CHENAB FOREST CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under Section 256 of the Income-tax Act of 1961 made by the Income-tax Tribunal, Chandigarh Bench, and the question which has been referred by the Tribunal is as follows:

(2.) THE relevant facts which are not disputed and which are stated in the statement of the case submitted by the Tribunal are as follows :

(3.) THE learned counsel appearing for the department has made two submissions, one of these is to the effect that the advances which had been made cannot be regarded as an expenditure and it would be in the nature of a debt and as it was not such a debt which would come within the purview of Section 36, so the assessee cannot claim any deduction on this account. Secondly, it has been urged that the assessee cannot seek protection under Sections 28 and 37 because when Section 36 is applicable then Section 37 will not be applicable. THE charging section is Section 4 which lays down that the income-tax shall be charged for any assessment year in respect of the total income of the previous year or previous years, as the case may be. THE words "total income" are very important and I may now turn to Section 2(24) which defines "income". Income has been defined to include several items which have been enumerated thereunder and we are concerned here with item No. 1 which is profits' and gains. Section 14 deals with the computation of total income and it lays down a classification of the several heads of income and Section 14D is the head of profits and gains of business or profession. THE next section to which reference may be made is Section 28 which is under the heading "profits and gains of business or profession" and it lays down the profits and gains which shall be chargeable for income-tax and Section 28(i) lays down that one of the items is "profits and gains of any business or profession which was carried on by the assessee at any time during the previous year". In my opinion a combined reading of these sections would show that the charge, i.e., income-tax, is leviable not on gross receipts or sale proceeds but on profits and gains properly so called and in the words of Lord Halsbury the word "profit" has to be understood in its natural and proper sense, i.e., in a sense in which no commercial man would misunderstand. See Gresham Life Assurance Society v. Styles, 1892 3 T.C. 185 H.L.. This was also approved by the Privy Council in connection with the case of Pondicherry Railway Co. v. Commissioner of Income-tax, AIR 1931 PC 165. THE Supreme Court has also approved of this and I may now refer here to a decision of the Supreme Court in the case of Badridas Daga v. Commissioner of Income-tax, 1958 34 ITR 10. It may be mentioned here that the aforesaid case was in respect of the provisions contained in Section 10(1), (2)(xi), (xv) of the Indian Income-tax Act of 1922, but it may be noted here that those provisions are similar to those contained in Section 28 of the Income-tax Act of 1961. It was held that, while Section 10(1) of the Indian Income-tax Act of 1922 imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed, and profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles.