COMMISSIONER OF INCOME TAX (CENTRAL) DELHI \I. HARPRASAD & CO. (P) LTD. February 25, 1975 [Y. V. CHANDRACHUD, R. S. SARKARIA AND A. C. GUPTA, JJ.] Income-tax Act (ll of 1922) Sections 128, 22(2A), 24(2A) & (2B)-
Capital loss incurred in 1/te year when capital gains were not exigible to tax- lf could be set against capital gains in subsequent years. By the Income-tax and Excess Profit Tax (Amendment) Act, 1947 s. 12B was inserted in the Indian Income-tax Act, 1922 .. making capital gains which arise after March 31. 1946, taxable. The same A':t inserted sub-sections (2A) and (2B) in s. 2.4 of the Income-tax Act.
As a result of the Indian Finance Act, 1949 which restricted the operation of s. 12B to capital gains ari.sing before April l, 1948, a.nd the Finance (No. 3) Act of 1956 which restored tax on capital gains with effect from. April l, 1948 capital gains arisinll from 1-4-1948 to 31-3-1956 were not taxable.
For the assessment vear J 955-56 which relates to the period when ce.pital gains were not taxable the assessee claimed a loss of Rs. 84,862/- arisini: from the 5a\e of certain sharc:s.
The Income-tax Officer disallowed the loss on the ground that it was a los.s of capital nature. The Appellate Assistant Commis- sioner, .in appeal, held that the assessee's claim was exaggerated, that the. actual .lo!! wa, only Rs. 28,662/- and agreed with the Income-tax Officer that the IO!s was not a revenue loss but a capital loss.
Before the Tribunal the assessee con- tended that the amount of Rs. 28,662/. which had been held to be a capital IE>ss by the authorities ~ihould be allowed to be carried forward and set off agairat profits and gains under the head "Capital gains" earned in future as laid down in. s. 24(2A) and (2B).
The Tribunal held in favour of the ass(:ssee. The High C0urt, in reference, confirmed the order of the Tribunal holding that the effe:t of sub-section:; (2A) and (28) of s. 24 read with sections 6 and 12B was that if a capital loss was incurred in a Year in which a. c~pital gain did not attract tax under section l 2B even then such loss would still be loss under the head 'capital i~ains' and if in a subsequent year the assessee had any profit under that head it would still be carried forward and set off against the taxable capital gain.
Allowing the appeal to this Court, HELD : (1) From the charging provision of the Indian Income-tax Act it is discernible that the word5 'income' or 'profits and gains' should be understood as including losses, so that both must enter into
computation, wherever it becomes material, of the taxable income of the assessee. Although s. 6 classifies income under six heads the main charging provision is s. 3 which levies income- tax as only one tax on the 'total income' of the assessee a5 defined in s. 2(15). An income in order to come within the purview of that definition must satisfy two conditions, (a) it rnust comprise the 'total amount of income. profits. and gains refeued to in s. 4(1), and (b) it must be computed in the manner laid down in the Act. If either of these conditions fails the income will not be a part of the total income that can be brought tu charge. [702F-703BI (2) The concept of ~arry forward of loss does not stand in vacuo. Itf: sole
purpose is to set off the loss against the profits of a subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss a1~ainst prcfit tn reduce the tax demand.
Tt follows that if such set off is not nermissible or possible owi11g to the income or profits of the subsequent year being from a non-.taxable source, then~ would be no point in allowing the loss to be carried forward.
Also, if the Joss arising in the previouJ year was under a hea•i not chargeable to tax it covld not be allowed to be carried forward and absorbed ag<tinst income in a subsequent year from a taxabb source. [704C-E] (3) Capital gains would be covered bv the definition of income ins. 2(6C) II
only if they were chargeable under s. l 2B. But s. 12B was not operative in the vears 1948 to 1956. Thus in the relevant previous year and the asses~;ment year· or even in he subsequent yeac, 'capital gains' or 'capital losses' did not n
c C.I.T. v. HARPARSAD & co. (Sarkaria, ].) form par: of the total income of the assessee which could be brought to charge and were, therefore, not required to be computed under the Act. That is con-
dition (b) which 'total income' must satisfy is not satisfied in the present case. l.703B-D] (4) Under· s. 22(2A) it is a condition precedent to the carry forward and set off of the loss that the assess~e must file a return either in response to a general notice, under s. 22( 1) or voluntarily, without any individual notice unuer sub- sectio•1 (2). If he does not file the return for the year in which the loss wa.q i"ncurred and get the loss computed by the Income-tax Officer, th~ right to carry forward the loss v.'ill also be lost.
