Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 37 of 1969

Judges

R.M Kantawala, C.J
S.K Desai, J.

Acts

provisions of clauses (iv), (v), (vi) and (vii) of sub-section (2) of section 10.12.
s. 10(2)(vi). Section 24 of the Indian I.T Act, 1922,
s. 10(2)(vii) of the Indian I.T Act, 1922,
section 24(2) of the Income-tax Act,
s. 12 of the Indian I.T Act, 1922.
s. 10 of the Indian I.T Act, 1922.
Sub-section (2) of s. 24
Sub-section (3) of s. 24
Indian I.T Act, 1922.

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Smart Summary

Legal Opinion Summary: S.K. Desai, J.

Factual and Procedural Background

The assessee is a public limited company incorporated circa 1932 to import and distribute petroleum and petroleum products in India. The company owned installations (storage tanks, pipelines, etc.) and land with buildings. During World War II these assets were requisitioned by the Government between 14 June 1942 and 11 December 1942 and were subsequently released in stages in 1948. While requisitioned, the Government used the assets for storage and distribution of petroleum and paid hire/compensation to the assessee; the last such payment covered January–August 1949 (accounting year 1949; assessment year 1950-51).

Prior to requisition the assessee's income was assessed as business income. In 1942 the assessee received a regular hire payment, and for the assessment year 1943-44 the ITO treated that receipt as income from other sources (rent/hire of plant) rather than business income. The assessee carried on limited trading up to 1946, and for the period 1943-44 to 1947-48 there was small business income and substantial income from other sources (hire/rent). From 1948-49 to 1954-55 the assessee's only income was rent/hire from the assets (and later rents from private lessees after release).

The assessee resumed active purchase/import of oil in 1954 (shipment received 31 July 1954; accounting year 1954, assessment year 1955-56). The ITO treated that business as a "new business" and dealt with income under s.10. Set-off of unabsorbed depreciation from the earlier years was generally refused by the ITO in the assessments for assessment years 1959-60 through 1962-63. The assessee appealed; the AAC and Tribunal made findings concerning continuity of business and availability of carried-forward unabsorbed depreciation, leading to a reference to the High Court on the stated question of law.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, unabsorbed depreciation relating to the assessment years 1943-44 to 1954-55, both inclusive, could be allowed as a set-off in the assessment years 1959-60 to 1962-63, both inclusive? (This is the principal question referred to the High Court.)
Whether the AAC was correct in allowing set-off of unabsorbed depreciation of earlier years when the ITO had found that the old business had ceased and a new business began in the accounting year relevant to assessment year 1955-56? (Departmental contention 1 before Tribunal.)
Whether the AAC could direct that income of earlier years be treated as income from business and allow set-off of past years' unabsorbed depreciation when the relevant assessments for those earlier years had become final treating that income as income from other sources? (Departmental contention 2.)
Whether unabsorbed depreciation computed under s.12 (income from other sources) could be set off against income computed under s.10 (business income) in subsequent years? (Departmental contention 3.)
Whether unabsorbed depreciation relating to assets no longer in existence could be allowed as a set-off in subsequent years? (Departmental contention 4.)

Arguments of the Parties

Revenue / Department (as advanced before the Tribunal)

The AAC erred in allowing set-off of unabsorbed depreciation from earlier years because the ITO had found the old business had ceased and a new business started in the accounting year relevant to assessment year 1955-56.
The AAC lacked competence to direct that earlier years' income be treated as business income and allow set-off of past unabsorbed depreciation where the relevant earlier assessments had become final treating that income as from other sources.
Unabsorbed depreciation that was computed under s.12 ("income from other sources") should not be allowed to be set off against income assessed under s.10 ("business") in later years.
Unabsorbed depreciation relating to assets that no longer exist should not be allowed to be set-off.

