COMMISSIONER OF INCOME TAX Vs. SHAH PRATAPCHAND NOWPAJI

JUDGEMENT

(1.) AT the instance of the Commissioner of Income-tax, the I.T. Appellate Tribunal, Hyderabad Bench, has, under Section 256(1) of the I.T. Act, 1961, submitted a statement of case for the opinion of this court, on the following question of law :

(2.) THE respondent-assessee is a registered firm carrying on business in money-lending and commission agency in groundnut seeds, castor seeds etc. In the course of its business, the assessee entered, on behalf of its constituents, viz., Tiruveedhi Lakshmaiah, Tiruveedhi Narayanasetty and Kotrika Venkatasetty and Sons, into forward contracts in groundnut and castor seeds in the Bombay market. THE settlement of the aforesaid contracts resulted in losses payable by the said parties. In fact, the assessee paid the losses on their behalf and debited their accounts with the same, amounting to Rs. 11,466, Rs. 70,561 and Rs. 62,302, respectively, THE aforesaid three parties did not pay the amounts already paid by the assessee towards their losses. THE suits filed by the assessee in the Court of the Subordinate Judge, Kurnool, were dismissed as not maintainable on the ground that the claims were based on wagering transactions which were forbidden by law under the Oil Seeds (Forward Contracts) Prohibition Act, 1947. THE appeals preferred by the assessee were not successful. THE assessee wrote off the amounts due from the three parties in its books in the accounting year relevant for the assessment year 1962-63 as bad debts. THE claim of the assessee was rejected by the ITO on the ground that the loss arose from the illegal transactions and that the debts did not arise in the course of the assessee's business. THE appeal to the AAC was unsuccessful. Aggrieved by the decision of the AAC, the assessee preferred a second appeal to the Income-tax Appellate Tribunal. THE Tribunal agreed with the Revenue that the advances were not made in money-lending business. However, the Tribunal held that they were payments made in the normal course of business as commission agents. Rejecting the claim of the Revenue that the loss claimed by the assessee was loss from speculative business, a categorical finding was given by the Tribunal to the effect that the assessee did not carry on any speculative transaction on its behalf and the transactions, which resulted in the losses paid by the assessed to the Bombay parties on behalf of its constituents, were speculative transactions, but they were not carried on by the assessee on its own. THE assessee had earned commission on account of those transactions which was assessed to income-tax from its commission business and the assessee has suffered the loss on account of non-realisation of advances made on behalf of its constituents and, therefore, it was intimately connected with its commission business and not one arising from speculative business. THE assessee carried on only one business consisting of two activities, viz., money-lending and commission business and they were inseparable from each other and there was intermingling and interlacing of funds and, therefore, the closure of the commission business in the year of account did not result in the stoppage of the assessee's business activity to which the losses related. THE loss suffered by the assessee on account of non-realisation of debts from its three constituents was held to be a loss suffered in the business which was in existence during the year and as such it was an admissible deduction for income-tax purposes. In the result, the appeal was allowed. Hence this reference.

(3.) THE Tribunal, as pointed out earlier, has found that the assessee did not carry on any speculative business and the loss suffered by the assessee was not loss in speculation business, but a loss arising from its business as commission agents and the normal trade practice of commission agents was to pay off losses on behalf of their constituents and to recover the same from the latter in due course and such payments of accommodation were necessary both in the assessee's interest and in the interests of its constituents. THE aforesaid findings are really findings of fact. THEre is ample material in support of the same and the said findings would justify the view of the Tribunal that the assessee is entitled to deduct the amount in question from its income. We, therefore, hold that the contention of the Revenue that the loss relates to speculative business of the assessee is not correct. This brings us to examine the question whether the assessee is entitled to have the deduction in the accounting year relevant to the assessment year 1962-63. Though the assessee had stopped the commission business in the accounting year in question, the other money-lending activity was admittedly continued. THE Tribunal, on a consideration of the entire facts, has found that the assessee maintained only one set of accounts for both money-lending and commission business and both activities were carried on at the same place and there was interlacing and intermingling of funds and one activity cannot be disassociated and considered separate from the other in ascertaining the profits from each. It is further found that the assessee carried on only one business consisting of two activities, viz., money lending and commission business, which were inseparable from each other and there was intermingling and interlacing of funds. In this view, we have no hesitation to agree with the Tribunal that the assessee is entitled to have the deduction in the year of account for the assessment year 1962-63.