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Petitioner: ROYAL CALCUTTA TURF CLUB VS Respondent: COMMISSIONER OF INCOME-TAX, WEST JUDGMENT
Court Name: Calcutta High Court Judge(s): Sabyasachi Mukharji, Subas Chandra Sen Title:ROYAL CALCUTTA TURF CLUB vs COMMISSIONER OF INCOME-TAX, WEST
JUDGMENT
Reported As: 1983 PTD 418 Result: Order accordingly Judgment JUDGMENT SABYASACHI MUKHARJI, J.-This reference under section 256 (1) of the Income-tax Act, 1961 poses before us the following question:- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that by virtue of the provisions of section 10(27) of the Income-tax Act, 1961 the losses on account of breeding of horses and pigs amounting to Rs. 74,060 and Rs. 19,918, respectively are not admissible deductions in computing the total income." 2. The reference relates to the assessment year 1965.66. The asses M/s. Royal Calcutta Turf Club claimed a loss of Rs. 74,065 in Broodmares Account and Rs. 19,918 in Pig Account. The Income-tax Officer, however, did not allow these losses because according to him the incomes from these two heads were exempt under section 10 (27) of the Income-tax Act, 1961. It may be instructive to refer to the fact how the Income tax Officer has dealt with this aspect in the assessment order. In the assessm ent year dealing with the computation of business he has added certain amount and one of the additions made by him was as follows :- "Loss claimed in Broodmares Account disallowed in view of section 10(27) of the Act 1961 as instituted by Act 5 of I964...Rs. 74,065." and the other head was as follows:-- "Loss claimed in Pig A/C. Disallowed in view of section 10 (27) of the Act as instituted by Act 5 of the 1964---.Rs. 19,918." He thus arrived at the total income of Rs. 8,96,235 after taking into consideration of the business income of Rs. 5,79,577 and other income.
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3. The assessee being aggrieved went up in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner after examining all the facts and circumstances of the case came to the conclusion that since the income derived from the business of livestock breeding poultry and dairy farm was exempt, it was quite natural that the loss should not also to be allowed to be set off against the other income. He, therefore, upheld the order of the Income-tax Officer. 4. There was a further appal before the Tribunal. The Tribunal examined the whole position and referred to certain decisions. The Tribunal also referred to several rival contentions and observed, inter alia, as "We have considered the rival submissions and are of the opinion, that the arguments of the Departmental Representative are well-founded. We do not find ourselves in agreement with the arguments advanced by the learned counsel of the assessee. There is no doubt that the assessee has got a right to have the loss allowed but this has got to be within the legally imposed limits under the Income-tax Act. The Income-tax Act nowhere provides that the loss from breeding of livestock will be allowed in the computation of income under other heads. There is also no doubt that the statute or any section thereof will be constructed in such a way that in case of doubt the benefit will go to the tax-payer. Sections 70 to 80 of the Income-tax Act, 1961 also do not provide that all the losses will be allowed whatever may be the circumstances. The language of section 10(2) is very year and there is no room for any ambiguity whatsoever. Further, the authorities cited by the learned Representative of the assessee ate not applicable to the facts and circumstances of the case. The most appropriate authority is of Patna High Court in Daimia Jain & Co. Ltd. v. Commissioner of Income tax (1967) 65 I T R 408. The facts of this case are that a private limited Company borrowed certain sums of money fur the construction of a house which was begun in April, 1950, and completed on April, 1952. The company paid interest of Rs. 79,265 on capital borrowed by it. The rent received was only Rs. 12,000 after deducting the statutory repairs and interest. There was a loss as the construction of the building was begun and completed between January 1, 1946 and March 31, 1956, the income, therefrom, was not chargeable for a period of two years from the date of completion under section 4(3)(xii) of the Income-tax Act, 1922, The assessee set of the loss against the other income. On these facts it has been held that:- "As the income from the building in question should not be included in the total income of the assessee either for purposes of taxing or even for the purpose of determining the rate, the question (If computation of determination of income or loss from the property in question under section 9 of Income-tax Act, 1922 did not arise and the loss if any, in respect of the property cannot be set off under any other head chargeable to income-tax. If the above principle is applied to the facts of, the case then it will become crystal clear that the two itmes of losses on accounting of breeding of horses and pigs are not admissible deductions." 5. Out of the aforesaid order of the said Tribunal, the question as indicated above, has been referred to this Court. The question before us is whether under section 10(27) read with section 70 of the Income-tax Act, 1961 was the assessee entitled to set off the loses on the two heads namely, Brood, mares account and the Pig account against its income of other sources under the head 'business'? In order to appreciate this question it would be relevant to refer to the provisions of section 10(27) of the Income-tax Act, 1961 as it stood in the relevant assessment year. Section 10 stipulates that in computing the total income of the previous year of any person any income falling within different categories mentioned in different clauses of section 10 should not be included and section 27 provided for non-inclusion of "any income derived from a business of livestock breeding or poultry or dairy farm". Section 70 upon which reliance was placed on behalf of the assessee and upon which set off was being claimed in the instant case provides as follow :-