Assessee

The assessee maintained that some business activity continued throughout, except for the compulsory interruption when assets were requisitioned; the assets had been exploited by the Government for the same purpose, and letting out/exploitation amounted to carrying on the same business.
Even if letting out were a different business, the unabsorbed depreciation relating to those years should still be allowable in the years in question.
Even assuming no business activity for a period, unabsorbed depreciation computed under s.12 could nonetheless be allowed against income from business under s.10 in subsequent years.
The assessee relied on authorities (including Manmohan Das) to submit that an ITO's decision in an earlier year on the head of income (which resulted in denial of carry-forward) is not binding on the assessee in a later year when the assessee seeks set-off.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Western India Oil Distributing Co. Ltd., [1971] 81 ITR 32	Held that the second proviso to s.10(2)(vii) (treating excess realised over written down value on sale as profits) is not applicable when income is computed under s.12.	The Court applied this precedent to conclude that the sum of Rs. 2,28,950 arising from sales in assessment year 1954-55 could not be included in the assessee's assessable income under s.10 because the assessment for that year had been under s.12; this fact affected the availability of carry-forward for that year.
New Jehangir Vakil Mills Co. Ltd. v. CIT, [1963] 49 ITR (SC) 137	Explains that in taxation there is generally no res judicata between assessment years; assessing authorities for a year may consider facts of a previous year to determine correct computation for the year before them.	The Court analysed this decision and concluded it did not support reopening earlier assessments on the facts before it; rather, it showed the earlier assessment's conclusion should remain undisturbed while authorities may consider earlier-year facts for computation of a later year. The Court found New Jehangir did not favour the assessee's position as urged by revenue.
CIT v. Manmohan Das, [1966] 59 ITR 699 (SC)	Holds that an ITO's decision in the preceding year that a loss cannot be carried forward (because the income was not business income) is not binding on the assessee for the subsequent year; the ITO of the subsequent year may determine afresh whether carry-forward is permissible.	The Court relied substantially on this authority to hold that the principle of finality (as applied by the Tribunal to preclude re-agitation) did not prevent the assessee from claiming unabsorbed depreciation in later years; the earlier ITO decision that income was under s.12 and carry-forward denied did not bind the assessee for subsequent assessments.
CIT v. Kushal Chand Daga, [1961] 42 ITR 177 (SC)	Addresses finality of quantification of loss where the ITO failed to notify the loss in writing under s.24(3); in such case, the computation is not final and may be re-opened.	The Court invoked this decision to note that while quantification of loss may attain finality if prescribed procedures (s.24(3)) are followed, the principle of finality as to quantification does not extend to determination of the source of income. The Court did not express a final view on all aspects but used Kushal Chand Daga to distinguish quantification-finality issues from source-of-income issues.

Court's Reasoning and Analysis

The Court first identified the relevant statutory framework under the Indian Income-tax Act, 1922 for the years in question:

s.6 — sets out heads of income including "Profits and gains of business" and "Income from other sources".
s.10(2)(vi) with proviso — allows allowance by way of depreciation for business income and permits carry-forward of unabsorbed depreciation by deeming the unallowed part to be part of the allowance in subsequent years.
s.12(3) — entitles a person letting on hire to allowances in accordance with specified clauses of s.10(2), thereby permitting depreciation against income from other sources but without an express carry-forward facility analogous to the proviso in s.10(2)(vi).
s.24(1)–(3) — provides for set-off of loss between heads, for carry-forward of business losses (with an eight-year limit), and requires the ITO to notify the amount of loss by order in writing under s.24(3).

The Court explained why Manmohan Das controls the principal dispute: Manmohan Das holds that an earlier ITO's decision that income in a prior year is not business income (and therefore that a loss cannot be carried forward) is not binding on the assessee for a subsequent year when the question of whether to allow carry-forward arises. The subsequent year's assessing officer may determine whether the loss is properly carried forward. The Court accepted this principle and applied it to the present facts.

Applying that principle, the Court noted the Tribunal's factual finding (accepted by the Commissioner) that the correct head of income for the years 1943-44 to 1953-54 was business income (s.10) and not income from other sources (s.12). That finding — which concluded the assessee had not wholly discontinued its business but had exploited its commercial assets via others during the requisition period — was not challenged by the revenue in the proper manner and therefore was final on the facts. As a result, where the correct head is business income, the proviso to s.10(2)(vi) entitles the assessee to carry forward unabsorbed depreciation and claim set-off in later years.

The Court also distinguished issues of "quantification" from issues of "source of income" and finality. It observed (with reference to Kushal Chand Daga) that quantification of loss might attain finality if procedural safeguards (such as the s.24(3) notification) had been properly followed, but that the principle of finality does not similarly prevent re-determination of the correct head of income — a view reinforced by Manmohan Das.

For assessment year 1954-55, the Court identified a special circumstance. In that year the assessee had obtained a definite pecuniary advantage by reason of its income being assessed under s.12 (income from other sources) rather than under s.10. The Court referred to the Division Bench decision in CIT v. Western India Oil Distributing Co. Ltd. which held that the proviso to s.10(2)(vii) did not apply when income was assessed under s.12 — and thus the assessee benefited by having that matter treated under s.12. Because the assessee had taken and retained that pecuniary advantage, the Court applied the equitable principle of approbate and reprobate: the assessee cannot both accept the benefit of assessment under s.12 for 1954-55 and later re-agitate that the correct head for that year was s.10 to obtain carry-forward advantage. On that basis the Court excluded the 1954-55 unabsorbed depreciation from carry-forward/set-off in the later years.

Holding and Implications

HOLDING:

The unabsorbed depreciation relating to the assessment years 1943-44 to 1953-54, both inclusive, could be allowed as set-off in the assessment years 1959-60 to 1962-63. However, the unabsorbed depreciation relating to the assessment year 1954-55 cannot be allowed as set-off in the assessment years 1959-60 to 1962-63.

