SOUTH INDIAN INDUSTRIALS, LTD BY ITS MANAGING DIRECTOR MAHOMED HASHIMSAIT Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) The question reierred B to us is: Whether there was sufficient legal evidence to justify the Income-tax Officer's finding that during the year of account the Company carried on no business within the meaning of Section 2(4) of the Income-tax Act, XI of 1922, and that the losses claimed by the Company were of a capital nature and could not be set off against the income from dividends.

(2.) The assessee Company is a limited company registered in 1904 under the Indian Companies Act. The main objects of the Company as set out in its Memorandum of Association are (1) to acquire and carry on the business then carried on by the Chittivalsah Spinning and Weaving Company Limited at Chittivalsah, (2) to acquire and carry on the business then carried on by the Madras Portland Cement and Tile Works, Ltd., at Madras and Bangalore and (3) to acquire and carry on the business then carried on by Messrs. Arbuthnot & Company, Madras including (a) Cement Works in Calcutta, (b) Rice Mills at Needamangalam and Tiruvalur and (c) Reliance Foundry at Madras. There is also another object set out in its Memorandum of Association, namely, to take or otherwise acquire and hold shares in any other company having objects altogether or in part similar to those of the Company or carrying on any business capable of being conducted so as directly or indirectly to benefit the Company. In pursuance of this last-mentioned provision the Company purchased a large number of shares in the Chittivalsah Jute Mills Company, limited, receiving in the shape of dividends during the year of account Rs. 1,40,000. Against that sum the assessees claimed to set off Rs. 1,59,489-1-5 being the total loss alleged to have been sutained on the Vellore Rice Mills, Cement Works, City Brick and Tile Works, Reliance Rice Mills and Reliance Engineering Works and including an amount of Rs. 37,015-0-2 as depreciation. A net loss of Rs. 19,470- 13-5 was thus arrived at from which a sum of Rs. 14,482-12-0 was deducted being income- tax on dividends, the loss returned being Rs. 4,988-1-5.

(3.) In pursuance of its objects the Company acquired and carried on various businesses until the year 1923. In that year, the Imperial Bank of India to which the Company owed large sums of money applied to the High Court for the winding up of the company and as a result the several businesses were, under the orders of the High Court, taken over and conducted by the Official Liquidator till 1925. Then, by consent, the liquidation proceedings were withdrawn and the Company tried to resume its activities with an increase of its share capital but apparently without success. From that year onwards, the Income-tax Commissioner finds that the Company was existing merely to dispose of its various concerns to their best advantage before closing down finally, and the letters referred to by him clearly support such a finding. It is clear that, with regard to the businesses in respect of which the assessees claimed to set off the respective losses, no trade was done in them since November 1925 except sales of old stock during the year of account amounting to Rs. 260 in the Madras Cement Works and Rs. 1806 in the City Brick and Tile Works, Bangalore. No purchase was made or anything manu factured during this year. On the contrary, it is admitted that no business whatsover was carried on except the sale of the old stock already referred to. The loss of Rs. 1,59,489-1-5 was made up of payment of interest on moneys borrowed, depreciation on the machinery and buildings, bad debts written of, loss in revaluation of closing stock due to deterioration and establishment and miscellaneous charges of the various concerns. The company, however, continued to retain its holding of shares in the Chittivalsah Jute Mills Company, Ltd., and to that extent the company was undoubtedly carrying on business; and this is not disputed by the Commissioner of Income-tax. What, however, is contested by him is the contention that the assessees are entitled to set off against dividends received from the Chittivalsah Jute Mills Company Ltd., the loss in the other concerns already referred to as, in his opinion, the assessees had ceased to carry on the business of those concerns and had sustained no "loss of profits or gains" which could be set off under Section 24 or otherwise against the other income.