Balakrishna Ayyar, J.:— Under S. 66(1) of the Indian Income-tax Act, the Income-tax Appellate Tribunal of Bombay has referred the following question for the decision of this Court:
“Whether the losses claimed by the assessee for the assessment years 1948-1949 and 1949-1950 require in law to be determined therefor and carried forward to be set off against its assessments for 1950-1951 and 1951-1952?”
The relevant facts are these: The assessee is a private limited company deriving income from three heads or sources, viz., interest on securities, dividends from companies and its business in shares and stocks. During the year 1948-49, it received Rs. 18,000 by way of interest on securities, Rs. 13084 by way of dividends from companies and sustained a loss of Rs. 1,32,607 in its business. During the year 1949-1950 it received Rs. 3,000 as interest on securities, Rs. 7,795 as dividends from companies and sustained in its business a loss of Rs. 35,252. During the year 1950-1951 it derived a net aggregate income of Rs. 13611. We may mention here that there is some discrepancy between the figures set out in the statement of the case submitted by the Tribunal and the figures appearing in an order of the Appellate Assistant Commissioner of Income-tax. The assessee submitted a return of income for the first time only on 29th March, 1951 on which date it submitted the returns relating to the years, 1948-1949, 1949-1950 and 1950-1951. In November, 1951 the company submitted a fourth return showing the income for the year 1951-1952. The total income was then shown as Rs. 34,269. The Income-tax Officer accepted the returns filed for the years 1950-1951, and 1951-1952, but he ignored the returns for the two earlier years 1948-1949 and 1949-1950. The assessee appears to have claimed before the Income-tax Officer that it was entitled to carry forward the losses which it had incurred in 1948-1949 and 1949-1950, and set them off against the profits for the subsequent years. That claim was negatived by the Income-tax Officer. He, however, ordered refund of the excess tax deducted at the source under S. 48 of the Act. From the order refusing the claim to set off the assessee appealed to the Appellate Assistant Commissioner of Income-Tax, who dismissed the appeal. That Officer observed:
“I am unable to accept the claim of the appellants since it has no legal basis. The returns showing heavy business losses for the years 1948-1949 and 1949-1950 were not filed in the relative assessment years. They were submitted long after, about the close of the assesment year, 1950-1951.”
He also remarked that the returns had been submitted voluntarily. Dealing with S. 24(1) of the Act, he observed:
“This sub-section thus applies only to an assessee and the term ‘assessee’ has been defined in S. 2(2) as a person by whom income-tax is payable. The use of the present tense in the definition indicates that the person should have been an assessee for the year of assessment in respect of which the loss was claimed. Thus the question of the determination of the loss and the set off of such loss, against any income of the other heads mentioned in S. 6 would therefore arise only in the course of assessment relating to that year.”
Finally, he remarked:
“I do not find any provision in law by which the appellant could compel the Income-tax Officer to take cognisance of the losses sustained in the previous years regarding which no return of income was filed either voluntarily during the relative financial year or no return was called for by the Income-tax Officer acting under the provisions of S. 22(2) or 34.”
The Appellate Tribunal dismissed the appeal that the assessee filed before it. It however agreed with the contention of the assessee that a question of law did arise and so has submitted the question quoted above for the determination of this Court.
The provisions of the Act that are here relevant are to be found in S. 24 as it stood before was amended in 1953 and 1955. That section so far as is now material, runs as follows:
“24(1), Where any 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 the loss set off against his income, profits or gains under any other head in that year.”
(The provisos and explanation are omitted). Sub-S. (2) ran as follows:
“Where any assessee sustains a loss of profits or gains 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, under the head ‘profits and gains of business, profession or vocation,’ and the loss cannot be wholly set off under the Sub-S. (1), the portion not so set off shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on; but no loss shall be so carried forward for more than six years, and a loss arising in the previous years for the assessment for the years ending on the 31st day of March, 1940, the 31st day of March 1941, the 31st day of March, 1942, the 31st day of March 1943, and the 31st day of March 1944, respectively, shall be carried forward only for one, two, three four and five years, respectively.”
Sub-S. (3) ran as follows:
“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 Income-tax Officer shall notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of this section.”
Mr. Jagadisa Aiyar, the learned Advocate for the petitioner, argued: The assessee in the present case had three sources or heads of income within the meaning of S. 6 of the Act, viz., dividends, interest on securities and business. By virtue of the provisions contained in Sub-S. (1) of S. 24, the assessee is entitled to set off the losses under one head against the income or profits from another head. If the entire loss is not thus absorbed Sub-S. (2) gives the assessee the right to carry forward the loss from business to another year and set it off against the profits that he might subsequently make. A further limitation on this right of the assessee is that he cannot carry the loss forward for a longer period than six years. Where the assessee has suffered a net loss in a particular year there would be no question of assessing him to tax in respect of that year because his income would have been not merely nil but a negative quantity. In order to enable the assessee to carry forward his loss and set it off against the profits of future years and in order to avoid disputes at a subsequent point of time the assessee is entitled to insist that the Incometax Officer should ascertain this loss. That the returns of the income were filed voluntarily, or, that they were not filed in the year following the account year, are not circumstances that would deprive the assessee of this right of his. The Income-tax. Officer was bound to ascertain the losses which the assessee had suffered and set them off against the profits it had earned in 1950-1951 and 1951-1952.
