MEHTA J R Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee who had purchased more than 51per cent shares of Chopda Electric Supply Co. Ltd., became its managing director w.e.f. March 1, 1948, and the appointment was to continue for a period of 20 years. The assessee was to get a fixed remuneration of Rs. 300 per month as also a commission of 10per cent on the net profits of the company. We are concerned in this reference with the asst. year 1960 61. Chopda Electric Supply Co. Ltd. was carrying on the business of generating and distributing electricity under a licence issued by the State Govt. The company was not making profits and admittedly the assessee neither drew the monthly allowance of Rs. 300 nor did he receive any amount by way of commission at any time.

(2.) IN 1952, the company borrowed monies from the Bank of India and the assessee stood surety for the repayment of the loan advanced by the bank to the company. The company had also executed a promissory note in favour of the assessee and the assessee had assigned the said promissory note in favour of the bank.

(3.) THE assessee then appealed to the Tribunal before whom the deduction was claimed primarily under S. 10(2)(xv) of the Act and alternatively under S. 12(2) of the Act. The Tribunal held that the amount in question could not be held to be an expenditure, to which alone the abovementioned provisions applied. The Tribunal found that there was scanty material to hold that the activity carried on by the assessee in relation to Chopda Electric Supply Co. was in the nature of carrying on of a business. The Tribunal recorded a finding that there was absence of satisfactory material to establish that the assessee carried on a regular business of managing the company. Thus, the claim made in the nature of a set off of loss by deduction under S. 10 of the Act was rejected on the ground that the basic fact of the assessee carrying on the business was not proved. The Tribunal further held that even otherwise the assessee was not carrying on the so called business on February 11, 1959, when he paid the amount to the bank and, therefore, he was not entitled to set off the loss as argued. The Tribunal then considered the contention of the assessee that all activities carried on by him in relation to various companies either in his capacity as a sitting director or managing director formed one single integrated activity of carrying on the business of managing companies. Proceeding on the assumption that the activities carried on by the assessee in regard to various companies amounted to carrying on the business, the Tribunal considered the question whether the activities in relation to different companies constituted different and distinct business or constituted the same business. The Tribunal found that there was a complete absence of any material to satisfy the Tribunal that the activities carried on by the assessee in relation to different companies constituted the same business. The Tribunal considered the claim of the assessee under S. 12(2) of the Act and found that the assessee's claim in substance was a claim for set off of a loss and was not a claim for the deduction of an expenditure and, therefore, S. 12(2) of the Act did not apply. The Tribunal further held that it was difficult to see as to how the incurring of the loss of Rs. 75,201 (sic) could be said to have been necessitated solely for the purpose of making or earning such income. On these facts, the following question has been referred at the instance of the assessee to this Court for opinion :