Supreme Court Upholds Assessee's Claim for Depreciation Terminal Allowance on Sale of Colliery Under Section 10(2)(vii) of Income Tax Act, 1922. Loss Written Off on Machinery and Plant Sold After Part-Year Business Use Qualifies Despite Closing Down Sale; Dividend Income from Stock-in-Trade Shares Set Off Against Brought Forward Losses Allowed Under Section 24(2).

Income tax assessment dispute relating to allowability of loss on sale of colliery and set off of dividend income against brought forward business losses under Income Tax Act, 1922.

Assessee sought allowance under Section 10(2)(vii) for loss of Rs. 11,257 on sale of colliery assets and set off of dividend income under Section 24(2) against earlier years' business losses.

Assessee sold its colliery under agreement dated November 29, 1954 effective from September 1, 1954; Income Tax Officer disallowed loss on sale and disallowed set off of dividend income received on shares held as stock-in-trade.

Income Tax Officer disallowed both claims; Appellate Assistant Commissioner upheld; Income Tax Appellate Tribunal accepted that assessee carried on business till November 29, 1954 but disallowed loss as arising from closing down sale; on second question, Tribunal disallowed set off; High Court, on reference, answered first two questions against assessee, holding sale was closing down sale and business carried on for purchaser, thus no set off. Other questions answered against assessee; fifth question not pressed; sixth question covered by second.

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? 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 and set off against losses brought forward from earlier years under section 24(2)?

Appellant contended that the loss of Rs. 11,257 was allowable under Section 10(2)(vii); the Tribunal had recorded a finding of fact that appellant carried on colliery business in the relevant accounting year; that finding was not challenged by department and was binding on High Court; agreement could not alter actual state of affairs of carrying on business. Appellant argued that once colliery business was carried on for part of the year, if shares yielding dividends formed part of trading assets, set off under Section 24(2) must be allowed. Respondent relied on lower authorities' reasoning that no business was carried on during relevant year because transfer effective from September 1, 1954; loss was from closing down sale and not allowable; dividend income was not business income and could not be set off.

Loss on sale of machinery or plant is allowable under Section 10(2)(vii) of Income Tax Act, 1922 if the business was carried on for part of the accounting year, the machinery and plant were used for the business, the sale took place during the accounting year, and the amount was written off in the books; there is no requirement that business be carried on for whole year or that loss from closing down sale be disallowed. Dividend income from shares held as stock-in-trade of share-dealing business can be set off under Section 24(2) against brought forward business losses if the assessee carried on that business for part of the relevant previous year; Section 6 classification of income does not bar set off. An unchallenged finding of fact by the Income Tax Appellate Tribunal is binding on the High Court in reference jurisdiction.

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. It is difficult to see how all the conditions necessary for the allowance under the above provisions were not satisfied. 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 used for the whole of the accounting period or if the assessee worked only for a part of the year and then sold out the loss that he incurred was not a business loss. On the second question once it is accepted that the colliery business was carried on for a part 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.

Assessment year 1956-57 (previous year September 1, 1954 to August 31, 1955). Income Tax Officer disallowed loss and set off; Appellate Assistant Commissioner affirmed; Income Tax Appellate Tribunal partly allowed in finding business carried on until November 29, 1954 but disallowed loss as closing down sale; disallowed set off. Tribunal referred two questions under Section 66(1); High Court directed reference of additional questions (3-6). High Court answered first two questions against assessee, third and fourth against assessee, fifth not pressed, sixth not answered. Assessee appealed by special leave to Supreme Court.

• Income Tax Act, 1922: 10(2)(vii), 24(2), 12, 6, 66(1)