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"70. Set off of loss from one source against income from another source the same head of income.- (1) Save as otherwise provided it this Act, where the not result for any assessment year in respect of any source falling under any head of income other than 'Capital gains' is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. (2) (i) Where the result of the computation made for any assessment year under sections 48 to 55 in respect to any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessm ent year in respect of any other capital asset. (ii) Where the result of the computation made for any assessment year under sections 43 to 55 in respect of any capital asset other then a short --term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset." 6. In this connection it may not be wholly inappropriate to refer to the provisions of section 24 of the Act of 1922 which provided for set-off of loss ill computing the aggregate income. Subsection (I) of section 24 of 1922 Act stipulates that where an assessee sustained a loss of profits or gains in any year under any of the heads mentioned in section 6, he should not be entitled to have the amount of loss set off against his income, profits or gains under any other head in that year. We are not concerned with the several provisions under the head. Section 71 of the 1961 Act provides for set off of loss from one head against income of another head section 72 of 1961 Act provides for carry for- -ward and set off of business losses on certain conditions. In this case it is im--portant to bear in mind that set off is being claimed under section 70 of 1961 Act which permits set-off of any income falling under any head of income other than the capital gain loss of the assessee against his income from the same head. We have noticed that in the instant case the exclusion has been Conceded in computing the business income or the source of income from the bead of business and in computing that business income the loss from one par--ticular source that is, Brood mares account and the Pig account had been excluded contrary to the submission of the assessee. The assessee wanted these losses to _`e set-off. The revenue contends that as the sources of the income are not to be included in view of the provisions of subsection (27) of section 10 of 1961 Act the loss suffered from this source could also not merit the exclusion. Under the Income-tax Act, there are certain incomes which do not enter into the computation of the total income at all. In this connection we have to bear in mind the scheme of the charging section which provides that the incomes shall be charged and section 4 of the Act provides that the Central Act enacts that the incomes shall be charged for the assessment year in accordance with and subject to the provisions of 1961 .Act in respect of the total income of the previous year or years or whatever the case may be. The scheme of the total income has been explained by section 5 of the Act which provides that subject to the provisions of the Act, the total income of the previous year of a person who is resident in Calcutta includes all incomes from whatever source it derives. In computing the total income certain incomes are not included under section 10 of the Act. It depends on the particular case where certain in--come in respect of which the Act is made inapplicable to the scheme of the Act and in such a case the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the legislature. In such a case we must look to the specific exclusion that has been made. The question is in this case whether section 10 (27) is a source which does not enter into the computation at all or is a source the income in respect of which is excluded in the computation as a total income, How this question will have to be viewed, has been looked into by the Supreme Court in several decisions to some of which our attention was drawn.
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We may first refer to a decision upon which reliance was placed on behalf of the revenue. Before we do so we must also notice the definition of the total income as provided in section 245 of 1961 Act which stipulates that total income means total income referred to in section 5 as computed in the manner laid down in the Act. Section 5 defines scheme of the total income as we have set out hereinbefore. 7. The first decision to which our attention was drawn is the case of Commissioner of Income-tax, Mysore-Travaucore-Cochin and Coorg v. Indo Mercantile Bank Ltd. (1959)361TR1 :AIR1959SC713). There the question was whether in an assessment to income-tax under the Travancore income-tax Act of the profits and gains of a business carried on by an assessee in the State of Travancore as well as the State of Cochin the assessee was entitled to set of the losses incurred in the State of Cochin against the profits made in the State of Travancore. There was nothing in sections 13 and 32 (1) of the Travancore Income-tax Act which distinguished between business in the State of Travancore and business in the State of Cochin. 8. According to the Supreme Court the object of the main section 24 of the Indian Income-tax Act, 1922 was to allow the set off of loss of profits or gains under one head against income, profits or gains under any other head and there was nothing in the first proviso to that section which would favour the disintegration of the head "business" and compel the application of the proviso to the same head. 9. The Supreme Court held that section 10 of the Income-tax Act, 1922 did not distinguish between business in British India and business in an Indian State or so divide business. 10. The Supreme Court on computation of business profits and gains made certain observations with which we are not concerned. 