But if the loss is from a source or head of income not liable to tax or exempt from tax neither the assessee is required to show the same in the. return nor is the Income-tax Officer under any obligation to compute or assess it, much less for the purpose of carry-farward. [7030-F] ( 5) In the instant case, the asscssee in his return had not shown any 'capital loss' but claimed the loss as a revenue loss.
The Income-tax Officer should have rejected the asmsee's claim to carry forward the loss merely on the ground that it was not a revenue loss and he need not have given a finding that it was a capital loss, because 'capital gains' were not taxable during the year.
[703F-Ci] ( 6) Section 24 (2) expressly refers to loss, 'in any busines$; profession or vocation'. It does not cover a capital loss under the head 'capital gains' which at the relevant time were not chargeable and did not enter into computation of the total income of the asse~see. Therefore, under s. 24(1) and (2) the assessee had no independent right to carry forward his capita I loss even if it could not be set off owing to the non-taxability of capital gains against future profits in the immediate subsequent years.
[704B-C] (7) Assuming, therefore, that the assessee in the subsequent years 1955-56 and 19 56-57 when the capital gains were not taxable made huge capital gains he would not be obliged to show those capital gains in his return. Therefore, the loss suffered by him in the relevant assessment year in the instlmt case could not be absorbed or set off against such capital gains.
[704F] C!VIL APPELLATE JURISDICTION : Civil Appeal No. 494 of 1970. From the judgment and order dated the 24th January, 1969 of the Delhi High Court in Income Tax Ref. No. 51 of 1966.
V. C. Desai, !. Ramamurthy and R. N. Sachthey, for the-appellant. A. K. Sen and H. K. PUl'i, for the respondent. The Judgment of the Co'CI't was delivered by SARKARIA, J.-This appeal is directed against the Judgment, dated 24-1-1969, of the High Court of Delhi answering in the affirmative the following question referred to it under s. 66 (1) of the India•, Income- tax Act, 1922 (for short, the Act) by the Commissioner of Income-tax: "Whether on the facts and in the circumstances of the
case the capital loss of R.~. 28,662/- could be determined and carried forward in accordance with thr provisions of Section 24 of the Indian Income-tax Act, 192:.t, when the provisions of section 12B of the Income-tax Act, 1922 itself were not applicable in the assessment year 1955-56."
The assessee (respondent) is a Private Limited Company. The assessment year under tderence is 1955-56 and the relevaQ.t previous year is from 1-5-1953 to 30-4-1954. On lC\-1-1952 the assessee pur- 14-470SupCf/75
SUPREME COUllT REPORTS chased 112-4- shar1es of M/s. Intercontin'!nt Travancore Pvt. Ltd. at a cost of Rs. 1,12,400/- from M/s. Escorts (A&M) Ltd. In the rek:- vant accounting year ending on 304-1953 the assessee received 562 bonus sh:i.res from the same company. It thus acquired a total num- ber of 1686 shares. On 3-9-53, i.e. during the relevant previous year the assessee sold all these 1686 shares !o M/s. Escorts (Agents) Ltd. for Rs. 84,300 and claimed a loss of Rs. 84,862/- in the income-tax return filed by it.
The Income-tax Officer disallowed the entire loss of Rs. 84,862 on the ground that it was a loss of a capital nature. The assessee carried an appeal to the Appellate Assistant Commii,- sioner and contended that this loss of Rs. 84, 862 /- was a revenue l0!1s . arisin)!; out of dealing in shares. The Appellate Assistant Commissionc~r found that the assessee's claim was exaggerated and that the actual lrn!S was to the tune of Rs. 28,662/- only. He furthtr held that this l0!1s of Rs. 28,662/- was not a 'revenue loss' but a 'capital loss' arising out of change of investments.
