Commissioner Of Income-Tax v. R. Dalmia (Deed)

S.S Chadha, J.:— These two references under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), pose the following questions for the opinion of the court:

“1. Whether the Tribunal was right in accepting the assessee's claim of adjustments to the balance-sheet dated September 30, 1961, by reference to the sum of Rs. 47.31 lakhs and on that basis, directing the deletion of the disallowance of interest of Rs. 5,04,537 made by the Income-tax Officer?

2. Whether, on the facts and in the circumstances of the case and in the alternative, the Tribunal was justified in restricting the disallowance of the assessee's claim of interest to Rs. 2,14,984?.

3. Whether, on the facts and in the circumstances of the case, there were any capital gains ‘arising’ to the company between April 1, 1946, and March 31, 1948?

4. Whether, on the facts and in the circumstances of the case, the company could be said to ‘possess’ accumulated profits to the extent necessary to cover the net debits to the assessee's accounts?

5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting from the assessment the addition of Rs. 23,12,989 and in holding that, in any event, the above addition should be reduced by Rs. 5,24,484?

6. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in treating the municipal valuation as the annual letting value of the properties Nos. 3, Sikandra Road and No. 9, Man Singh Road, New Delhi?”

2. These reference applications arise out of the assessment of Shri R. Dalmia, an individual, for the assessment year 1962-63 for which the previous year ended on September 30, 1961. There was an earlier income-tax reference for the assessment year 1961-62 for which the relevant previous year was the year ended on September 30, 1960. That reference was answered by this court on March 24, 1981, in R. Dalmia v. CIT, [1982] 133 ITR 169. Questions Nos. 3, 4 and 5 posed for our opinion are covered by the said earlier judgment of this court. It has not been shown to us that the decision of this court has been questioned in the Supreme Court. No arguments have been addressed persuading us to take a different view. We answer questions Nos. 3, 4 and 5 according to the opinion expressed in the aforesaid case. Question No. 6 has also been answered by this court at the instance of the Department in ITR No. 103 of 1974 for the assessment year 1961-62. The view taken by the Division Bench is based on the view expressed by the Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Corporation, [1980] 122 ITR 700 and in the case of Sheila Kaushish v. CIT, [1981] 131 ITR 435. We accordingly answer question No. 6.

3. We will notice the facts relevant for answering questions Nos. 1 and 2. For the assessment year 1962-63, the assessment of Shri R. Dalmia was completed on March 13, 1967, on a total income of Rs. 26,76,789 as against a loss of Rs. 5,83,375 returned by the assessee in addition to which a carry forward of loss from earlier years had also been claimed. The assessee had claimed to deduct, in computation of his total income, interest payments aggregating to Rs. 5,04,537, the details of which appear in the statement at serial No. 7 of annexure-1. The Income-tax Officer was of the opinion that on the basis that had been adopted in the assessments for 1960-61 and 1961-62 there should be a complete disallowance of the interest claimed. The Appellate Assistant Commissioner for the reasons given in his order for the assessment year 1961-62 upheld the disallowance but gave a relief of Rs. 19,846. The assessee as well as the Department appealed to the Tribunal, the assessee seeking further relief and the Department objecting to the reduction of Rs. 19,846 granted by the Appellate Assistant Commissioner.

4. The main ground before the Tribunal concerned the disallowance of interest claimed by the assessee as a deduction. The interest payments of the assessee during the previous year amounted to Rs. 5,04,537 and this was sought to be deducted in the computation of the total income. The Income-tax Officer as well as the Appellate Assistant Commissioner had taken the view that the assessee had borrowed amounts for purposes other than business and that the assessee had spent considerable amounts on a certain litigation and that since borrowed moneys have been utilised for the purpose, the interest, to that extent, was disallowable. It is for this reason that the whole of the amount claimed by the assessee was disallowed.

5. One of the arguments addressed by Shri Ganesan on behalf of the assessee before the Tribunal was that though the balance-sheet as on September 30, 1961, showed a debit balance of Rs. 55.65 lakhs, in reality this is not the correct position if regard be had to the assessment made on the assessee for earlier years. In his adjusted balance-sheet, Shri Ganesan attempted to show that there is actually a surplus of Rs. 73.71 lakhs. His further contention which is material for our purpose was that on the liabilities side, a sum of Rs. 55.77 lakhs is shown as due to the shareholders of Dalmia Jain Airways Ltd. Of this, a sum of Rs. 47.31 lakhs has been treated as the assessee's income from an adventure in the nature of trade for the assessment year 1960-61 and this assessment has been confirmed by the Tribunal, vide order dated August 23, 1969, in ITA No. 1004 of 1968-69. The inference sought to be drawn was that it meant that there was no loan to this extent.

6. The Tribunal came to the conclusion and summarised its conclusions on this issue thus:

“(i) The details of the loans on which interest payment is claimed should be considered item-wise, to the extent they are found to have been utilised on sources of assessable income the interest should be allowed as deduction whether the source actually yielded income this year or not, but if this method is adopted, the assessee would not be entitled to set off Rs. 19,846.

“(ii) If, for any reason, the above analysis is not possible, the overall financial position will have to be considered with reference to the balance-sheet as adjusted in respect of the sum of Rs. 47.31 lakhs and the interest would be liable to be disallowed to the extent of about of Rs. 15,000 only. As the assessee has earned an interest of Rs. 19,846, this would result in no disallowance being made under this head.

(iii) If (i) is not possible, and our decision regarding the adjustment of Rs. 47.31 lakhs is found to be incorrect (either because our conclusion is reversed or the addition of Rs. 47.31 lakhs is deleted in further proceedings), the disallowance will be worked out on the basis of the Tribunal's order last year, viz., at Rs. 2,34,830, and the assessee would be entitled to set off Rs. 19,846 against this.”

