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

- **Citation:** [1971] 3 S.C.R. 383
- **Court:** Supreme Court of India
- **Decided:** 1971-01-18
- **Bench:** J. C. Shah, K. S. HEGDE ANDcA. N. GROVER
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/western-states-trading-co-ltd-v-commissioner-of-income-tax-central-calcutta-5136
- **Pages:** 6

## Headnote

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 loss at Rs. 11,257 .00; however he rejected a claim to
set off this loss against the appellant's other income on the view that the
assessee did not carry on the business of the colliery during the year since
the transfer took place with ~t
from September 1, 1954. The Appellate
Assistant Commissioner /upheld this order and, although the Tribunal, in
appeal, ·accepted the assessee's contention that it carried on busin.,.s till
November 29, 1954, if did not allow the loss on the view thaJ.it had resulted from a closing down sale. In respect of the same year, cer~li dividends
on shares received by the assessee were .. included in its income unper s. 12
but i:s claim to set off this income against the loss in business for earlier
yea<s brought forward, was disallowed: The High Gll>lrt, upon 11 iyference
made to it, htid against the appellant on botll the~ mues. On appeal to
this Court,
HELD : The T•.ibunal had, in clear and unequivocal tenns, upheld the.·
contention of the appellant that it had actually carried on the business till
November 29, 1954.
Section 10(2) (Vii) provides that profits or gains
shall be computed after making the allowan~in respect of any such build_
ing, machinery or plant which had been so
e,tc., the amount by which
the written down value thereof exceeds the
ount 'for which the building,
machinery or plant is actually sold or its scrap value . The first proviso
requires that such amount should actually be written off in the books of
the assessee.
It is difficult to see how all the conditions necessary for the
allowance under the above provisions were not satisfied. The colliery
business was carried on by the appellant during .p~ of the releval}t accounting year. The ntachinery and plant had bt!lll used for the purpose
of the business. The sale of the colliery took pla'ce during the accounting
year; and. the loss of Rs. 11,237.00 was written off inthe books of t,be
appellant. [387 C-F]
Commisrioner of Income· Tax, Bombay City II v. National Syndicate,
41 I.T .R. 225; followed.
384
SUPREME COURT IUU'ORTS
[1971] 3 S.C.R.
Once it is accepted that the colliery business was carried on for a part
A
of the relevant assessment year, the assessee would be entitled to. get a set
off under s. 24(2) of the Act if the shares on account of which the dividendS were received formed part of the assessee's trading assets. It was
not disputed that the shares formed part df the stock-in-trade of the sharedealing business of the assessee. There could be no reason, therefore, for
the 3S.'lessee not being entitled to the set off claimed. [388 B-DJ
C.l.T., Andhra Pradesh v. Cocanada Radhaswami Bank Ltd., 57 I.T.R.
306; Commissioner of Income Tax Madhya Pradesh v. Shrikishan Chandmal, 60 I.T.R. 303 and Commissioner of Income Tax, Ahmedabad v.
Bhavnagar Trust Corporation (P,) Ltd., 69 l.T.R. 278; 'referred to,
C1v1L APPELLATE JURISDICTION : Civil Appeals Nos. 589' and
590 o.f 1967.
B
c
Appeals by special leave from the judgment .ancl order dated
May 7, 1965

## Text

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 loss at Rs. 11,257 .00; however he rejected a claim to
set off this loss against the appellant's other income on the view that the
assessee did not carry on the business of the colliery during the year since
the transfer took place with ~t
from September 1, 1954. The Appellate
Assistant Commissioner /upheld this order and, although the Tribunal, in
appeal, ·accepted the assessee's contention that it carried on busin.,.s till
November 29, 1954, if did not allow the loss on the view thaJ.it had resulted from a closing down sale. In respect of the same year, cer~li dividends
on shares received by the assessee were .. included in its income unper s. 12
but i:s claim to set off this income against the loss in business for earlier
yea<s brought forward, was disallowed: The High Gll>lrt, upon 11 iyference
made to it, htid against the appellant on botll the~ mues. On appeal to
this Court,
HELD : The T•.ibunal had, in clear and unequivocal tenns, upheld the.·
contention of the appellant that it had actually carried on the business till
November 29, 1954.