Implications / Consequences:

On the facts accepted by the Tribunal (and not challenged by the Revenue), the assessee may carry forward and claim unabsorbed depreciation for the years 1943-44 to 1953-54 in the specified later assessments.
The assessee is precluded from claiming carry-forward for assessment year 1954-55 because it obtained and retained a pecuniary advantage from that year's assessment under s.12 and cannot now repudiate that position (approbate and reprobate principle).
The Court applied and relied upon Supreme Court authority (Manmohan Das) to hold that an earlier ITO decision on the head of income does not bind the assessee in later years; however, procedural finality in quantification may operate differently where s.24(3) formalities have been complied with (as discussed with reference to Kushal Chand Daga).
The assessee succeeded substantially and was awarded the costs of the reference from the revenue (costs granted to the assessee by the Court).

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Western India Oil Distributing Co. Ltd. v. Commissioner Of Income-Tax

S.K Desai, J.:— The assessee is a public limit company. In this reference, we are concerned with the assessment years 1959-60, 1960-61, 1961-62 and 1962-63, for which the relevant accounting years are the calendar years 1958, 1959, 1960 and 1961, respectively. The assessee-company was established some time in 1932 with the object of importing petroleum and petroleum products from abroad and distributing the same in India. For the purpose of the said business the assessee owned assets by way of installations such as storage tanks, pipelines, etc., and land together with the buildings built thereon. During the second world war, the said installations and other immovable properties were requisitioned by the Government under the defence of india act on several different dates between 14th June, 1942, and 11th December, 1942. These assets were subsequently released to the assessee in stages on 31st January, 1948, 2nd September, 1948, and 4th November, 1948. The assets were used by the Government for the same purpose as the assessee was using them all along prior to the requisitioning, i.e, for storage and distribution of petroleum and petroleum products though the distribution was now made by the Government to its various departments and not to private consumers. For such requisitioned assets the Government paid compensation by way of hire charges to the assessee; the last of such amounts was paid to the assessee for the period January to August, 1949, in the accounting year 1949 relevant to the assessment year 1950-51. Although the assessee could not carry on its business after the requisitioning of these assets by the Government, it did continue for some time to do limited business of buying and selling petroleum and petroleum products. During the accounting years 1942 to 1946, the assessee had made both purchases and sales of petroleum and petroleum products.

2. Up to the assessment year 1942-43, for which the accounting year is the calendar year 1941, the income earned by the assessee was being assessed as income from business. It may be mentioned, however, that in the last assessment some small income received by way of rents of installations temporarily leased out was separately assessed as income from other sources. In the calendar year 1942, a regular rent (or compensation) in the amount of Rs. 97,000 was received from the Government towards charges payable for the requisitioned assets. Accordingly, for the assessment year 1943-44, the question arose whether this was income from business or whether it was income from other sources. Rejecting the assessee's claim that it was business income, the ITO held that this was in the nature of rent received from hire of plant and hence to be considered as income from other sources. Now, as we have already mentioned, the assessee had continued to do the business on a small scale of dealing in petroleum and petroleum products; this was continued up to 1946. Thus for the assessment years 1943-44 to 1947-48 there was some small income from business and fairly substantial income from other sources, the latter being the amounts received from the Government for the requisitioned assets. From the assessment year 1948-49 to the assessment year 1954-55, the assessee's only income was from rent or amounts in respect of the assets requisitioned by the Government. It may be stated that after the assets were released by the Government, the assets had been leased out to certain private parties, who paid amounts by way of rents and hire charges to the assessee. In respect of these amounts the income received by the assessee was also treated by the ITO as income from other sources. For the first time after 1946, the assessee on 1st January, 1954, placed an order for the purchase of oil and the shipment in pursuance thereof was received on 31st July, 1954, i.e, in the accounting year 1954, relevant to the assessment year 1955-56. Thus, once again the assessee was carrying on business in petroleum and petroleum products which had not been actively carried on during the assessment years 1948-49 to 1954-55. The ITO in the assessment made for the said assessment year 1955-56 held that the business which the assessee had carried on in that year was a new business, though of dealing in the same petroleum products. The income from such business was directed to be considered under s. 10 of the Indian I.T Act, 1922. It may be mentioned that in that year there was loss in business and, therefore, it appears that the claim for set-off of the unabsorbed depreciation of the past years was not made by the assessee and not even otherwise considered by the ITO. The same position continued in the assessment years 1956-57 and 1957-58, there being once again loss determined in those years. For the assessment year 1958-59, the ITO appears to have allowed the set-off of the loss of the assessment year 1955-56, but once again we find no indication in the order of the ITO as to how the claim for unabsorbed depreciation of the earlier years was dealt with. For the said assessment year, the total income was determined at nil. We then go to the assessment year 1959-60, which is the first of the years under consideration in this reference. There is indication in this order that the ITO considered the unabsorbed depreciation from the assessment year 1955-56 onwards only as available for set-off in the subsequent years. Thus, in computing the income for that year, which was ultimately determined at nil, the ITO allowed the set-off of the loss of the assessment years 1955-56, 1956-57 and 1957-58. The position in the remaining years is similar and in all these years the assessee's claim for set-off of the unabsorbed depreciation of all the past years from 1939-40 onwards was rejected by the ITO in the relevant assessment years.

