was delivered by

MANCHANDA J.---This is a case stated under section 66(1) of the Income-tax Act, 1922, by the Income-tax Appellate Tribunal. The question referred is:

" Whether the Tribunal was right in law in holding that an equitable apportionment of the expenses could be made by virtue of the provisions of Explanation 1 to section 24(1) of the Income-tax Act ? "

The material facts are these. The assessee is an individual. During the relevant year of assessment, which is the assessment year 1956-57, the previous year being the year ended Bhadon Sudi 2, Sambat 2012, he carried on business in speculation and money-lending at Agra in the name of Makhan Lal Ram Swarup, hereinafter referred to as head office. He also carried on another business under the name and style of Messrs. S. D. Gupta & Co., hereinafter referred to as the branch, in which the business was confined to speculation business alone. The assessee kept only one account for expenses incurred in the head office and branch business carried on in the aforesaid names.

Accounts of the branch showed a net speculation profit of Rs. 96,612, where as there was a gross speculation loss of Rs. 1,02,451 claimed in respect of the head office. An expense of Rs. 24,527 was claimed by way of expenses. This the Income-tax Officer allowed against the income from money-lending at the head office.

In the original assessment made on 18th September, 1956, under section 23(3), the Income-tax Officer had set off the speculation loss against the income from other business and had determined the net income at Rs. 22,841. Subsequently, the Income-tax Officer took action under section 34(1)(b) on the ground that the assessee had been under-assessed because the speculation loss had been allowed to be set off against profit from other business. The assessee did not challenge the section 34(1)(b) proceedings on any ground. He did not claim that the set-off of speculation loss in the original assessment against income from other business under the provisions of section 10 was correct. He would appear to have accepted the position that there was an under-assessment and the speculation loss could not be set off against the income from other business. The Income-tax Officer therefore in the reassessment proceedings treated speculation as a separate business and set off the speculation loss at the head office of Rs. 1,02,451 against the net speculation profit in the branch which was computed at Rs. 96,612. In setting off the loss of Rs. 1,02,451, which was the gross loss and not the net loss at the head office he added, on an estimate basis, expenses of Rs. 3,000 out of the total expenses of Rs. 24,527 claimed by the assessee. The result was that the gross loss in the head office of Rs. 1,02,451 increased by Rs. 3,000. The net loss, therefore, at the head office from speculation was determined at Rs. 1,02,451 and setting this off against the profit of Rs. 96,612, the net loss of Rs. 8,839 was directed to be carried forward and set off against future speculation profits.

The only objection taken by the assessee was to the addition of Rs. 3,000 as estimated expenses in respect of the speculation business at the head office. The contention was that where an assessee is carrying on a single business, and a part of the profits of the business is not liable to tax, the deduction of expenses of the business should be allowed in its entirety although a part of the expenses may have been incurred for earning non-taxable profits. This contention was repelled by the Income-tax Officer, who considered that the assessee was in fact carrying on two businesses, one in money-lending and the other in speculation and, as none of these two businesses were exempt from taxation, the expenses would necessarily have to be reasonably apportioned. The Appellate Assistant Commissioner deleted the addition of Rs. 3,000 on the ground that section 10(2)(xv), which is the only section, according to him, under which a claim for business expense could be deleted or curtailed, did not envisage separate expense for each different business.

The Income-tax Appellate Tribunal, on an appeal having been taken by the department, reversed the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer relying mainly on the explanation to section 24(1) of the Act. It was of the view that the speculation business must be regarded as a distinct and separate business from that of money-lending and if the expenses had not been apportioned by the assessee the Income-tax Officer would be justified in making an equitable apportionment of the expenditure. Against that order the present reference has been made under section 66(1) and the question set out hereinabove has been referred.

Mr. Kirti relying upon the decision of this court of which one of us was a member in Jagannath Mahadeo Prasad v. Commissioner of Income-tax contended that the Tribunal was in error in relying upon the explanation to section 24(1) of the Act and if the explanation to section 24(1) has no application then according to him the provisions of section 10(2) do not permit the splitting up or apportionment of the expenses of various businesses that may be carried on by the assessee.