Against the decision of the Appellate As~:stant Commissioner tr.e assessee preferred an appeal before the Tribunal, challenging the find- ings of the Commissioner both in regard to the amount of loss and rts nature. At the stage of arguments before the Tribunal, the assessee's C..ounsel did not press these grounds of appeal but took up the plea that the amount of Rs. 28,662/- which had been held to be a "capital 10s.!.'' by the authorities below, should be allowed to be carried forward and set off against profits and gains, if any, under the head "capital gairu" earned in futr.re, as laid down in sub-sections (2A) & (2B) of s. 24 of the Act.
Despite objection from the Departmental Representativ1~, the Tribunal allowed this new ground to be raised with the ob&ervation that ft was "a pure question of law and did not require investigation of any fresh fact". It further accepted the contention of the a~sessee and directed that the "capital loss" of Rs. 28,662/- should be carried forward and ~et off agairu.t "capital gains" it any, in future.
At the instance of the Commissioner of Income-tax, the Tribunal referred the above question (set out at the commencement of this judg- ment) to the High Court under~- 66(1) of the 1922 Act.
It was contended before the High Court on behalf ot the Revenue that the expression "capital gains" in sub-section (2A) of s. 24 has reference only to section 12B so that the loss suffered in the year i.n which. the profits under Che head "capital gains" were not taxable, could not fall within sub-section (2A) of s. 24, S. K. Kapoor J., speaking for the Division Bench, rejected this contention in these tenns :· "This argument overlooks the fact that the head of income
chargeable to income-tax are set out in section 6. ~lion 12-B deals only with the computation of capital gains and with their taxability if they arise during a particular period. As a matter of fact, section 12B itself refers
to ~ection 6 inasmuch as it says that "the tax shall be payable by an assessee under the head "capital gains". This obvious- ly has reference to the Vlth head in section 6. The effect of c
c c.r.r. v. HARPARSAD & co. (Sarkaria, J.) sub-section (2A) and (2B) of section 24 read with section 6 and 12B, therefoce, is that if a .capital !oss is incurred in a year in which a capital gain did not attract tax under section 12B such loss would still be loss under the head "capital
gains" and if in subsequent year the assessce has any profit under that head it can still be carriM forward and set oft' against the taxable capital gain. The Tribunal, was in my opinion, right in c.oming to the conclusion that it did.'.' Hence this appeal by the
Commissioner of Income-tax (Central) Delhi. Capiwl Gains Tax for the first time was introdu~ed by the Incomc- tax and Excess Profit Tax (Amendment) Act, 1947 (No. of 1947) which inserted section 12B in' the Act.
This section made taxable "capitai £ains" which arose after March 31, 1946 The same Act of 194 7 added as the Vlth heali "capital gains" in 5. 6 of the Act. It also inserted sub-sections (2A) and (2B) ins. 24 of the Act. The Indian Finance Act, 1949 virtually abolished the levy and restricted the operation of s. 12B to "capital gains" arisin9 before the 1st April, 1948. But s. 12B in its restricted form, andi the VIth head, 'capital gains' in s. 6, and sub-sections (2A) and (2B) of s. 24 were not deleted and continued to form part of thr. Act. The Finance (No. 3) Act, 1956 reintroduced the "capital gains" tax with effect from the 31st March, 1956. It substantially altered the old section 12B and brought it into its present form. As. a result of Finance Act (3) of 1956 "capital gains" again became taxable in the assessment year 1957- 58. The position that emerges is that "capital gains" arising, between 1-4-1948 and 31-3-1956, were not taxable. The capital loss in ques- tion relates to this period.
Mr. V. S. Desai, learned Counsel for the appellant contends that accordir1g to the scheme of the Act a "capital Joss" occurring in a pre- vious year, could be allowed to be carried forward and set off against the capital gains of a subsequent year, only if the income 'lllder that head was taxable in the relevant previous and subsequent years. Since during the period from 1-4-1948 to 31-3-1956, capital gains (plu$) or capita! gains (minus) did not enter into computation of the total income of the assessee chargeable to tax under s. 3 read with s. 12B of the Act, the question of carrying forward such loss did not arise, much Jess could such a loss be set off against the profits of any 6Ubse- quent year.