Section 10(2) (Vii) provides that profits or gains
shall be computed after making the allowan~in respect of any such build_
ing, machinery or plant which had been so
e,tc., the amount by which
the written down value thereof exceeds the
ount 'for which the building,
machinery or plant is actually sold or its scrap value . The first proviso
requires that such amount should actually be written off in the books of
the assessee.
It is difficult to see how all the conditions necessary for the
allowance under the above provisions were not satisfied. The colliery
business was carried on by the appellant during .p~ of the releval}t accounting year. The ntachinery and plant had bt!lll used for the purpose
of the business. The sale of the colliery took pla'ce during the accounting
year; and. the loss of Rs. 11,237.00 was written off inthe books of t,be
appellant. [387 C-F]
Commisrioner of Income· Tax, Bombay City II v. National Syndicate,
41 I.T .R. 225; followed.
384
SUPREME COURT IUU'ORTS
[1971] 3 S.C.R.
Once it is accepted that the colliery business was carried on for a part
A
of the relevant assessment year, the assessee would be entitled to. get a set
off under s. 24(2) of the Act if the shares on account of which the dividendS were received formed part of the assessee's trading assets. It was
not disputed that the shares formed part df the stock-in-trade of the sharedealing business of the assessee. There could be no reason, therefore, for
the 3S.'lessee not being entitled to the set off claimed. [388 B-DJ
C.l.T., Andhra Pradesh v. Cocanada Radhaswami Bank Ltd., 57 I.T.R.
306; Commissioner of Income Tax Madhya Pradesh v. Shrikishan Chandmal, 60 I.T.R. 303 and Commissioner of Income Tax, Ahmedabad v.
Bhavnagar Trust Corporation (P,) Ltd., 69 l.T.R. 278; 'referred to,
C1v1L APPELLATE JURISDICTION : Civil Appeals Nos. 589' and
590 o.f 1967.
B
c
Appeals by special leave from the judgment .ancl order dated
May 7, 1965 of the Calcutta High Court in Income-tax Reference
Nos. 183 aind 238 of 19'61.
C. K. Daphtary, B. P. Maheshwari and N. R. Khaitan, for the
appellant (in both the appeals).
S. C. Manchanda, S. K. Aiyar, R. N. Sachthey and B. D.
Sharma for the respondent (in both the appeals).
The Judgment of the Court was delivered by
D
Grover, 1.
These appeals by special leave from a judgment
of the Calcutta High Coul"t arise out-.of certain questions of law
E
which were referred relating to the assessment for the assessment
year 1956-57, the relevant accounting year being from September
1, 1954 to August 31, 1955.
The assessee owned a colliery called the _Western Kajoria CollieryL ltereinafter referred to as "colliery". It entered into an agreeF
ment with another company on November 29, 1954 to sell the
colliery to it. According to this agreement the vendor was to sell
and the purchaser was to buy as on and from September 1, 1954
all the underground rights etc of the colliery with the machinery
and other articles detailed in the schedules annexed to the agreement. It is not necessary to give the details of the other stock-inG
trade which the piiri:haser-was to purchase.
The sale was to
be completed within one year from the date of the execution of
the agreement. According to clause 7 of the agreement pending
completion of the sale or delivery of possession of the premises
to the purchaser the vendor was to carry on business on behalf of
the purchaser and run the said colliery as on and from September
1, 1954 on the account and at the cost. of the purchaser.
The
purchased was to get all the profits and was liable for all the losses
from that date.
H
A
B
c
D
E
\VESTERN STATES TRADING co. v. C.I.T. (Grover, J.)
385·
The price fixed for the colliery was Rs. 3,50,000. The book
value of the assets was Rs. 4,80,290/-. In the relevant assessment
year the loss of :as. 70,290/- was claimed by the assessee. The
Income tax Officer rejected. the claim for deduction of the Joss
from the assessee's other income on the ground that during the
accounting period the assessee did not carry on the business of
colliery since the transfer took place with effect from September
1, 1954. After making adjustment for certain assets which, according to the Income tax Officer, were not entitled to .depreciation
he detennined the figure of loss to be Rs. 11,251/-.. This los>
was also disallowed.
The Appellate Assistant Commissioner upheld the order of the Income tax Officer.
