- (1.) The appellants, hereinafter called 'the assessees', are engaged in the business of manufacturing biscuits and confectionery. They have factories at Gwalior and Hyderabad and have their selling organisation spread all over India. The assessees also carry on a money-lending business at Gwalior in the name and style of Khanchand Lachmandas, hfereinafter called "k. L. ". In the books of account of K. L. were posted entries for advances made to the Gwalior Factory. Under a notification issued by the central Board of Direct Taxes the income arising to the assessees from the gwalior Factory during the account year ending 31/03/1955, was exempt from payment of income-tax and super-tax.
(2.) In proceedings for assessment for the year 1954-55 of the assessees the Income-tax Officer disallowed, out of the amounts claimed for "shortage", rs. 3,64,000. 00 in the Gwalior factory, and Rs. 35,000. 00 in the Hyderabad factory. Again the Income-tax Officer held that K. L. in its transactions had incurred a loss of Rs. 1,35,566. 00 and since it had invested Rs. 20,88,077. 00 in the Gwalior factory, income from which Was exempt from payment of tax. loss amounting to Rs. 59,000. 00 being the amount proportionately attributable to the investments of K. L. in the Gwalior factory of the assessees was liable to be allocated in computing the. income of the Gwalior factory, and the balance only in computing the loss of profit of K. L.
(3.) The Appellate Assistant Commissioner in appeal corrected an arithmetical error and disallowed under the head "shortage" in the Gwalior factory Rs. 1,60,000. 00 only, and maintained the amount of Rs. 35,000. 00 disallowed in respect of the Hyderabad factory. In the view of the Appellate assistant Commissioner, K. L. had advanced Rs. 16,85,534. 00 and not rs. 2088. 077. 00 as determined by the Income-tax Officer and the proportionate amount debitable out of the loss suffered by K. L. to the Gwalior factory was Rs. 47,550. 00.;