As against this, Sbri Ashok Sen, learned Counsel for the assessee maintains that a right to carry forward a loss under any of the heads enumerated in s. 6, is. not dependent upon the taxability of income under that head; it is sufficient if at the relevant time "capital 9ain~" is one of the heads cf income recognized by the charging s. 6 and the loss is adjustable ae:ainst "capital rrains", if anv, in future under s. 24. ·The argument proceeds; thats. 6(vi) was not lying inert on the statute boo]< but was operative, throughout, for the purpose of calculating the losses under that head. Shri Sen compared the non-taxability of capital gains during the: period from 1-4-1948 to 31-3-1956, to a tax holiday for those years. Another illustration given by the learn.ed Counsel is of a person whose total income falls entirely on the negative side on account of losses suffered by him under any of the heads of income given in s. 6. Such a person notwithstanding the fact that he had no assessable income has a ri3ht to file a return and get his losses con~puted by the Income-tax Officer merely for the purpose of carrying forward the loss. The Income-tax Oillcer, it is added, ca1mot ignore th·:! return filed by the assessec, voluntarily, showing losses even though such a return is filed beyond time. ln this connection, Shri Sen has referred to Commissioner of fllcome-tax,
Punjab v. Kulu Vai/ey Transport Co. Ltd.('), Jaikisha11 Gopikishan and Sons v. Commis- sioner vf Income-tax, .M.P.(2) and Commissioner of Income-1~ax, M .. dhya Pradesh v. Khushal Cha·id Daga(8).
Before dealing with the contentions canvassed, it will &c appropri- ate to have a clear idea of the terms 'income', 'total income', 'computa- tion of total income', 'carrying forward' of a loss and its purpose, in the context of the scheme of the Act.
Section 2 Cl. ( 15) defines "total income" to mean total amount of income, profits and gains referred to in sub-section ( 1) of sectio11 4 computed in the manner laiJ down in this Act. Section 3, captioned as ·'Charge of Income-tax!', emphasises that the income-tax shall be charged in respect of the total income of the previous year of, every assessee. Section 4 defines the ambit of that total i11come. Section 6 enumerates six heads of incone, profits and gains chargeable to income- tax. They are :
" ( i) Salaries. (ii) Interest on securities. (iii) Income from property. (iv) Profits and gains of business, profession or vocation. (v) Income from other sources. (vi) Capital gains."
Sections 7, 8, 9, W, 12 and 12B relate to payability and computa- tion of tax under the various heads of income. The material part of s. I 2B at the relevant time was as follows :
"12B ,(1) The tax shall be payable by an assessee under the head "Capital gains" in ~espect of any profits or gains arising from the sale, exchange or trnnsfer of a capital ass·~t effected after the 3 I st day of March I 946 and before the 1st day of April, 1948 and such profits and gains shall be deemed to be income of the previous yenr in which the sale, exchange or transfer took place."
l l 7 7, f. T. R. 518 (S.C.). (2) B4. !. T. R.(~5· (3) 41. l. T. R. 177 (S.C.) c II c c.1.r. v. HARPARSAD & co. (Sarkaria, J.) Section 22(1) requires a general notice to be published requiring every person whose total income during the previous year exceeds the maximum non-taxable limit to file a return. Sub-s·~ction (2) of this section enables the income-tax Officer to issue no.ice to any such person requiring him to furnish a return. Sub-section (2A)-which was inserted by !he Income-tax Amendment Act 25 of 1953 with effect from 1-4-1952-provides:
i.If any person who has not been served with a notice under sub-section (2) has sustained a loss of profits or gains in aey year under the head Profits and gains of busi- ness, profession or vocation, and such loss or any part
thereof would ordinarily have been carried forward under sub-s. (2) of section 24, he shall, if he is to be entitled to the benefit of the carry forward of loss in any subsequent assssment, furnish within the time specified in the general notice given under sub-s. ( 1 ) all the particulars required under the prescribed form of return."
