COMMISSIONER OF INCOME TAX Vs. V MANDIRAM PILLAI

JUDGEMENT

(1.) THE following question has been referred to this court at the instance of the CIT under s. 256(1) of the I.T. Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Tribunal : was right in holding that the sum of Rs. 28, 000 representing the loss stated to have been incurred in repatriating the funds from Ceylon is a business loss and should be allowed as a deduction in the assessment ?" *THE assessee is a partner in a firm in Ceylon. He has a house property in India and also in Ceylon. He has also income by way of salary earned abroad. From an extract of the period of stay in India filed by the representative of the assessee before the ITO, it was seen that during the seven years preceding the previous year for the assessment year 1972-73, the assessee was in India for 890 days, and under s. 6(6)(a) if the assessee's stay in India during the above-said period was 730 days or more, his status was that of an ordinarily resident person. THE ITO, therefore, took the status of the assessee as an ordinary resident.THE assessee returned the Indian property income at a minus figure of Rs. 3, 506. In other words, there was a loss under the head "property". His foreign property income was Rs. 750, foreign salary income was Rs. 3, 432 and his income from the partnership known as Messrs. S. M. R. & Co., colombo, was Rs. 91, 082. THE total foreign income came to Rs. 95, 264 and converting it at the official rate of exchange, the amount in Indian rupees came to Rs. 1, 25, 367. After adjusting the loss in property in India, the net income was taken at Rs. 1, 21, 861 and it was taxed accordingly.THE assessee appealed to the AAC contending that he had remitted Rs. 2, 87, 536 between December 31, 1971, and March 27, 1972, that these remittances represented share of profits earned in Ceylon from Messrs. S. M. R. & Co., Colombo, and that out of the above remittances, only a sum of Rs. 2, 38, 203 was actually received in India.

(2.) THE result was that there was a loss of Rs. 49, 333 and the assessee claimed this sum of Rs. 49, 333 as a deduction against the Ceylon income of Rs. 95, 264 mentioned above. THE sum of Rs. 95, 264 is in terms of Ceylon rupees. THE AAC pointed out that there was no evidence whatsoever for the alleged loss of Rs. 49, 333. He further pointed out that the claim was made with reference to the remittances of profits earned in prior years and that even if there was any loss in remittances, it partook of a capital loss which could not be deducted against the income of the current year. He, therefore, dismissed the appeal.THE assessee appealed to the Tribunal. THE Tribunal noticed that the past profits had been taxed in the relevant assessment years on accrual basis and that the current profit also was taxed on the same basis. THE claim of the assessee before the Tribunal was that when a smaller sums was received than what was taxed in the earlier years, then there would be a loss which should be allowed as deduction. In the opinion of the Tribunal, since the income derived from the foreign firm was from business, the character of the income in the hands of the recipient was also under the head "Business" and that the real income theory would be applicable to the assessee.

(3.) THE primary enquiry should be whether the loss which the assessee claims to have sustained arose as an incident to the carrying on of the business. If this question is determined in favour of the assessee in the sense that the loss was incidental to the business, then the further question would arise whether the loss was on capital or revenue account. In the case before the Supreme Court, the matter had to be considered only from the standpoint of the second aspect whether the loss arose on capital or revenue account. In the present case the loss was not incidental to the business, because the asscssee did not carry on any business in India which had any connection with the foreign business. THE remittance had nothing to do with any business. THE assessee 'was only in the position of a person who as owner of monies thought it fit to remit funds to India. THE loss was personal. THE learned counsel for the assessee put forward the proposition that wherever there is a loss on remittances from a person who earned monies abroad, then the loss must be allowed as a deduction. We are unable to accept this wide proposition. As pointed out earlier, the loss must be incidental to the business before it is considered for the purpose of assessment. If it has nothing to do with a business, then it cannot feature in the computation of income. When once the decision is reached that the loss was incidental to the business, then the further circumstance of the loss being on capital or revenue account would arise for consideration. As, in the present case, the loss has arisen only because of the assessee's remitting the funds for his own purposes, the loss had to be taken only as personal loss and not as business loss.