B.L.GUPTA J. - (1.) THIS is a reference under section 66(1) of the Income-tax Act. The question which has been referred to us for opinion is as follows : Whether the litigation expenses incurred by the assessee in defending the civil suits field by its members after the business of the assessee company in speculative transactions in gur was stopped on account of the ban imposed by the Government by notification dated February 15, 1950, published in the Government Gazette is a permissible deduction within the meaning of clause (xv) of sub-section (2) of section 10 of the Indian Income-tax Act ?
(2.) THE reference relates to three assessment years 1952-53, 1953-54 and 1954-55. THE facts giving rise to the reference are these. THE assessee is a company. THE business of the company was to act as a clearing house for forward and speculative transactions in gur carried on by its members. THE company acted as principal to principal in transactions with its own members and when acting as clearing house for profits and losses incurred the assessee also used to charge certain fees from its members. As there were heavy fluctuations in the prices of gur, the Government, by a notification dated February 15, 1950, banned speculative transactions in gur. After the ban was imposed the members of the company decided that the pending contracts should be squared up at the closing rates of February 14, 1950. This gave rise to several civil suits by the members in defending which the company had to incur certain expenses. One of the members, namely, Mohan Lal & Co., applied for the widing up of the company and for the appointment of a liquidator. Ultimately the widing up application was dismissed by this court. This court held the civil court should give a finding whether Mohanlal was a creditor. In this proceeding also the company had to incur litigation expenses. Certain other suits were filed against the company by some of its constituents. It incurred expenses in defending these suits also. The question which the Income-tax Officer had consider was whether the expenditure incurred by the assessee in the various litigation was a permissible deduction under section 10(2)(xv) The quantum of the litigation expenses incurred by the assessee in each one of the years in question was not in dispute. It is admitted between the parties that no speculative dealing in gur were done by the assessee company in any one of the years in question, that no other business whatsoever was done by the company, that in October, 1950, another company called Vijay Veopar Chamber was formed for the purpose of acting as a clearing house for all types of forward transactions between the members of the company, and that the office premises and furniture of the assessee company were made over to the newly formed company. It was according held by the Income-tax Officer that no business was done by the assessee company and the business had been stopped and accordingly the assessee was not entitled to claim a deduction in respect of the litigation expenses under section 10(2)(xv). Appeals were taken to the Appellate Assistant Commissioner of Income-tax. He disposed them of by a common order. He held that no business was carried on by the assessee in the years in question on account of the ban imposed by the Government. The formation of another company, namely, Vijay Veopar Chamber, and the transfer of the office premises and the furniture by the assessee company to the newly formed company indicated that the assessee never intended to revive its business. Accordingly the Appellate Assistant Commissioner also disallowed the litigation expenses as being not deductible under section 10(2)(xv). Further appeals were taken to the Income-tax Appellate Tribunal, which also disallowed the litigation expenses on the finding that the assessee had stopped its business in speculative transactions in gur on account of the ban imposed by the Government and that no business whatsoever was done by the company in the years in question. These are the facts that we find from the statement of the case. We may at once state that the statement is not complete and not give a strictly accurate picture of the case as it developed from stage to stage and does not incorporate all the findings recorded by the various authorities. On application under section 66(1) the case has been referred to us on the question of law which has been stated in the beginning of this judgment. We have gone through the various orders and in the first place we find that the question that was actually agitated before the Tribunal was not whether the litigation expenses amounting to Rs. 27,380-9-0 were allowable as business expenditure under section 10(2)(xv) but whether the amount could not be allowed to be set off as a loss against the other income of the assessee under section 24(1) of the Income-tax Act. It is true that in begining of paragraph 2 of the appellate order it is stated that the dispute relates to the disallowance of litigation expenses but the last sentence in that paragraph states the finding in the following words : Consequently, the question of its setting off under section 24(1) does not arise.
(3.) THIS means that the question which has been referred to us was not the question raised before and decided by the Tribunal. In this view it is not strictly necessary for us to answer the question which has been referred to us and it would be proper to return the reference unanswered on the ground that the question of law referred of us does not arise out of the appellate order of the Tribunal. As, however, learned counsel for the department did not raise before us any objection on this ground, and as the case urged before us on the footing that the question referred to us did arise, we proceed to decide it. Before we do so we should like to set out all the findings which have been recorded in the various orders and which have not been fully set out in the statement of the case. The business of the company consisted of transactions of two kinds, (1) entering into forward speculative transactions in gur with its members as between principal and principal and (2) acting as a clearing house in respect of similar transactions in gur between its members. In the first case all that it did was to enter into such transactions, make a record of them and pay or receive the difference when the time for settlement of the transactions arrived. In the order other case it recorded the transactions between its members and when the date of settlement arrived it debited the difference to one member and credited it to the other. If follows that it could be said to carry on its business only so long as it continued to enter into fresh transactions with its members or to record the fresh transactions between its members inter se. It is admitted that it did not carry on transactions of either kind in any commodity other than gur. It is also admitted that it did not enter into any fresh transactions after February 14, 1950, the day immediately proceeding the day on which the Government banned forward transactions in gur. It is also not the case of the assessee that it settled any transactions already entered into by it, subsequent to February 14, 1950. Having regard to the nature of its business it is doubtful that even if it had settled any of its old transactions, the mere settlement of the old transactions could be called the carrying on by it of its business if it had decided not to carry on the business subsequent to February 14, 1950.;