3. The assessee went in appeal to the AAC, who passed a common order dealing with these several appeals. In his view, from the assessment year 1955-56, when the assets in question were returned by the Government to the company the assessee was carrying on the same business as it was carrying on during the preceding years. On the facts of the case, he negatived the view of the ITO that the assessee-company had started a new line of business from the assessment year 1955-56. The AAC was further of opinion that even during the earlier period when the assets of the assessee-company were taken over by the Government, the income received by the assessee was rightly assessable under head “Business” and the unabsorbed depreciation for this period would, therefore, be available for being set off against the income arising during the years in question. Accordingly, the ITO was directed to work out the unabsorbed depreciation of the appellant-company from the assessment year 1939-40, and allow the same to be set off against the income assessable during this year.

4. Being aggrieved by the order of the AAC, the ITO filed appeals to the Tribunal. Before the Tribunal, the following contentions were advanced on behalf of the department:

“(1) Whether the AAC was right in allowing the set off of the unabsorbed depreciation of the earlier years when the ITO had already given a finding that the old business had long ceased to be carried on and a new business had been started in the accounting year relevant to the assessment year 1955-56?

(2) Whether the AAC was competent to give a direction that the income of the earlier years should be treated as income from business and allow the set-off of the past years' unabsorbed depreciation accordingly when the relevant assessments had become final, treating the income of soma of the years as income from other sources?

(3) Whether the AAC was right in directing the set-off of the unabsorbed depreciation relating to the income computed under the head “Income from other sources” under s. 12 of the Act for some of the years against the income computed under the head “Business” under s. 10 of the Act in the subsequent years?

(4) Whether the unabsorbed depreciation relating to the assets no longer in existence could in any case be so allowed to be set-off?”

5. The findings of the AAC were supported by the assessee and it was urged; (i) that some business was carried on by the assessee throughout except for the interregnum caused during the period of inactivity due to compulsion, its commercial assets being requisitioned by the Government; (ii) that the letting out of such commercial assets, which were exploited by the Government for the same purpose as that of the assessee, amounted to carrying on the same business as had hitherto been carried on; (iii) that even if letting out of the assets amounted to a different business, the unabsorbed depreciation relating thereto was still allowable in the instant years; and (iv) that even assuming there was no business activity at all, the unabsorbed depreciation computed under s. 12 could none the less be allowed against income from business computed under s. 10 in the years in question.

6. On a consideration of the entire material and evidence on record, the Tribunal came to the conclusion that the assessee had not discontinued its business in the sense that it had completely given it up during the accounting years relevant to the assessment years 1943-44 to 1954-55, though income by way of lease rent received during some of the years may have been assessed as “income from other sources”. Its finding, therefore, was that the assessee had been carrying on business throughout, though during the years 1943-44 to 1954-55, the business that the assessee was carrying on prior to 1943-44 was in a state of suspense. According to the Tribunal, the assessee during this period was deriving income from business which was by way of exploiting its commercial assets through others. It may be mentioned that this finding, which is in favour of the assessee, has not been challenged by the department in the appropriate manner and may, therefore, be regarded as having been final.

7. On the second question, however, which was whether in view of the fact that for some of the years the income assessed was or has been only income under the head “Income from other sources” and the fact that the assessments for the relevant years 1943-44 to 1954-55 had become final, the unabsorbed depreciation relevant to these years can still be allowed as set-off in future years, the Tribunal found against the assessee. In its view, the assessments which had once become final could not be subsequently challenged unless the matter was alive. Counsel for the assessee had submitted that whether the depreciation was allowable under s. 12 or s. 10, the depreciation was identical inasmuch as it was on the same assets and was, therefore, the unabsorbed depreciation computed in terms of sub-s. (3) of s. 12 read with cl. (vi) of sub-s. (2) of s. 10 thereof can equally be treated as unabsorbed depreciation under cl. (vi) of sub-s. (2) of s. 10. The Tribunal had no hesitation in rejecting this argument. On the third question as to whether the unabsorbed depreciation relating to the assets which were no more in existence and could yet be allowed as a set-off in future years so long as the business, of which they were the assets, continued, the decision of the Tribunal was against the department and in favour of the assessee. This part of the decision of the Tribunal appears to have been accepted by the department and is not the subject-matter of the reference before us.

8. On these facts, the following question of law is referred to the High Court for its opinion:

“Whether, on the facts and in the circumstances of the case, unabsorbed depreciation relating to the assessment years 1943-44 to 1954-55, both inclusive, could be allowed as a set-off in the assessment years 1959-60 to 1962-63, both inclusive?”