The material purt of s. 24 runs thus : "24. ( 1 ) Where any assessce sustains a loss of profits or gains in any year under any of the heads mentioned ;n section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year :
Provided that in computing the profits and gains chargc- abl<: under the head "Profits and Gains of business, profession or voc,ation", any loss sustained in speculative transaction which a1e in the nature of a business shall not be taken into account except to the extent of the amount of profits and
gains, if any, in any other business consisting of speculative transactions : ( 2) Where any asscssee sustains a Joss of profits or ga;ns in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940, in any business, profession or voca- tion. and the loss cannot be wholly set off under sub-section ( 1), so much of the loss as is not so set off or the whole Joss where the assessee had no other head of income shall be carried forward to the following year, and
( i) where the loss was sustained bv him in a business consisting of speculative transactions, it shall be set off only against the profits and galns. if .iny, of any business in speculative transaction carried on by him
in that year; (ii) where the loss was sustained by him in any other busi- ness, profession or vocation, it shall be set off against the profits and gains, if any. of anv business, profes-
sion or vocation carried on by him in that year pro- vided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; ar.d
if the loss in either case cannot be wholly so set off, the amount of loss not so set off shall be carried for- ward to the following year and so on ….. . 2A. NcJtwithstanding anything contained in
sub-section ( 1 ) , where the loss sustained is a loss falling under the head "Capital gains'', such loss shall not be set off except against any profits and gains falling under that head.
2B. Wherean assessee sustains a loss such as is referred c to in sub-s1~ction (2A) and the loss cannot be wholly set off in accordance with the provisions of that sub-section, the portion not so set ofl' sha!l be carded forward to the following year and set oft against capital gains for that year, and if it cannot be so sd off, the amount thereof not so set oft shall be carried forward to the following year and so on, so however, that no such loss shall be so carried forward for more than six years :
Provided that where the loss sustained in any previous year does not exceed fifteen thousand rupees, it shall not be carried forward. (3) When; in the course of the assessment of the t'Otal in- come of any assessee, it is established that a loss of
profits or gains has taken place which he is entitled to have set off under the provisions of this section. the Income-tax, Office~ shall notify to the assessee by ord<:r in writing the amount of the loss as computed
by him for the purposes of this section." s~ction 2( 6C) provides that 'income' includes (among other things)-" (vi) any capital gai.n chargeahle under Section 128."' From the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains'. should be understood as includ- ing losses also, so that, in one sense
'pro~ts ar;d gains' represent 'plus income' whereas losses represent 'minus income' (1). In other \\'ords, Io's is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computaiion, wherever it beC'Jmes material, in the same mode of the taxable income of i:he assessee.
Although s. 6 classifies income under six heads, the main charging provision is s. 3 which levies income-tax, as only one tax, on the 'total income' of the assessee 3.S defined in s. 2 (15). An income in orcier to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the "total amount of income, ——-
(I) CIT v. Ktwamchand Prem Chand 40 ITR 106 (SC): CIT v. E!phinston Spinning & Weai'ing Mi/is; 40 !TR 142'~f:). c c.r.T. v. JfA.1U'ARSAD & co. (Sarkaria, .'.) profits and gains referred to in s. 4( 1) ." Secoridly, it must be "co~ puted in the manner laid down in the Act". If either of these cond1- tio,ns fails, the income will not be a part of the "total income" th!\t c!'ln be brought to charge.
