Commissioner Of Income-Tax, Uttar Pradesh v. Manmohan Das

A COMMISSIONER OF INCOME-TAX, UITAR PRADESH MANMOHAN DAS November 5, 1965 [K. SUBBA RAo, J. C. SHAH ANDS. M. S!KRI, JJ.] Income-tax Act (11 of 1922), ss. 10 and 24-Treasurer of Bank-If "vocarion"-Right of assessee to carry forward loss of one year to subse-qllent year and set off against profit-Scope of. The respondent was appointed Treasurer of a Bank in respect of certain of its branches, sub-agencies and pay offices. In the pre,·ious c year corresponding to the assessment year 19)0-51, he suffered a loss in performing his duties as Treasurer. But the Income-tax Officer, in assess-ing the respondent to income-tax, declared that the loss could not be carried forward to the next year under s. 24(4) of the Income-tax Act, 1922, on the ground that it was not a business loss. For the assessment year 1951-52, the Income-tax Officer refused lO allow the loss to be set off against the net profit for the year and brought that amount of profit to tax as remuneration received by the respondent as Treasurer of the D Bank. The order was confirmed by the Appellate Assistant Commissioner.. but. the Appellate Tribunal held that the remuneration received by the respondent was income arising from the pursuit of a profession or vocation within the meaning of s. 10 of the Act and therefore the loss suffered during the preceding year could be set off against his income in the subse-quent year. On a reference the High Court agreed with the Tribunal. In appeal to this Court, HELD : (i) The decision recorded by the Income-tax Officer, who computed the loss in the previous year under s. 24(3), that the loss could not be set off against the income of the subsequent year was not binding on the respondent, as, under s. 24(2), it is for the Income-tax Officer dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. [534 A-CJ (ii) The use of the expressions "serve the Bank" and "in the service of the Bank" in the contract appointing the respondent as Treasu:er of the Bank have to be read in the setting of the other convenants and are· not decisive of the question whether the respondent was a servant of the Bank. Under the contract the respondent had to procure due perform-ance of the duties of the cash department by employees under his super-vision and he was to be responsible for all acts done by them and to make good the loss which might result from any embezzlement, theft, fraud, misappropriation, mistake, misconduct, omission, negligent act or default of any such person. In carrying out his duties under the contract he was not to be controlled or supervised by the Bank and the agreement was not liable to summary determination. The contract was therefore for service and the respondent could not be called a servant of the Bank . Therefore, the remuneration received by him was not "salaries" within· the meaning of s. 7 of the Act. [538 F-G; 540 E-F; 543 BJ Section 24(2) confers a statutory right upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward so much of the loss as is n?t set .off under sub-s .. 0) t.o the following year, and to set it off against hts profits and gams, if 532 SUPREME COURT REPORTS (1966] 2 S.C.R. .any, from the same business, profession or vocation for that year. The occupation of a Treasurer is not a profession, nor does it partake of the ·Character of a business or trade. But taking into consideration the nature of the duties performed, and the obligation undertaken, together with the right to remuneration subject to compensation for loss arising to the Bank from his own acts and omissions or of the servants introduced by him into the business of the Bank, the respondent could be regarded as following a vocation. His remuneration must therefore be computed ·under s. 10 and loss of profit suffered in that vocation in any year could be carried forward to the next year and be set off against the profit of that year. [543 B, C-D, F-G] Dharangadhara Chemical Works Ltd. v. State of Saurashtra, [1957] S.C.R. 152, followed. Shivnandan Sharma v. The Punjab National Bank Ltd. [1955] 1 S.C.R. 1427 and Piyare Lal Adishwal Lal v. Commissioner of Income-tax, Delhi 40 I.T.R. 17, distinguished. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 512 of 1964. Appeal from the judgment and decree dated December 23, 1960 of the Allahabad High Court in Income-tax Misc. Case No. 475 of 1954. A. V. Viswanatha Sastri, R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, for the appellant. S. T. Desai, and J.P. Goyal, for the respondent. The Judgment of the Court was delivered by Shah, J, Under an agreement dated January 2, 1931, Lala E Manmohan Das-hereinafter called 'the assessee'-was appointed Treasurer of the Allahabad Bank Ltd. in respect of certain Branches, Sub-Agencies and Pay Offices. The assessee was assessed to income-tax as representing his Hindu undivided family, and the income received by the assessee under the terms of the agreement with the Allahabad Bank, was treated as income of F the Hindu undivided family. In the previous year corresponding to the assessment year 1950-51 the assessee in performing his duties as a Treasurer suffered a net loss of Rs. 38,027. For the assessment year 1951-52, the profit and loss account of the assessee showed Rs. 73, 81 S as receipts, against which were debited out-goings amounting to Rs. 39,370 which included Rs. 20,000 being G the loss suffered by the assessee as Treasurer of the Patna Branch of the Allahabad Bank arising . from misappropriation by an Assistant Cashier. The Income-tax Officer refused to allow the loss suffered in the previous year to be set off against the net profit of Rs. 34,445 and brought that amount of profit to tax H as remuneration received by the assessee as Treasurer of the Allahabad Bank. The order of the Income-tax Officer was con-firmed in appeal by the Appellate Assistant Commissioner. The A Income-tax Appellate Tribunal held that the remuneration received by the assessee as Treasurer of the Allahabad Bank was income arising from pursuit of a profession or vocation within the meaning of s. 10 of the Act and the loss suffered during the preceding year was liable to be set off against the assessee's income from that source in the year under consideration. B At the instance of the Commissioner of Income-tax, U.P., the following questions were referred to the High Court of Allahabad under s. 66(1) of the Income-tax Act, 1922: "(l) Whether on a true interpretation of the deed of agreement dated 2nd January, 1931, appointing the assessee as Treasurer of the Allahabad Bank Limited, income earned by the assessee from his activities as such Treasurer fell to be computed under Section 10 of the Act or Section 7 or Section 12 of the Income-tax Act? If the answer to this question is that such income is D liable to be computed under Section 10 of the Act, (2) Whether the assessee could clain1 a set off of the loss suffered by him in the preceding year 1950-51 against his profits in the year under consideration, i.e., 1951-52 having failed to prefer an appeal against the refusal by the Income-tax Officer making the assess· ment for the year 1950-51 to allow the assessee to carry forward the loss under Section 24(2) of the Act ?" The High Court held that the remuneration received by the asses.see from the Allahabad Bank was income liable to be taxed under s. 10 of the Income-tax Act, and that the assessee could F claim to set off the loss computed in the assessment year 1950-51 against the profit in the subsequent year. With certificate granted by the High Court, this appeal has been preferred by the Com-missioner of Income-tax. The second question presents little difficulty. In making his order of assessment for the year 1950-51 the Income-tax Officer G declared that the loss computed in that year could not be carried forward to the next year under s. 24(2) of the Income-tax Act, as it was not a business loss. The Income-tax Officer has under s. 24(3) to notify to the assessee the amount of loss as computed by him, if it is established in the course of assessment of the total income that the assessee has suffered loss of profits. Section 24(2) B confers a statutory right (subject to certain conditions which are not material) upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward L3Sup. CI/66-4 the loss as is not set off under sub-s. ( 1) to the following year, and to set it off against his profits and gains, if any, from the same business, profession or vocation for that year. Whether the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and gains of the same business, profession or vocation under s. 24(2) has to be determined by the Income-tax Oflicer who deals with the assessment of the subsequent year. It is for the Income-tax Offi-cer dealing with the assessment in the subsequent year to deter-mine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the Income-tax Officer who computes the loss in the previous year under s. 24(3) that the loss cannot be set off against the income of the subse-quent year is not binding on the assessee. The answer to the first question depends upon the true inter-pretation of the terms of the agreement between the