9. Before dealing with the statutory provisions and the authorities which were cited at the bar and submitted for our consideration, it may be mentioned that the copies of the assessment orders of the assessee for the years 1943-44 to 1954-55 are annexed as annexs. “A-1” to “A-12”. In the first of these years, it is found in para. 3 of the order that the loss to be carried forward is indicated at Rs. 2,38,675. Similarly, in the next assessment order for the year 1944-45, in para. 4 there is a statement that depreciation amounting to Rs. 75,546 is carried forward. In para. 4 of the assessment order for 1945-46, we find the observation of the officer that depreciation amounting to Rs. 78,035 is carried forward. In all these three years, it may be noted, that the total income arrived at (15) is nil and there is no tax liability on the company. We find, however, a change from the next assessment order in which full set-off is allowed and no tax liability found, but the earlier observation that the loss or depreciation is carried forward is missing. In the assessment order for the year 1950-51, certain profit for the year was found, but this was set off against the unabsorbed depreciation pertaining to the assessment year 1939-40. It appears, however, that this was subsequently sought to be rectified and a fresh order was passed for that assessment year, holding that the total income of the assessee was at Rs. 1,11,117 without any setoff. For the year 1951-52, a loss of Rs. 1,91,885 was found. For the assessment year 1953-54, a profit of Rs. 26,203 has been found to be the total income of the assessee, on which it was held that it was liable to pay income-tax and super-tax. This brings us to the assessment year 1954-55. In this year, it appears that certain installations had been sold by the assessee-company during the year of account for rupees nine lakhs, the original cost of such installations was Rs. 2,77,401 and its written down value as at the beginning of the year was Rs. 48,451. Thus, the department sought to add to the profits the balancing charge of Rs. 2,28,950 under the proviso to s. 10(2)(vii); this was sought to be read along with s. 12 of the Indian I.T Act, 1922. However, after taking this item into account, but allowing a set-off of the balance of the unabsorbed depreciation for the assessment years 1942-43 and 1943-44, the total income was found by the ITO at nil.

10. It appears that the matter was thereafter carried further by the assessee and ultimately in CIT v. Western India Oil Distributing Co. Ltd., [1971] 81 ITR 32, a Division Bench of this court decided that the provisions of the second proviso to s. 10(2)(vii) of the Indian I.T Act, 1922, by which the excess realised over the written down value on the sale of any building, machinery or plant in respect of which depreciation had been allowed should be deemed to be profits, were not applicable in computing income assessable under s. 12 of the Act. In view of this decision, it was obvious that the sum of Rs. 2,28,950 could not be included within the assessee's assessable income.

11. In this reference excepting the last of the assessment years in consideration, which may be governed by the I.T Act, 1961, we are concerned with the provisions contained in the Indian I.T Act, 1922. For the assessment years in question, i.e, 1943-44 to 1954-55, the source of income and the carrying forward of the loss or depreciation of a particular year would be governed clearly by the provisions of the Indian I.T Act, 1922. Section 6 of the said Act gives the several heads of income chargeable to income-tax. One of such heads of income is “Profits and gains of business, profession or vocation”, which we find subsequently dealt with under s. 10 of the said Act. Another of such heads of income is “Income from other sources” which is dealt with under the provisions contained in s. 12 of the said Act. In respect of profits and gains of business, profession or vocation, an allowance byway of depreciation is provided for in s. 10(2)(vi), and the proviso to s. 10(2)(vi) allows an assessee to carry forward unabsorbed depreciation. It provides that an allowance or part of the allowance by way of depreciation, to which effect has not been given, shall be added to the amount of allowance for depreciation for the following year, and the same is to be deemed to be part of such allowance for that year, and this process is to continue for the succeeding years. In respect of “income from other sources” provided for under s. 12, it is sub-s. (3) which brings in the allowance by way of depreciation by providing as follows:

“12. (3) Where an assessee lets on hire machinery, plant or furniture belonging to him, he shall be entitled to allowances in accordance with the provisions of clauses (iv), (v), (vi) and (vii) of sub-section (2) of section 10.”

12. It will be perceived that by reason of this sub-section the assessee would be entitled to an allowance by way of depreciation against his income from other sources but will not be permitted to carry it forward, which facility is made available to the assessee by reason of the proviso to s. 10(2)(vi). Section 24 of the Indian I.T Act, 1922, provides for set-off of loss in computing the aggregate income. Sub-section (1) thereof provides that where an assessee sustains a loss of profits or gains in any year under any of the heads mentioned in s. 6, he shall be entitled to have the amount of loss set off against his income, profits or gains under any other head in that year. There are, however, certain provisos and Explanations to this, which are not material for our purposes. Sub-section (2) of s. 24 provides for carrying forward of the loss to the following year for loss of profits or gains in any business, profession or vocation. There are certain restrictions and conditions but cl. (iii) of sub-s. (2) provides that if the loss cannot be wholly set off in the following year, the amount of loss not so set off shall be carried forward to the following year, and so on. But there is a limit of eight years provided beyond which such loss cannot be carried forward. Sub-section (3) of s. 24 provides that when, in the course of the assessment of the total income 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 ITO shall notify to the assessee by order in writing, the amount of the loss as computed by him for the purposes of this section. These, in our opinion, are the statutory provisions which are relevant for the purpose of deciding the question arising in this reference.