7. As a result of the Income-tax Appellate Tribunal's order dated May 30, 1973, and the consequential order, the Income-tax Officer made the computation of income. It adopted the second alternative. The income from other sources was noticed. Thereafter, it is mentioned:

“Loan with interest payment Rs. 5,04,537 Deduct interest credited Rs. 19,846 Rs. 4,84,691

8. It is necessary to elaborate a little about this sum of Rs. 47.31 lakhs which has been treated as the assessee's income from an adventure in the nature of trade for the assessment year 1960-61. The facts are that A Ltd. was floated as a public company on July 9, 1946, with a subscribed and paid up capital of Rs. 3% crores in the form of 35 lakhs shares of Rs. 10 each. Another company, B Ltd., was incorporated as a public company on March 11, 1948, but was converted into a private company on April 26, 1952. A shareholder filed a petition for the compulsory winding up of A Ltd. That company, however, went into voluntary liquidation on June 13, 1952. Five shareholders wrote to the voluntary liquidator of A Ltd. that B Ltd. had agreed to take over the entire assets and liabilities of A Ltd. provided a proposed scheme was sanctioned by the court. The voluntary liquidator proposed a scheme of arrangement which was unanimously approved by the members. The scheme was sanctioned by the District Judge on February 10, 1953, and later modified. Under the modified scheme, the proposal was to pay: (a) Rs. 5-4-0 per share immediately to such shareholders as wished to avail of this option; (b) in the alternative, Rs. 7 per share in six instalments in five years; (c) in the alternative, Rs. 10-4-0 per share in ten years. The assessee, who was controlling both the companies, undertook to guarantee the proposed payment with his own property. By a subsequent order dated February 10, 1953, the District Judge passed an order transferring the assets and liabilities of A Ltd. to B Ltd. The sanction of the scheme was to be notified in the newspapers and any member who wished to avail of this scheme had to give notice of his address and surrender his share scrips to B Ltd. within 6 months from the date of publication of the notice. The scheme was notified and published in the newspapers on, February 20, 1953, and under para 9 of the scheme the shareholders were to apply to B Ltd. before August 20, 1953. Thereafter, by an agreement dated March 24, 1953, between the assessee and B Ltd. (whose name was in the meantime changed to Asia Udyog (P) Ltd.) it was agreed that, after the expiry of five years from the date of the passing of the scheme, B Ltd. should transfer to the assessee its liability regarding whatever amount remained unpaid to the members of A Ltd. under the scheme, within one year after the expiry of five years. On September 26, 1958, another agreement was executed between the assessee and B Ltd. whereby the company agreed to transfer its liability for the payment to be made to the shareholders of A Ltd. in accordance with the scheme amounting to Rs. 67 lakhs against a consideration of Rs. 67 lakhs, and the assessee took over that liability to pay the shareholders of A Ltd. This agreement came into force on October 1, 1958. As on October 1, 1958, there were as many as 4,72,548 shares which had not been surrendered and in respect of those shares nothing was payable because of non-compliance of para 9 of the scheme and the Tribunal found that the payments to be made by the assessee aggregated to Rs. 20,30,892. and the surplus of Rs. 47,30,892 was the assessee's business income holding that the assessee was in a position to have a fair idea of the liability to the shareholders of A Ltd. pursuant to the scheme; that there was a large number of shareholders of A Ltd., from the regions which went over to Pakistan; that the assessee, therefore, knew in 1953 that those shareholders would not be coming forward to claim any compensation under the scheme and the assessee conceived the idea of taking advantage of his position and availed of his position with B. Ltd. and the original guarantee to derive a gain out of the so-called liability to the shareholders of A Ltd.; that both the agreements were only by way of camouflage to conceal the real gain and that such gain resulted from an activity which was by itself a business activity, or, in any case, the bargain amounted to an adventure in the nature of trade. At the instance of the assessee, the question of law was referred for the opinion of this court as to whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 47,30,892 was income taxable under the head “Business”. This court in R. Dalmia v. CIT, [1982] 137 ITR 665 came to the conclusion that the dominant intention of the assessee was to embark on an adventure in the nature of trade and the gain resulting to the assessee therefor was taxable in his hands as income from his business. The assessee was unsuccessful in getting this judgment set aside by the Supreme Court. The result is that this sum of Rs. 47.31 lakhs has been treated as the assessee's income from an adventure in the nature of trade for the assessment year 1960-61 and the assessment has been confirmed by the Tribunal whose view has been upheld by this court.

9. By making this adjustment, an effective balance-sheet as on September 30, 1961, was drawn up on behalf of the assessee. As per the balance-sheet, Dalmia Jain Airways Ltd. shareholders' liability is shown as Rs. 55.77 lakhs less assessed as income in 1960-61 at Rs. 47.31 lakhs. The overall financial position had to be considered with reference to the balance-sheet as adjusted in respect of the sum of Rs. 47.31 lakhs. This direction was rightly given by the Tribunal and the income computed by the Income-tax Officer. The Income-tax Officer has deleted the disallowance of interest of Rs. 5,04,537. The answer to question No. 1 has, therefore, to be against the Department and in favour of the assessee. In view of our answer to question No. 1, question No. 2 does not arise.

10. In the result, we answer question No. 1 against the Department and in favour of the assessee and do not answer question No. 2 as it does not arise in view of our answer on question No. 1. Questions Nos. 3, 4 and 5 are covered by the decision of this court in R. Dalmia v. CIT, [1982] 133 ITR 669 and question No. 6 is covered by the decision of this court in ITR No. 103 of 1974 decided on December 16, 1981 (infra p. 526) and we answer them accordingly. On the facts and circumstances of the case, there is no order as to costs.