There is no force in this contention. All that was held in that case was that for the purpose of computing the profits and gains from business under section 10, proviso 1 to section 24(1) had no application ; that the first proviso to section 24(1) does not govern the computation of profits and gains for the purpose of section 10 and that the proviso should be read only when the provisions of section 24(1) are applied. It was further pointed out that sections 10 and 24(1) play their part in the assessment of total income but they operate at different stages in the process of assessment. It was there held that under the provisions of section 10 speculation loss which was loss from business could be set off against the profit from other business.

No such question, as arose in the case of Jagannath Mahadeo Prasad, arises in this reference. As already observed, the petitioner would appear to have accepted that the speculation loss cannot be set off against his other money-lending business income under section 10. Therefore, when he himself concedes that section 24(1) is applicable, and the two businesses, i.e., money-lending and speculation, are two separate businesses for the purposes of the Act, it hardly lies in his mouth to say that the profit and loss of each such business should be computed without taking into consideration the individual expenses thereof. This is not to say that the assessee is debarred from raising any such plea or from putting forward such a claim merely because he had accepted that the proviso to section 24(1) applies to his case. It is well settled that there is no estoppel in income-tax proceedings nor is the principle of res judicata applicable. Therefore, the question that will still remain to be considered is, whether the Income-tax Officer was debarred by an express prohibition contained in section 10 or any other provision of the Act, from apportioning the expenses between the two sets of businesses in order to determine the true loss which had to be carried forward ?

Ordinary commercial practice and the principles of accountancy require that a person, who has several businesses, particularly if they are being carried on at different places and not under one roof, should be able to tell at a glance which business is yielding profit and which is running at a loss. Each branch ordinarily maintains its own profit and loss account which is ultimately taken to and incorporated in the head office books of account. In the present case also the assessee had himself returned the net and not the gross profit in speculation from his branch business. The net profit therefrom could only have been determined if the expenses for earning that income had been set off and deducted from the gross profit at the branch. When the assessee had returned the net profit in speculation from the branch business, there was no justification whatever for returning only the gross and not the net loss in speculation at the head office. Unless the expenses have been set off against the gross profit, or added to the gross loss, it is not possible to determine the true profit or loss and that is precisely what the Income-tax Act seeks to compute. The net figure of profit and loss can never be computed unless the expenses incurred therefor are taken into consideration.

Section 6 of the Act gives the various heads of income chargeable to income-tax. Head No. 4 thereunder is:

" (6) (iv) Profits and gains of business, profession or vocation."

How income under this particular head is to be computed is given in section 10 of the Act. The relevant portion of this runs :

" 10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.

(2). Such profits or gains shall be computed after making the following allowances, namely: ...

(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation."

In sub-clause (1) of section 10 the words used are " any business". When determining the profits of " any business " the expenditure wholly laid out for that business has to be allowed. " Any " does not necessarily mean one business. A person may have several businesses and though they will all be assessable under the head " business, profession or vocation" nevertheless the expense for each such business will have to be separately considered particularly if the loss or profit of each such business has to be separately treated for any purpose of this Act, even though the tax may ultimately be chargeable only on the totality of the profit and loss of the separate business. Under section 10 of the Act, the words " any business " cannot be restricted to one business and must be taken to deal with each and every business carried on by the assessee. There can, therefore, be no warrant for saying that section 10(2)(xv) places an embargo on the Income-tax Officer's powers to determine the true profit or loss of each business separately. Ordinarily, the assessee would himself, for his own benefit and for the more efficient carrying on of his business, take into account the expenses incurred for each business separately, but if the assessee does not for any reason do so, the Income-tax Officer will have the right to apportion such expenses on a fair and reasonable basis. If the apportionment is unreasonable the petitioner can have the matter set right on appeal. We are however not called upon to consider that question in the present case as it was frankly conceded, and rightly so before the Income-tax Appellate Tribunal, that the apportionment, if it could have been made, was a reasonable one.

In this view of the matter, the question is answered in the affirmative by saying that the Income-tax Officer could have apportioned under section 10 of the Act the expenses between the money-lending and speculation business.

The reference is answered accordingly. In the circumstances of the case, however, the parties are left to bear their own costs of this reference. Counsel's fee is assessed at Rs. 200.

Question answered in the affirmative

 

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