13. The principal attack of the learned counsel for the assessee was on the principle of finality which found favour with the Tribunal and the application thereof which resulted in prejudice to the assessee. The Tribunal held that during the years 1943-44 to 1954-55 the income earned by the assessee ought to have been considered to be income from business and not as income from other sources. However, the ITO treated the income as income from other sources. The assessment had not been carried further in appeal and inasmuch as the assessee had accepted it, it had become final and the question, therefore, could not be re-agitated and the earlier conclusion upset in the subsequent assessment years which were under consideration before it. It was submitted that this approach of the Tribunal was neither proper nor correct. This was sought to be supported by reference to a decision of the Supreme Court in New Jehangir Vakil Mills Co. Ltd. v. CIT, [1963] 49 ITR (SC) 137. The relevant portion of the head-note of that decision, to which our attention was drawn, reads as follows (Headnote):

“For years prior to the calendar year 1944, the assessee was treated as an investor and not a dealer in shares and, in the relevant assessments, profits or losses therefrom were not taken into consideration in computing its taxable income. For the assessment year 1945-46, the assessee was treated as a dealer in shares in the relevant accounting year 1944, and for the purpose of computing the profits that arose out of sales of shares in 1944 the position of the assessee in 1943 was considered, and it was held that the assessee had indulged in share-dealing in that year also and, on that basis, the cost price of the shares sold in 1944 was taken:

Held, that though the question which directly arose before the taxing authorities was whether the assessee was a dealer in shares in 1944, the question of the position of the assessee in 1943 also arose in determining how the profits made in 1944 should be computed. Therefore, it was not correct to say that the position of the assessee in 1943 was completely outside the scope of the assessment proceedings for 1945-46. In determining or computing profits made by the sale of shares in 1944, the assessing authorities had to decide whether the assessee started its share-dealing activities on January 1, 1944, or at an earlier date. It was, therefore, open to the taxing authorities to consider the position of the assessee in 1943. The circumstance that in an earlier assessment relating to 1943 the assessee was treated as an investor did not e???top the assessing authorities from considering, for the purpose of computation of the profits of 1944, as to when the trading activities of the assessee in shares began. Nor could it be said, because it was held that the trading activities began in 1943, that the assessment relating to the year 1943 was being reopened. What was being done was only to compute the profits of 1944, which the authorities were entitled to do, by finding out when the trading activity in shares began.

In matters of taxation there can be no question of res judicata. The decision given by an Income-tax Officer for one assessment year cannot affect or bind his decision for another year. Generally, the doctrine of res judicata or estoppel by record does not apply to such decisions.”

14. We are afraid that this decision, far from supporting the assessee, suggests that the Supreme Court did not look with favour upon the reopening of the earlier assessments but in its view what was being done in the facts of the case before it was not to reopen an earlier assessment but consider the correct legal position for the year 1944, for which purpose the position of the assessee in 1943 and his dealings in 1943 could be considered. These dealings, according to the Supreme Court, could be gone into to determine the true position of the assessee as a dealer or investor in 1944 although the conclusion that he was an investor in 1943 must remain undisturbed in the assessment proceedings for the subsequent years.

15. Our attention was then drawn by counsel for the assessee to CIT v. Manmohan Das, [1966] 59 ITR 699 (SC). The facts in the said case before the Supreme Court were as follows. By an agreement dated 2nd January, 1931, the assessee was appointed treasurer of the Allahabad Bank for its several branches, sub-agencies and pay offices. As treasurer various duties had to be performed by the assessee. Under the said agreement, the assessee was entitled to monthly allowances subject to a maximum of Rs. 2,250 per month. In addition he was entitled to Rs. 350 per month for travelling expenses. In the previous year relating to the assessment year 1950-51, the assessee had suffered a net loss of Rs. 38,027 in the performance of his duties. The ITO who computed the loss in the year decided that this loss could not be carried forward to the next year to be set off against the income of the subsequent year. This was on the ground that the remuneration received by the assessee was “salary” within the meaning of s. 7 of the I.T Act. The claim to set off this loss of 1950-51 against the income of 1951-52 was again made in the assessment year 1951-52 but was rejected by the ITO. The matter was carried further. The AAC confirmed the order of the ITO. The Income-tax Appellate Tribunal, however, found in favour of the assessee holding that what the assessee was receiving was income arising from pursuit of a profession or vocation within the meaning of s. 10 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. The matter was carried further to the High Court, which agreed with the Tribunal, and with a certificate granted, an appeal was subsequently preferred to the Supreme Court. The question which was answered in favour of the assessee by the High Court and with which we are concerned, was whether the assessee could claim a set-off of the loss suffered by him in the preceding year 1950-51 against this profits in the year under consideration, i.e, 1951-52, having failed to prefer an appeal against the refusal by the ITO making the assessment for the year 1950-51 to allow the assessee to carry forward the loss under s. 24(2) of the Act. Shah J. (as he then was) speaking for the Supreme Court answered this question as follows (p. 702):

“The second question presents little difficulty. In making his order of assessment for the year 1950-51, the Income-tax Officer declared that the loss computed in that year could not be carried forward to the next year under section 24(2) of the Income-tax Act, as it was not a business loss. The Income-tax Officer has under section 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) 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 the loss as is not set off under sub-section (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 section 24(2) has to be determined by the Income-tax Officer who deals with the assessment of the subsequent year. 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. A decision recorded by the Income-tax Officer who computes the loss in the previous year under section 24(3) that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.”