Allahabad Bank and the assessee. If under the terms of the agreement it is found that the assessee was carrying on a business, profession D or vocation, the assessee would be entitled to carry forward the loss suffered therein and set it off against the profits in the sub-sequent year of the same business, profession or vocation under s. 24(2). If the remuneration was received by the assessee as a servant of the Bank, and on that account has to be computed under s. 7 of the Act, the right to set off the loss cannot be E claimed under s. 24(2). The fact that the assessee held an office is however not decisive of the question whether remuneration earned by him was as a servant of the Allahabad Bank. Receipt of remuneration for holding an office does not necessarily give rise to a relationship of master and servant between the holder of the office and the person who pays the remuneration. F The agreement is between the Allahabad Bank Ltd. and Lala Manmohan Das-called in the agreement "Treasurer", and the expression Treasurer includes "his heirs and representatives". By cl. 2 it is recited that the Treasurer is appointed for the Bank's Branches and Sub-Agencies and Pay Offices mentioned therein and such other offices in other parts of India for which he may be appointed, and that the Treasurer has agreed to provide security to the Bank for the due discharge and performance of his duties and obligations to the Bank. The agreement then proceeds to set out the conditions of the agreement, the follow-ing of which are relevant : (1) "The Treasurer shall serve the Bank as Treasurer for its Branches, Sub-Agencies and Pay Offices as hereinafter provided." until this agreement is determined (2) "The remuneration of the Treasurer shall be a monthly allowance for each of the Branches, Sub-Agencies and Pay Offices . , the total of such monthly allowance to be Rs. 2,250 (Rupees two thousand two hundred and fifty) plus Rs. 350 (Rupees three hundred fifty) for travelling expenses." ( 3) "The duties, liabilities and responsibilities of the Treasurer to the Bank shall be such as either by custom or contract usually devolve on a Treasurer in the service of the Bank including the duties, liabilities and respon-sibilities hereinafter mentioned and the Treasurer shall faithfully discharge his duties and duly perform his obli-gations to the Bank." (4) "The Treasurer shall with the approval of the Bank appoint at adequate salaries to be paid by the Bank all the Indian staff as may be con-sidered sufficient by the Bank for the business of the Cash Department of the Bank's Branches, Sub~Agencies and Pay Offices and shall dismiss any person or persons so appointed whom he shall be reasonably directed by the Bank to dismiss and shall with like approval appoint another or others in the place of person or persons so dismissed. The Treasurer shall be deemed to have appointed the present staff of the Cash Depart-ment of the Branches, Sub-Agencies and Pay Offices aforesaid. Provided always that the Bank shall accept any proposal of the Treasurer for transfer, suspension or disniissal of any member of the Cash staff in the Bank." (5) "The Treasurer shall be responsible to the Bank for the work and conduct of every person . . . to be appointed or employed on his staff and shall make good to the Bank any loss or damage sustained or in" curred by the Bank from any embezzlement, theft, fraud, misappropriation, misconduct, mistake, omission negligent act or default of any such person or persons.': (6) "The Treasurer shall keep under his care and supervision or that of his staff the moneys, cash, bullion securities, cheques, notes, hundies, drafts, orders and [1966] 2 S.C.R. other documents or property which may from time to time be entrusted to him at the Branches, Sub-Agencies and Pay Offices and shall whenever so required to do so tra_nsmit from one place to another place under such guard as may be provided by the Bank all such money, documents or properties and shall be responsible for the care and proper custody of the same while in transit. That the Bank shall for the efficient working of its Cash Department provide proper iron safes and a strong room in each of the said Branches, Sub-Agencies and Pay Offices and the Treasurer shall be responsible to the Bank for any loss occasioned to the Bank through the negligence, malfeasance or mis-feasance of any of his servants or agents by the payment or delivery of any money, document or property afore-said to a wrong person whether owing to forgery, mis-take, fraud or otherwise." (7) "The Treasurer shall be responsible for the cor-