WESTERN STATES TRADING CO. LTD. vs. COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA

CIVIL APPEAL No. 589/1967Supreme Court[1971] 3 S.C.R. 38318 January 1971Bench: 3 JudgesAuthor: J.C. SHAH, K.S. HEGDE, A.N. GROVER6 pages
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What were the facts?

The assessee, Western States Trading Co. Ltd., entered into an agreement on November 29, 1954, to sell its colliery. The agreement stipulated that the vendor would carry on the business on behalf of the purchaser from September 1, 1954. For the accounting year September 1, 1954, to August 31, 1955, the Income Tax Officer calculated a loss of Rs. 11,257.00 but disallowed its set-off against other income, stating the business was not carried on by the assessee during the year. The Appellate Assistant Commissioner upheld this. The Tribunal accepted that business was carried on until November 29, 1954, but disallowed the loss as a 'closing down sale'. Dividends received on shares, part of the assessee's stock-in-trade, were included under Section 12, but the claim to set off this income against brought-forward business losses was disallowed. The High Court ruled against the assessee on both issues.

What did the Supreme Court hold?

The Supreme Court held in favour of the assessee on both issues. Regarding the first issue, the Court found that the Tribunal had unequivocally accepted that the assessee carried on the colliery business until November 29, 1954. It was held that all conditions for allowance under Section 10(2)(vii) were satisfied: the business was carried on for part of the year, machinery and plant were used for business, the sale occurred during the accounting year, and the loss of Rs. 11,257.00 was written off. The Court followed its decision in Commissioner of Income Tax, Bombay City II v. National Syndicate, stating that the business did not need to be carried on for the entire year. For the second issue, the Court held that once it is accepted that the colliery business was carried on for a part of the year, the assessee is entitled to a set-off under Section 24(2) if the shares, from which dividends were received, formed part of the assessee's trading assets. It was undisputed that the shares were stock-in-trade of the assessee's share-dealing business. Therefore, the dividend income should be treated as income from business and set off against brought-forward business losses, as per established principles and decisions like C.I.T., Andhra Pradesh v. Cocanada Radhaswami Bank Ltd. The appeals were allowed with costs, and the High Court's decision on these two questions was set aside.

What were the issues?

1. Whether the sum of Rs. 11,257.00, representing a claim for loss on the sale of assets on which depreciation was allowable in earlier years, is allowable under Section 10(2)(vii) of the Income Tax Act, 1922, in computing the total income of the assessee? - Assessee's contention: The loss is allowable under Section 10(2)(vii) as the colliery business was carried on during part of the accounting year, the assets were used for business, the sale occurred during the year, and the loss was written off. Relied on Commissioner of Income Tax, Bombay City II v. National Syndicate. - Revenue's contention: Not explicitly recorded, but implied by the rejection of the claim by the lower authorities. 2. Whether dividend income was to be treated as income, profits, and gains of the company's business and set off against losses brought forward from earlier years under Section 24(2) of the Income Tax Act, 1922? - Assessee's contention: The dividend income should be set off against brought-forward business losses as the shares formed part of the assessee's stock-in-trade. Relied on C.I.T., Andhra Pradesh v. Cocanada Radhaswami Bank Ltd., Commissioner of Income Tax Madhya Pradesh v. Shrikishan Chandmal, and Commissioner of Income Tax, Ahmedabad v. Bhavnagar Trust Corporation (P,) Ltd. - Revenue's contention: Not explicitly recorded, but implied by the rejection of the claim by the lower authorities.

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 24(2),Section 12

AI-generated summary — verify with the full judgment below

A c .. D E F G H 383 WESTERN STATES TRADING CO. LTD. v. COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA January 18, 1971 [J. C. SHAH, C.J., K. S. HEGDE ANDcA. N. GROVER, JJ.J Income Tax Act 1922, s. 10(2)(vii) and: 24(2)-Appel/ant selling colliery after running it for part of the year-loss on sale written off-if allowable under s. 10(2) (vli)-Profits on shares forming part of stoc!<-in· trade of appellant's share-dealing business-Whether could be set off against business loss of previous years.

The asse~ entered, into an agreement with another company on November 2'9, 1954 for the sale of its colliery. It was provided , in the agreement that pending completion of the sale or delivery of pbssession, the vendor was to carry on business on behalf of the pur~haser and .run the ro)liery as on and from September 1, 1954 on the account· and at the cost .fl( the purchaser.

In the course o'f the jjppellant's assess!IJ'nt to income tax for which the accounting year was fr-Om September 1, 1954 to August 31, 1955, the Income Tax Officer, after making '3djustment for certain assets which according to him were not entitled to depreciation, worked " out the figure of lo

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