16. If this decision be properly analysed, it would seem that the application of the principle of finality, which has been submitted for our acceptance by counsel for the revenue and which found favour with the Tribunal has been rejected by the Supreme Court in a substantially similar set up when it opined that the decision of the ITO in the preceding year that the loss cannot be set off against the income of the subsequent year is not binding on the assessee despite the fact that he has rested content with that decision and not carried further the matter by way of appeal. To put it in other words, in the assessment year 1950-51, the ITO, dealing with the assessee's case, held that there was a net loss but that this could not be carried forward inasmuch as the income received by the assessee was not from the pursuit of any business, profession or vocation. For the succeeding year 1951-52, the assessee contended that his income was from pursuit of business, profession or vocation and sought to set off the preceding year's loss against the income for the succeeding year. This contention was urged despite the fact that in the preceding year the income had been held to be from a source other than a business, profession or vocation, and on that ground the carrying forward of the loss had not been allowed. It was held by the court that the income of the assessee for both the years must properly be regarded as having arisen from the pursuit of a vocation and, further, that because of this the assessee was liable to have the preceding year's loss set off against the income for the assessment year 1951-52. It brushed aside the argument of the revenue that the preceding year's decision by the ITO had become final and by reason of such finality the [assessee in 1951-52 would not be entitled to set off the loss incurred in 1950-51, although the correct legal position was that the income was from the pursuit of a business, profession or vocation and that, if this was so, the assessee was entitled to carry forward the loss.

17. It was submitted by counsel for the assessee that a similar approach must be followed by us and applied to the facts of the case. It is true that in the assessment years under consideration the ITO held that the correct head of the assessee's income was “Income from other sources” under s. 12 and in some of the assessment years it was on this express footing that the carrying forward of the unabsorbed depreciation was not permitted, whilst in others, excepting the first three (as we have pointed out earlier), the only conclusion reached by the ITO was to hold that the assessee was not liable to pay tax but without computing or specifying that there was unabsorbed depreciation liable to be carried forward. It was submitted on behalf of the assessee that although the assessee had not canvassed the issue further or gone in appeal from the ITO's decisions in these years, any such finding was not binding on the assessee and that the issue could be gone into or even re-agitated by the assessee for the years in question when set-off was claimed. In these years, i.e, the later years when set-off is claimed, according to counsel for the assessee, it would not be open for the department to submit that the matter had become final for these earlier years by reason of the assessment orders for these years, against which appeals had not been preferred. It appears to us that this submission will have to be accepted in view of the decision of the Supreme Court in Manmohan Das' case, [1966] 59 ITR 699 from which we have extracted a passage earlier. In order to satisfy ourselves we referred to standard text books on the subject and found that various authors on the subject had understood the decision of the Supreme Court in the same sense in which we have understood it. The position as to quantification of the amount of loss appears to be different. Mr. Joshi, on behalf of the revenue, drew our attention to another decision of the Supreme Court in CIT v. Kushal Chand Daga, [1961] 42 ITR 177, which was a matter concerning finality of the amount of loss determined in the preceding years. The Supreme Court in that decision, which need not be examined in detail, held that inasmuch as the I.T.O had failed to notify the loss computed by him by an order in writing as required by s. 24(3), the computation would not be regarded as final but would be allowed to be re-agitated and re???etermine??? in a Sub???equent ye???r. This decision would suggest, although we express nofinal opinion on the point, that if the quantification of loss is ??? ???g the prescribed procedure, such quantification may be impressed with the p???inciple of finality if the matter is not carried further. However, the principle ???f finality as may be applicable to the question of quantification of th??? amount of loss does not appear to be applicable to the determination of t???e source of income and the decision whether the loss can or cannot be allowed to be carried forward by reason of the determination of the source. Th??? is the clear result of the decision of the Supreme Court in Manmohan D???s case, [1966] 59 ITR 699. As far as carrying forward of loss and carrying forward of unabsorbed depreciation are concerned, although ther??? are some important differences between the provisions, a few of which we have indicated earlier in this judgment, these differences are not ma???erial as far as this aspect of the matter is concerned. Once the correct principle flowing from Manmohan Das' case, [1966] 59 ITR 699 (SC) is rea???ised, it would appear that if in an earlier year it has been held that th??? correct head of income applicable to the assessee's case is under s. 12, ???.e., “income from other sources” and by that reason the benefit of car???ying forward of unabsorbed depreciation is denied to the assessee, such???a decision will not bind the assessee in the subsequent year in which he???wants to claim the set-off. He can have the question determined in theater year although in the earlier year in which the decision was given t??? assessee rested content with the order of the ITO and did not carry t??? matter further.