11. The Supreme Court further held that the proper function of a proviso was that it qualified the generality of the main enactment by providing an exception and taking out as it were from the main enactment, a portion which, but for the proviso, would fall within the main enactment. Ordinarily, it was foreign- to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which was foreign to the main enactment. 12. Reliance was, however, placed on certain observations of the Supreme Court at page 5 (of 1. T. R.) : (at p 716 of A. I. R) where the Supreme Court held that under section 2 (15) of the Act "total income" was defined to mean the total amount of income, profits and gains computed in the manner laid down in that Act. The 'total world income' was defined as including all income, profits and gains whether accruing or arising except income to which the Act did not apply. This decision, in our opinion does not really help us in the solution of the implementation of the problem with which we are faced. 13. Reliance was also placed on certain observations of the Supreme Court in the case of A. V. Fernandez v. State of Kerala ((1957) 1 STC561 : AIR 1957 SC 657), the Supreme Court dealt with certain provisions of the Act or certain Legislature for certain transactions in particular cases being provided to be not coming within the purview of the Sales Tax Act and if it was so provided then the transactions to respect of those sales could not come within the purview of this Act. This is well- settled proposition. The question, however, arises as to what is the effect of a particular enactment or whether the effect of a particular enact--ment in an Act is not made applicable to certain income source or whether the income arising from certain source is not included to the computation of the total income. 14. In this connection on behalf of it a assessee reliance was placed on a decision of the Supreme Court in the case of Commissioner of Income-tax Ahmedabad v. Karatnchand Premchand Ltd. ((1960) 40 I T R 106: AIR 1960 SM 1175). There the assessee which held the managing agency of a company in British India and also carried on a pharmaceutical business in the native State of
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Baroda without British India, during the relevant chargeable accounting periods, showed profit in the managing agency business but incurred losses in the pharmaceutical business in the native State. The question was whether in ascertaining the business profits of the assessee for the purpose of the Business Profits Tax Act, 1947, the losses incurred in the native State reduced the British Indian profits of the assessee. 15. It was held that the third proviso to section 5 of the Business Profits Tax Act took out of the ambit of the Act merely "income, profits or gains" of a business in an Indian State and did not exclude the business itself. The loss suffered by the assessee in the pharmaceutical business carried on in the State of Baroda had to be deducted in computing the business income of the assessee for the purpose of the business profits tax. 16. The Supreme Court further held that the expression "income, profits or gains" in the third proviso to section 5 of the Business Profits Tax Act, in its context, did not include losses. 17. It may not be inappropriate to set out section 5 of the Business Profits Tax-Act which is as follows ---5. Application of Act.-This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (i) or sub-clause (ii) of clause (b) of subsection (1) of .Section 4 of the Indian Income-tax Act, 1922 or of clause (c) of that subsection Provided that this Act shall not apply to any business the whole of the profits of which accrue or arise without the taxable territories where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in the taxable territories unless the business is controlled in India Provided further that where the profits of a part only of a business carried on by a person who is not resident in the taxable territories or not ordinarily so resident accrue or arise in the taxable territories or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise, then except where the business being the business of a p;;~---n who is resident, but not ordinarily resident in the taxable territories is controlled in India, this Act shall apply only to such part of the business, and such part shall for all the purposes of this Act be deemed to be a separate business Provided further that this Act shall not apply to any income, profits or gains of business` accruing or arising within any part of India to which this Act does not extend unless such income, profits or gains are received... In or are brought into the taxable territories in any charge--able accounting period, or are assessable under section 42 of that Act." The Supreme Court after noting the said proviso noted that on behalf of the assessee the argument was that in its true scope and effect the third proviso had merely the effect of exempting the income, profits or gains of the Baroda business except when they were received or brought into India, but the business itself was not excluded from the purview of the Act ; the business was still one to which the Act applied under the substantive part of section 5 and as the third proviso exempted income, profits or gains only, the losses of the Baroda business could be set off against the profits of the business in India. 18. After noting the rival contentions of the revenue the Supreme Court proceeded to examine the assessee's contentions. It was contended on behalf of the assessee that such a construction resulted in this anomaly that if the income, profits or gains were not brought into India, they escaped tax and yet the losses of a business which was outside India were taken into consideration in computing the profits etc. In India. 19. The Supreme Court noted the decision of Commissioner of Income---tax v. Indo-Mercantile Bank Ltd. Which we have discussed before and observed that we should read the third proviso as a whole and in the context in which it occurred, in order to find out what it meant. So read it was difficult to bold that it had the effect of excluding the Baroda business except in so far as the profits thereof were brought into the taxable territories.