The Appellate Tribunal, however accepted the contention of the assessee that it carried on business till November 29, 1954 but did not allow the loss
as the Tribunal was of the view that it had resulted from a closing
down sale.
There was another item of dividends received from certain
shares held by the assessee during the relevant accounting year.
The Income tax Officer included these dividends in the Company's
income under s. 12 of the Income tax Act, 1922, hereinafter called
the "Act". The assessee failed to satisfy the authorities that the
income received on account of the dividends could be set off
against the loss in business of earlier years brought forward. The
Tribunal made a reference of the following two questions under
s. 66(1) of the Act :
"(I) Whether on the facts and in the circumstances
of the case the sum of Rs. 11,257 /- being a claim for
loss on sale of assets on which depreciation was allowable in earlier years is allowable under Section 10(2) (vii)
in computing the total income of the assessee?
F •
(2) Whether on the facts and in the circumstances
of the case dividend income was to be taken -as income,
profits and gains of business of the company ar.d set off
against losses brought forward from earlier years under
section 24(2)?"
G
H
Since certain other questions had been sought to be referred
by the assessee in respect of which the Tribunal declined to make
a reference the as~essee moved the High Court and the High
Court directed that the following questions be referred :
"(3) Whether in the facts and circumstances of the
case, the interest income from Western Kajoria Collieries Ltd. is income taxable under Section 10 of the
Indian Income tax Act or under Section 12 of the said
Act?
11-l807 Sup C.J/71
386
SUPREME COURT REPORTS
[1971] 3 S.C.R.
\ 4) Whether on the facts and circumstances of the
.case there was any material to hold that the loan of M/ s.
Shri ViioY. Corporation Ltd. was . an accommodation
loan not advanced during the normal course of money
lending business?
( 5) If the answer to question ( 4) is that the loan
was a business loan whether the debt had become bad in
the year of account and deductible in computation of the
total income?
( 6) Whether in the facts and circumstances of the
case the Tribunal was right in refusing to allow set off
of earlier year's business losses under section 24(2)?"
'Fhe two references were dealt with together by the
High
<::ourt.
A
B
c
On the first question the High Court was of the view that the
sale was a closing down sale and the net result of the transaction
was that the assessee was working the colliery from &ptember
D
1, 1954 for and on account oi the purchaser. While recognising
lliat the coal ·business was not stopped as from September
l,
..._
· '1954 the High Court came to the conclusion that it was on account
" o( the purchaser 1hat the bus:aess was carried on and any profits
qt~sses which might have resulted until the actual sale were to be
those' of. the purchaser .and the vendor was to get only the price
fixed tog~her with interest.
The first question
was answered
against the assessee.
The sec'Ond question was also answered
against the assessee on the· view ·1hat no colliery business
in the relevant yearwas carried on by it and therefore no question
E
of set off could'arise. The third and the fourth questions were
a~wered in accordance with the findings of fact given by the Tri-
. bunal and against the assessee. The fifth question was not pressed
F
and was not answered.
The sixth question was covered by the
second question and therefore no answer was returned wjth regard
to it as well.
In the pr"sent appeals we are concerned with the first and the
second q)iestion.
It has been submitted on behalf of the appelG
lant thatthe loss of Rs. 11,257 /-was allowable under s. 10(2)(vii)
of the Act in computing the total income of the appeJlant. The
·Tribunal had recorded a findini;r which was one of fact; that in·
the relevant accounting year the appellant did carry on the colliery
business.
The finding of the Tribunal had not been challenged
by the department.by raising an appropriate question and therefore H
it was not open to the High Court to go against the finding
of the Tribunal
and hold that the business
was carried on
for and on account of the purchaser. At any rate it was an un-
I
A
B
c
D
WESTERN STATES TRADING co. v. C.I.T. (Grover, J.)
387,
disputable faci that the appellant carried on the business
upto
November 29, 1954 and it was only by virtue of the agreement
made on that day that it agreed to treat the business as having
been transferred to the purchaser with effect from September l,
1954. By means of the agreement it was not possible to alter the
actual state of affairs, namely, the carrying on of the business by
the appellant.