18. Mr. Joshi faintly argued that ???e principle laid down in Manmohan Das' case, [1966] 59 ITR 699 (SC) should be restricted to the immediately succeeding year and cannot b???applied in cases where the question is sought to be redetermined o???e-agitated after the lapse of a number of years as was the case before us. There is no substance whatever in this contention. The Supreme Court has clearly observed that the decision in the earlier year is not binding on the assessee. If that decision does not bind the assessee despite the fact that he has not carried the matter further, it will not bind him in the very next year or the year thereafter or in any following year. The fact that the question is sought by the assessee to be redetermined and re-agitated after a lapse of a number of years would seem to have no bearing on the application of the principle commended by the Supreme Court.

19. It may be mentioned that Mr. Munim had also sought to justify his criticism of the approach of the Tribunal with reference to the decisions of the Delhi and the Bombay High Courts. We have not referred to these decisions in the view that we have taken that the point is covered by the decision of the Supreme Court in Manmohan Das' case, [1966] 59 ITR 699. We also found these to have little ???aring ???n t???e question ???er consi???eration.

20. We have now to apply the ?????? facts elicited by the Tribunal in the statement of case, which we have briefly set out earlier in thi??? judgment. It would appear that for all the years which are mentioned in the question referred to us, i.e, 1943-44 to 1954-55, the correct ???ead of income of the assessee was not “Income from other sources “but” I??? come from business, profession or vocation”. This was a finding of the Tr???bunal which has been accepted by the Commissioner. If that was s??? it would follow that the unabsorbed depreciation in any of these year??? was liable to be carried forward and the assessee was liable to have the b???nefit of the special provision contained in the proviso to s. 10(2)(vi) of th??? Indian I.T Act, 1922. The assessee is not precluded from claiming a se??? off in respect of the same for the assessment years in question. However, as indicated earlier, we find that there is some difficulty for the last of th??? years in question, i.e, 1954-55. It is found that in this year the assesse had obtained a distinct pecuniary advantage by assessment of its income u???der s. 12 and not under s. 10. By reason of such assessment the assess??? contended that the provisions contained in the proviso to s. 10(2)(vii) wer??? not applicable when its income was being assessed under s. 12; and this p???t was decided in favour of the assessee in the decision of the High Court, viz. in CIT v. Western India Oil Distributing Co. Ltd., [1971] 81 ITR 32 (Bom), w???ch we have referred to earlier. For this year, it was submitted on behalf of th??? revenue that the revenue was not merely resting its argument on the conte???ion that the assessment under s. 12 for this year should be regarded as final, ???ely because it was so held by the ITO and that the assessee had not gone fu???er; it was submitted that in addition to such argument, which was equall available for the other years as for this year, the revenue relied upon the fact that the assessee had taken benefit of the fact that its income was assessed under s. 12 and that where it had taken such a benefit it could not subsequently be permitted to submit that the correct section or the head under which its income ought to be assessed is s. 10. Such estoppel was claimed against the assessee on the well-known principle of “approbate and reprobate”. Mr. Munim submitted that the assessee had not sought assessment under s. 12 but that when the department assessed its income as “income from other sources” under s. 12, the assessee was entitled to make the submission that the provisions of s. 10(2)(vii) were not applicable. It is clear to us that for this assessment year, i.e, 1954-55, the assessee had secured a definite pecuniary advantage by reason of its income being assessed as “income from other sources” under s. 12; whilst retaining that pecuniary advantage it cannot be permitted to re-agitate the question in a later year and submit that the correct head of income was not under s. 12 but under s. 10. For this year, then, because of this special circumstance, the assessee would not be entitled to carry forward the unabsorbed depreciation, if any, for that year and set off the same against the income for any succeeding year. In this view of the matter, the question referred to us is answered as follows:

On the facts and in the circumstances of the case, the unabsorbed depreciation relating to the assessment years 1943-44 to 1953-54, both inclusive, could be allowed as set-off in the assessment years 1959-60 to 1962-63. However, the unabsorbed depreciation relating to the assessment year 1954-55 cannot be allowed as set-off in the assessment years 1959-60 to 1962-63.

21. The assessee has succeeded substantially and the result must be that it will be entitled to the costs of the reference from the revenue. There will be an order accordingly.

Western India Oil Distributing Co. Ltd. v. Commissioner Of Income-Tax

Legal Opinion Summary: S.K. Desai, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue / Department (as advanced before the Tribunal)

Assessee

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Western India Oil Distributing Co. Ltd. v. Commissioner Of Income-Tax

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