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Reference Case No. 15 of 1966, decided on 20th December 1967.
S. 24(1) ‑ Loss ‑ Set‑off ‑Continuation of business, necessary for claiming set‑off of loss from total income‑Functioning of Bank closed in pursuance of winding up order but income from property and interest on securities continuing to accrue Liquidation expenses incurred by defunct Bank, held, cannot be set‑off against income accruing from properly and from interest on securities.
Re : Hulashilal Ramdayal 9 I T R 635; B. C. G. A. (Punjab) Ltd. Khanewal v. Commissioner of Income‑tax, Punjab I L R 16 Lah. 306 distinguished.
Ruhul Islam, M. R. Khan and M. Hasan for Applicant.
Afzalul Hoque for Respondent.
Dates of hearing : 19th and 20th December 1967.
‑In compliance with the direction of this Court under section 66(2) of the Income‑tax Act, herein after called "the Act" the Income‑tax Appellate Tribunal, Dacca Bench has referred the following questions for our opinion:
"1. Whether on the facts and circumstances of this case, namely, that in pursuance of the winding up order passed by the High Court at Dacca the functioning of the Bank was closed and the income accruing to the Bank from whatever source is being deposited in liquidation fund, the Bank was liable to assessment under the law.
2. Whether on the facts and in circumstances of this case the assessee Bank was entitled under the law to set‑off the liquidation expenses against income from the interest on securities' and Income from property'.
3. Whether on the facts and circumstances of this case, the loss incurred by the Bank on account of liquidation should have been treated as the expenses incurred for collection of outstanding dues of a closed business' "
The assessee, the Pioneer Bank Ltd. is in liquidation by an order made by this Court on 24‑2‑1955, and the State Bank of Pakistan is the Official Liquidator. The Pioneer Bank had certain properties which were rented out. In regard to the five assessment years involved, the liquidator submitted a report showing an income of Rs. 32,522 for the assessment year 1956‑57 and for other years it showed different amounts as loss after setting off the income from properties as well as the interest earned on securities. The Income‑tax Officer, however, refused to make the assessment on the basis of the said returns. The assessee unsuccessfully appealed to the Assistant Appellate Commissioner and then to the Tribunal. Thereafter a prayer was made to the Tribunal for stating the case and making a reference to this Court. That prayer was also rejected by the Tribunal. On an application to this Court, the Tribunal was, however, directed as stated at the outset to refer certain questions and the tribunal in compliance with the said direction has referred the questions quoted above.
Mr. Ruhul Islam, learned Advocate for the Liquidator, State Bank of Pakistan, submits that although the Bank has been wound up, the property as well as the securities were being maintained by the Liquidator as a part of the banking business temporarily suspended in the interest of the Bank which is being wound up. His contention is that the respondent ought to have allowed the set‑off as claimed by the assessee on a fair reading of section 6(10) as well as section 24 of the Act.
Mr. Afzalul Hoque, learned Advocate for the respondent, claims that the assessment has been rightly made. He does not contest the proposition of law that if the bank would have in fact been carrying on its normal business, the set‑off could in law, be claimed from total income in case of loss in its banking business. But he emphasises that in this case the fact is that there is no banking business in existence.
Section 6 of the Act, which occurs in Chapter III which relates to taxable income, provides that the following heads of income shall be chargeable to Income‑tax.
"(i) Salaries
(ii) Interest on securities
(iii) Income from property
(iv) Profits and gains of business, profession or vocation
(v) Income from other sources (vi) Capital gains."
The provisions relating to interest on securities is to be found in section 8, Section 9 provides for levying taxes on property. Both these sections also provide for certain allowance to be made in computing the income on interest on securities and from properties. It is not the contention of the assesse that the allowances permissible under the Act have not been granted to the assessee. What is, however, contended by Mr. Ruhul Islam is that by reason of section 24, loss incurred by the assessee in regard to its banking business should have been allowed to be set off from the income derived under the head interest on Securities and income from property. It will be seen that neither section 8 nor section 9 provides for an allowance being granted for liquidation expenses.
Mr. Islam's contention to the effect that such allowances are to be granted by reason of the provisions of section 24 of the Act cannot be entertained, for the simple reason that sec tion 24 contemplates such a set‑off in regard to an existing business. In making the winding up order on 24‑2‑55 Akbar, J (as his Lordship then was) observed: "From the observations quoted above, it is abundantly clear that in the interests of the creditors, the depositors and the public, this Bank should not be allowed, to function any more and should be wound up immediately."
Subsection (1) of section 24 of the Act reads as follows:
"Where any assessee sustains a loss of profits or gaits in 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 gains under any other head in that year."
It will, therefore, appear that the continuation of the business is necessary to claim that the loss incurred should be set off from the total income. The order in this case is that "this bank should not be allowed to function any more and should be wound up immediately."
Mr. Islam's contention is that the tax is payable on the total income which is to be found out after taking into account gains and loss of a business.
In the case of Re : Hadashilal Ramdayal (9 I T R 635), a Division Bench of the Allahabad High Court consisting of Colliete and Rajpal, JJ. held that an assessee who had three shops was entitled to set‑off the losses claimed by him against the profits made in other two shops. In that case business itself was not closed.
In the case of B. C. G. A. (Punjab) Ltd., Khanewal v. Commissioner of Income‑tax, Punjab (I L R 18 Lah. 306) a Full Bench' of that Court held that a person carrying on different trades is entitled to set‑off, for purposes of income‑tax, for the loss incurred by him in respect of one against the profits made by him in the other, but the, condition precedent is that both the businesses should be in existence. In the case before us the Tribunal has found in its order dated 7‑1‑62 as follows:
"It is clear that the High Court has stopped the banking operation merely but the Management of the properties and securities by their very nature yield income."
This finding indicates that so far as the banking business is concerned it is at an end. The expenses incurred for earning income on securities and also the property from which rent had been earned would be deducted as permissible under the provi sions of sections 8 and 9, but a set‑off cannot be claimed for the non‑existent business:
For the reasons stated above, we answer the question (1) in the affirmative and questions Nos. 2 and 3 in the negative.
There will be no order as to costs.
‑I agree.
S. Q. Questions answered.
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