TMI Blog1974 (2) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... e deduction of Rs. 27,959 claimed by the assessee was rightly refused by the Appellate Tribunal ? " The relevant facts which are not disputed and which are stated in the statement of the case submitted by the Tribunal are as follows: The reference application pertains to the assessment year 1964-65, for, which the accounting year commenced on 1st of May, 1962, and ended on 30th April, 1963. The assessee is a firm of forest lessees consisting of two partners both of which are private limited companies. The aforesaid contracts which were being exploited by the assessee-firm ended and the firm was dissolved some time in 1967-68. For the exploitation of forests, i.e., felling of trees, cutting the same into sizeable logs for conversion thereof by sawing into scantlings and carriage of the timber sawn to the banks of side stream for ultimately being floated down the Chenab river and carting and lorrying to the sales depots at Jammu and Pathankot, the assessee-firm had to engage various sub-contractors. These sub-contractors had to be given advances before coming to the works, besides supply of subsidised rations to the labour at the works. Both the advances as also the cost of rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erable. So the claim is, therefore, in respect of the amounts which neither accrued nor incurred in the previous year. The Tribunal, as it appears from its order, also observed that section 36 appears to be a harsh section against the trading assessee because it practically debars all bad debts which arise out of ordinary transactions except those which are incurred by way of sales but the Tribunal felt that they could not interpret otherwise the clear provisions of the statute. The Tribunal was of the view that a question of law did arise for consideration and, therefore, formulated the question already mentioned above and has made a reference to this court. At the time of the hearing it may be mentioned here that the learned counsel appearing for the assessee-firm conceded this position that he could not claim deduction on account of its being a bad debt if it did not come within the purview of section 36(2) of the Act, and this position was also not disputed that in this reference such matter cannot be gone into which relates to facts on the question whether it was a bad debt or not as contemplated by section 36 of the Act. Bat the learned counsel for the assessee-firm submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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. This was also approved by the Privy Council in connection with the case of Pondicherry Railway Co. v. Commissioner of Income-tax. 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. 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. In another decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the amounts which had been advanced. Reliance has also been placed on another decision of the Supreme Court in the case of Commissioner of Income-tax v. Nainital Bank Ltd. and it was held that under section 10(1) of the Indian Income-tax Act, 1922, the trading loss of a business is deductible in computing the profit earned by the business. But every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation, and that whether loss is incidental to the operation of a business is a question to be decided on the facts of each case having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out, and further that the degree of the risk or its frequency is not of much relevance but its nexus to the nature of the business is material. In another case, Commissioner of Income-tax v. Mysore Sugar Co. Ltd., a similar question came up for consideration. In that case the assessee company used to purchase sugar-cane from the sugar-cane growers and used to crush the same in the factory to prepare sugar. As a part of its business operations it used to enter into agreement a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court available in respect of forest leases particularly in respect of the advances made to the sub-contractors and therefore the learned counsel for the assessee-company has relied by way of an analogy and conclusions on the decisions already cited and discussed above. Now I will examine the other relevant sections of the Act. Along with section 28, 29 lays down as follows: " 29. Income from profits and gains of business or profession, how computed.-The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43. " In my opinion if section 28 is read along with section 29 then it would be clear that the computation of the income as contemplated by section 28 has to be in accordance with the provisions contained in sections 30 to 43 which means that it should be also in accordance with section 37 if the case falls under section 37. In the present case out of sections 30 to 43 the only sections which can be made applicable are either section 36 or 37. I have already stated above that the assessee-company's learned counsel is not relying on section 36 but is relying on section 37 and to me it appears that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a redraft of the former and as far as section 10 is concerned, I have already referred to the various decisions of the Supreme Court. It would be also relevant here to quote a passage from Iyengar's Income Tax Commentary, 6th edition, volume 1, page 911, which runs as follows : "Specific section Vs. Residuary section.--Section 36(1)(vii) vis-a-vis section 37(1). Both section 36(1)(vii) and section 37(1) cover losses incurred in business. The claim under either head would only be maintainable if the loss is incidental to the business. To this extent, the considerations for the grant of the allowance are common. The departure arises this way. If the loss is due not to irrecoverability, the claim would not arise under the present section 36. The claim under section 36(1)(vii) is restricted only to cases where by reason of the inability or insolvency of the debtor to pay, the money is unable to be recovered. In all other cases, the claim for allowance should have to be sustained under section 37(1) which requires that the expenditure (not being of a capital nature) should have been wholly and exclusively incurred for the purpose of the business. Consequently, there would be a cer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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