In our judgment there is a good deal of subataqce il). the above
contentions urged on behalf of the appellant. The Tribunal had,
in clear and unequivocal terms, upheld the contention of the appellant that it had actually carried on the business till November 29,
1954.
Section 10(2)(vii) provides that profits or gains shall be
computed after making the allowance in respect of any such building, machinery or plant which had been sold etc. the amount by
which the wrrtten down value thereof exceeds the amounts for which
the building, machinery or plant is actually sold or its scrap value.
Tbe first provise requires that such amount should actually be written off in the books of the assessee. It is difficult to see. how all 1he
conditions necessary for the allowance under the above provisions
were not satisfied.
The colliery business was carried on by the
appellant during part of
the relevant accounting year. The
machinery and plant had been used for the purpose of the business.
The sale of the colliery took place during the accounting year. The
loss of Rs. ll,2751- was written off in the books of the appellant
E
The present case appears to be covered by the decision of this
Court in Commissioner of Income tax, Bombay Citv TI v. Nmional
Syn~icate(') in which .~II the above conditions for the applicabhty of s. 10(2)(v11) were .. .held to be present.
It was
said
that there was no other condition to be found in the section or in
the Act which had to be complied with.
There was nothing to
show that the business of the assessee should have been carried on
for the whole year or that the machinery or plant should have been
F
G
H
used for the whole of the accounting period or if the assessee
wo~ked only for a part of .the year and then so:d out the loss that
he. mcurred was not !1 bus mess loss. The decisions · which were
rehed upon by the High Court are hardly of much assistance in the
matter and are distin~uishable on facts. The first question should
have been answered m favour of the assessee .
. on the secon~ quest!on once it is accepted that the collierv
business was {;arried on ;.or a part of the relevant assessment wa·r
the ~ssessee would be enlltled to get a set off under s. 24(2) of the
Act tf the shares on account of which the dividends wer
.. d
formed part of the assessee's fad'
. ·
e rece11e
the decisions of this Court (see~ J°.j ~~~~1
5
•
PTt tds w~ll settled by
<I)
~I l.T.R. 225.
· · ·
1ra ra es11 v. Cocanada
388
SUPREME COURT REPORTS
[1971 J 3 s.c.R.
Radhaswami Bank Ltd. (1) that s. 6 of the Act classifies the taxable
income under the several heads but the scheme is that income tax
is one tax and s. 6 only classifies the taxable income under different
heads for the purpose of computation of the net income of the
assessee.
While sub-s. ( 1) of s. 24 provides for setting off the
A
Joss under one of the heads mentioned in s. 6 against the profits
under a difierent head in the same year sub-s. (2) provides for the
R
carrying forward of the Joss for one year and setting off the same
against the profits or gains of the assessee from the business in
the subsequent year or years. It was emphasised in the aforesaid
decision that snb-s. (2) of s. 24 in contradistinction to sub-s. (1)
is concerned only with the business and not with its heads under
s. 6 of the Act. Dividends are included in the meaning of income
C
under·sub-s. (IA) of s. 12 which is the residuary head. Applying
the principles adverted to before the amount of dividends woiild
form a part of the income from business of the assessee if the shares
were a ·part of the assessee's trading assets and the assessee would
be entitled to a set-off as claimed against the Joss from its business
incurred during the previous years.
It does not appear to have
0
been disputed at any stage that the shares formed part of the
stock-in-trade of the share dealing business of the assesee. Therse
could be no reason, therefore, for the assessee not being entilled
to the set off claimed. The High Courts have cqnsistently taken
the view that business Joss carried forward from earlier years can
be set off against dividend income derived from shares held as
stock-in-trade.
( vide Commissioner of Income tax Madhya PraE
desh
v.
Shrikishan Chimdma/( 2 ) and Commissioner of Income
tax, Ahmedabad v.
Bhavnagar Trust Corporation (P) Ltd.(')
The second question, therefore, should have been answered
in
favour of the assessee.
In the result the appeals are allowed with costs in this Court
F
and the decision of the Hfgh Court is set aside only with regard
to questions 1 and 2, the answers to which are returned as already
indicated.
One hearing fee.
R.K.P.S.
(i) 57 l.T.R. 306.
(3) 69 I.T·R. 278.
Appeals allowed.
(2) 60 I.T.R, 303.
I