Now, capital gains would be covered by the definition of 'income' in sub-section (6C) of s. 2, only if they were chargeable und~r s. 12B. As noticed already, s.12B as modified by the Finance Act, 1949, Jid · not charg,. any 'capital gains' arising between 1-4-1948 to 1-4-19?7· lnJced s. 12B was not operative in these years (1948-57). Durmg this pe'riod, "capital gains", whether on the positive or the negative side, could not be computed a.nd charged under s. 12B or any other provisions of the Act. In the instant case, the second condition, name-. ly, "the manner of computation laid down in the Act" which-to use the words of Stone C.J. (1)-"forms an integral part of the definition of 'total income' " was not satisfied. Thus in the relevant previous year and the assessment year, or even in the subsequent year, capital gains or ''capital los..~es" did not form part of the "total income" of the asses- see which could be
brought to charge, and were, therefore, not required to be computed unjer tho Act. Before the insertion of sub-section (2A) in s. 22 by the amend- ment of 1-4-1952, an assessee was entitled to carry forward a !os• even if ho had submitted no return for the year in which the loss was su~tained. After the enactment of sub-section (2A), it is a condition precedent to the carry-forward and set off of the loss, that the assessee must file a return either in response to a general n'Otice under sub-sec- tion (1) of s. 22 or voluntarily, without any individual notice 1mder 1mb-section (2) of that section. If he does not file the return for the year in which the loss was incurred and get the loss computed oy the Income-tax Officer, the right to carry forward the loss will also be lost. But if the loss is from a source or head of income not liable to tax or congenitally exempt from income-tax, neither the assessee is required to show the same in the return, nor is the Income-tax Officer under any obligati'On to compute or assess it, much less for the purpose of "carry forward". It is noteworthy that in the instant case, tile assessec in his return had not shown any "capital losses". He had claimed this loss as a revenue loss. The Income-tax Officer could, therefore, reject the assessee's claim to carry forward the loss, merely on the ground that it was not a "revenue l'Oss''. His further finding that it was !\ "capital loss" was only incidental and, in fact, Wl'lS n_ot ncces- s.a;t.
From what has been said above, it follows as a necessary corollary. that during the period s. 12B did not make income under the head, 'capital gains' charneable, an assessee was neither required to show income under that head in his return, nor entitled to file a return show- ing "capital losses" merely for the purpose of getting the same com- puted and carried forward. Sub-section (2A) of s. 22 would not give him such a right because the operation of that sub-section is, in
terms, confined to (i) a l'OSs which is sustained "under the head 'pro- fita and gains' of business, profession or vocation" and would ordinarily (1) In re Kamdar [1946] LT.IC 10, 21.
have been carried forward under sub-section (2) of s. 24, and (ii) to "income" which falls within the definition of 'total income. Both these conditions necessary for the application of the sub-section are lacking in the present case.
Nor do we find any substance in the contention that under sub-sec· tion (2) read with sub-section (1) of s. 24, the assessee had an inde- pendent right to carry forward his capital loss, even if it could not be set off, owing to the non-tax.ibility of capital gain&, against future pro- fits, il any, in the immediate subse<J.uent years. Sub-section (2) cif s, 24 expressly refers to loss 'in any business, profession or vocation'. lt does not cover a. "capital l•oss", or the minus income u11der the head 'capi- tal gains' which at the relevant time, were not chargeable and did not enter into computation of the 'total income' of the assessee under the Act.
Jt may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off. Its sole pur- pose is to set off the loss against the profits of a subsequent year. It presupposes the permissibilil y and possibility of the carried-forward Joss being absorbed or set off against the profits and gains, il' any, of the subsequent year. Set Dff implies that the tax is exigible and the as,essee wants to a~just the Joss agaii1st profit to reduce the tax-
demand. It follows that if such set-off is not permissible or ,po~sible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be "carried forward". Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allr,wed to be carried forward and absorbed against income in a subsequent year. from a taxable source.
Now let us test the claim of the assessee in the light of the abuve principles. 111e "cap.ital loss" of Rs. 28,662/- in the present case, was sustained in September 1953, that is, in the previous year 1953-54. Let us assume that in the subsequent years 195.S-56 and 1956-57 when the capital gains were not taxable, he made huge capital gains far ex- ceedin.~ this loss, could he be obliged to show those capital f!ains i!Jr. his return? Could the Joss of the year 1953-54 be absorbed or set off against sur;h capital gains of the subsequent years? The answer is cmpha1ically in the negative.
The cases cited by Shri Sen are not relevant. In all those cases, the heads of income under which the losses were sustained, were chargeable to tax. None of them was a case of 'capital loss' pert~1in ing to the period, 1948 to 1957.
For the foregoing reasons, we are of the opinion that the H:igh Court was in error in answering the question referred to it, in favour of the assessee. We would reverse that answer in favour of the Re,•e- nue.
In the result, the dppeal is accepted with costs. V.P.S. Appeal allowed. c