MANCHANDA, J. -
(1.)THIS is a case stated under section 66(1) of the Income-tax Act, 1922, by the Income-tax Appellate Tribunal. The question referred is :
Whether the Tribunal was right in law in holding that an equitable apportionment of the expenses could be virtue of the provisions of Explanation 1 to section 24(1) of the Income-tax Act ?
(2.)THE material facts are these. THE assessee is an individual. During the relevant year of assessment, which is the assessment year 1956-57, the previous year being the year ended Bhadon Sudi 2, Sambat 2012, carried on business in speculation and money-lending at Agra in the name of Makhan Lal Ram Swarup, hereinafter referred to as head office. He also carried on another business under the name and style of Messrs. S. D. Gupta & Co., hereinafter referred to as the branch, in which the business was confined to speculation business alone. THE assessee kept only one account for expenses incurred in the head office and branch business carried on in the aforesaid names.
Accounts of the branch showed a net speculation profit of Rs. 96,612, whereas there was a gross speculation loss of Rs. 1,02,451 claimed in respect of the head office. An expense of Rs. 24,527 was claimed by way of expenses. This the Income-tax Officer allowed against the income from money-lending at the head office.
In the original assessment made on 18th September, 1956, under section 23(3), the Income-tax Officer had set off the speculation loss against the income from other business and had determined the net income at Rs. 22,841. Subsequently, the Income-tax Officer took action under section 34(1)(b) on the ground that the assessee had been under-assessed because the speculation loss had been allowed to be set off against profit from other business. The assessee did not challenge the section 34(1)(b) proceedings on any ground. He did not claim that the set-off of speculation loss in the original assessment against income from other business under the provisions of section 10 was correct. He would appear to have accepted the position that there was an under-assessment and the speculation loss could not be set off against the income from other business. The Income-tax Officer therefore in the reassessment proceedings treated speculation as a separate business and set off the speculation loss at the head office of Rs. 1,02,451 against the net speculation profit in the branch which was computed at Rs. 96,612. In setting off the loss of Rs. 1,02,451, which was the gross loss and not the net loss at the head office he added, on an estimate basis, expenses of Rs. 3,000 out of the total expenses of Rs. 24,527 claimed by the assessee. The result was that the gross loss in the head office of Rs. 1,02,451 increased by Rs. 3,000. The net loss, therefore, at the head office from speculation was determined at Rs. 1,02,451 and setting this off against the profit of Rs. 96,612, the net loss of Rs. 8,839 was directed to be carried forward and set off against the future speculation profits.
(3.)THE only objection taken by the assessee was to the addition of Rs. 3,000 as estimated expenses in respect of the speculation business at the head office. THE contention was that where an assessee is carrying on a single business, and a part of the profits of the business is not liable to tax, the deduction of expenses of the business should be allowed in its entirety although a part of the expenses may have been incurred for earning non-taxable profits. This contention was repelled by the Income-tax Officer, who considered that the assessee was in fact carrying on two businesses, one in money-lending and the other in speculation and, as none off these two businesses were exempt from taxation, the expenses would necessarily have to be reasonably apportioned. THE Appellate Assistant Commissioner deleted the addition of Rs. 3,000 on the ground that section 10(2)(xv), which is the only section, accordingly to him, under which a claim for business expense could be deleted or curtailed did not envisage separate expenses for each different business.
The Income-tax Appellate Tribunal, on an appeal having been taken by the department, reversed the decision of the Appellate Assistant Commissioner and restored that of the Income-tax Officer relying mainly on the explanation to section 24(1) of the Act. It was of the view that the speculation business must be regarded as a distinct and separate business from that of money-lending and if the expenses had not been apportioned by the assessee the Income-tax Officer would be justified in making an equitable apportionment of the expenditure. Against that order the present reference has been made under section 66(1) and the question set out hereinabove has been referred.