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What it said in express terms was that the Act should not apply to any income profits or gains of business accruing or arising in an Indian State etc. The Supreme Court noted that the proviso did not say that the business itself was excluded from the purview of the Act. 20. The Supreme Court observed at page 116 (of I T R) ; (at p. 1151 of AIR) of the report as follows :- "Next, we have to consider what the expression `income, profits or gains' means. In the context of the third proviso, it cannot include losses because the latter part of the proviso says, `unless such income, profits or gains are received etc. Into the taxable territories'. Obviously, losses cannot be brought into the taxable territories except in an accounting sense, and the expression `income, profits or gains' in the context cannot include losses. The expression must have tit; same meaning throughout the proviso, and cannot have one meaning in the first part and a different meaning in the latter part of the provision. The appellant cannot, therefore, say that the third proviso excludes the business altogether, because it takes away from the ambit of the Act not only income, profits or gains but also losses of the business referred to therein. On behalf of the appellant it has been argued that though the language of the third proviso to section 5 of the Act is similar to that of section 14 (2) (c) of the Indian Income-tax Ace, the language of the two provisions is not identical and it is not correct to say that their effect is substantially the same. It is pointed out that the language of section 14 (2) (c) was one of exemption only in respect of any income, profits or gains accruing or arising in an Indian State, though for purposes of 'total income' the Income-tax Act applied thereto, and therefore, the normal process of aggregating profits and losses wherever they occurred could be adopted. But, says learned counsel for stir appellant, the position is otherwise under the third proviso to section 5 of the Act, because, firstly, it uses the expression `the Act shall not apply' and secondly, there is no question of exempting the profits from tax while including them for the purposes of `total income'. We agree that the complication of excluding the profits from tax while including them for determining "total income" does not arise under the third proviso to section 5 of the Act; but the argument presented is the same as we have dealt with earlier. The argument merely takes us back to the question does the third proviso to section 5 of the Act merely exempt the income, profits or gains or does it exclude the business? If it excludes the business, the appellant is right in saying that the position under the proviso is not the same as under section 14 (2) (c) of the Indian Income-tax Act. If on the contrary the proviso merely exempts the income, profits or gains of the business to which the Act otherwise applies, then the position is the sane as under section 14 (2) (c). It is perhaps repetition, but we may emphasize again that exclusion, if any, must be done with reference to business, which is the unit of taxation. The first and second provisos to section 5 do that, but the third proviso does not. Lastly, it had been contended that the construction adopted by the High Court is likely to lead to consequences which the Legislature manifestly could not have intended. This contention has been pressed in respect of two matters : (a) computation of capital under the rules in Schedule 11 of the Act in a case where the assessee-Company sustains a loss in Indian State; and (b) relief for deficiency of profits where the assessee makes profits in an Indian State but sustains a loss in India. As to the first matter, it has been fully dealt with by the High Court with reference to R. 2-A of the Rules in Schedule 11 and it has been rightly pointed out that no difficulty really arises by reason of R. 2-A. Nor are we satisfied that any real difficulty arises with regard to relief for deficiency of profits when the assessee makes profits in an Indian State but sustains a loss in India. The Act will not apply to such profits unless they are brought into India, and it they are brought into India. Section 6 will apply with regard to relief on the ground of deficiency of profits. It is unnecessary to consider here any hypothetical difficulty which may arise in the application of section 6. The appellant relies on the third proviso to section 5 of the Act in support of the contention that it excludes the Baroda business of the assessee and the losses of that business cannot be set off
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against the profits of the business in India, and the appellant can succeed only on establishing that the proviso clearly and without any ambiguity excludes the Baroda business. We agree with the High Court that if there is any ambiguity of language, the benefit of that ambiguity must be given to the assessee. However, the conclusion at which we have arrived is that on the language of the proviso as it stands, it does not exclude the Baroda business of the assessee but exempts only the income, profits or gains thereof unless they are received or deemed to be received in or brought into India." 21. It appears to us that subsection (27) of section 10 excludes by the expression "any income derived from a business of livestock breeding or poultry or dairy farming". It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. 22. Great reliance was, however, placed on behalf of the assessee on certain observations of the Supreme Court in the case of Commissioner of income tax (Central) Delhi v. Harprasad & Co. P. Ltd. ((1975) 99I T R 118 ; 1975 Tax L R 404). There during the accounting period ending April 30, 1954, relevant to the assessm ent year 1955-56, the assessee sold cc, lain shares at a loss of Rs. 22,662 which it claimed as revenue loss. Both the…
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