In support of this contention of his, Mr. Jagadisa Aiyar referred to Income tax Commissioner v. Govindalal (1). The facts there are summarised in the first paragraph of the judgment of the learned Chief Justice:
“On the 4th September 1951, one Govindalal Dutta, an owner of a tea business, filed voluntary returns of his income in respect of five consecutive years. Those were assessment years 1946-1947 to 1950-1951. Of the returns so filed, that for the assessment year 1946-1947 showed a loss of Rs. 37,925-2-9 and that for 1947-48 showed a loss of Rs. 36,033-15-0, while that for the year 1948-1949 showed a paltry profit of Rs. 75-3-3. In making assessments on these returns, the Income-tax Officer paid no attention to the returns for 1946-1947 and 1947-1948. The first return to be dealt with was the return for the year 1948-1949 and on that return he made an assessment on an income of Rs. 5545.”
In paragraph 12 the question for determination was thus posed:
“The question, before us, is whether in view of the provisions of S. 24(2), the assessee was entitled to have his claim of losses during the two earlier years examined and to be given the benefit of those losses in his assessment for 1948-1949, if the losses claimed were made out.”
The department contended that the Income-tax Officer was not bound even to determine for purposes of S. 24(2) whether there had been any losses during the earlier years which the assessee was entitled to carry forward and set off against subsequent profits because S. 24(2) did not apply to losses during the years for which there had been no assessment it was contended on behalf of the department that such a construction of S. 24(2) was implicit in the use in the sub-section of the word “assessee” as its definition stood at the relevant date. (It will be recalled that this is one of the grounds on which the Appellate Assistant Commissioner rested his conclusion).
Dealing with this argument the Court observed:
“The contention thus put forward on the basis of the word ‘assessee’ is plainly untenable and it is only fair to Mr. Meyer to say that, after some discussion he himself conceded that it could not be correct.”
The learned Chief Justice then quoted Sub-S. (3) of S. 24 and observed:
“It will be noticed that the section speaks of a loss being established in the course of the assessment of an assessee and the loss contemplated is a loss of profits or gains which the assessee is entitled to have set off under the provisions of the section. Under the provisions of Sub-S. (2) of the section, an assessee is entitled to have his business loss earned forward and set off against subsequent profits from the same business for six years. I can see no reason to hold that the loss contemplated by Sub-S. (3) is not the whole Joss of all those six years, or any or more of the years within that period. Sub-S. (3) in speaking of loss which an assessee is entitled to have set off under the provisions of the section, adds no qualification and obviously has in view all the loss which under the terms of the section, an assessee is entitled to have carried forward. If that be so, then the assessee in the present case was entitled in the course of his assessment for the year 1948-1949 to try to establish, if he could that a loss had been suffered by him within the six preceding years and that it had not been possible to set off such loss against the profits of the respective years, nor had it been possible to set off the business part of the loss against the profits from the same business or subsequent years.”
Later he added:
“The Income-tax Officer was, however, required, since a claim of set off of earlier loss had been made before him, to investigate into the claim and see if it was established that losses had taken place in the two earlier years which the assessee was entitled to have set off under the provisions of S. 24(2).”
A similar view was taken in All India Groundnut Syndicate Ltd. v. Commissioner of Income-tax . In that case, the learned Chief Justice observed:
“It is clear that this Sub-S. [S. 24(3)] casts a duty upon the Incometax Officer. The duty is that he has to compute the loss and notify the loss to the assessee. This Sub-section was clearly enacted in order to crystallise the loss in any particular year of assessment, to leave no dispute with regard to that loss and to give notice to the assessee of the amount at which the loss was computed by the Income-tax Officer. But the right which the legislature confers upon the assessee does not arise under this subsection but it arises under Sub-S. (2) and that right is to carry forward the loss of the previous years for a period of six years, and that right is an absolute unqualified right and that right is not made conditional upon any computation made by the Income-tax Officer or any notice issued by the Income-tax Officer. Therefore, whereas the right is conferred under Sub-S. (2) of S. 24, Sub-S. (3) is merely a machinery or procedural section which provides how and when the Incometax Officer should compute the loss and how he should communicate the loss to the assessee.”
Again, at page 101, the learned Chief Justice observed:
“The right to claim a relief which the assessee is claiming only arose to the assessee in the assessment year 1948-1949 when the assessee had made profits and sought to set off the losses incurred during the previous years against the profits. The fact that the Income-tax Officer has not computed the loss of the earlier years can have no bearing upon the right of the assessee which arises in the year 1948-1949. There is nothing to prevent the Income-tax Officer from computing those losses which the assessee may have incurred earlier and which he has failed to do.”
The Bombay decision was followed by a Bench of the Nagpur High Court in Seth Khushalchand Daga v. Commissioner of Income-tax (2). At page 426, some of the observations of Chagla C.J were quoted with approval.
A Bench of this Court, however, has taken an entirely different view. The case is reported in O.M Ahmed Sahib…Applicant; v. Commr. Of Income-Tax, Madras…. (3). The facts there were as follows: The assessee carried on a business in yarn and cloth in Melapalayam, Tirunelvelr district. On 15th August 1943, the Income-tax Officer sent him a notice under S. 22(2) of the Act calling upon him to make a return of his income for the assesment year 1943-1944. On 21st September 1945 the Income-tax Officer sent him a notice under S. 34, read with S. 22(2) calling upon him to rile a return of his income for the assessment year 1942-1943. In pursuance of this notice the assessee filed a return for the year 1942-1943 showing a loss of Rs. 7875. The Income-tax Officer called for and examined the accounts of the assessee and closed the proceedings with a note showing that the income was nil. That was not communicated to the assessees. The assessment for the year 1943-1944 was completed on 31st March 1946, and at that stage the assessee was not permitted to set off the loss of the previous year; the refusal was based on the ground that no assessment had been made in the previous years and so no loss had been determined. The Appellate Commissioner dismissed the appeal which the assessee filed before him. The Tribunal also held that the claim to set off was not admissible. This Court observed:
“To claim therefore the benefit of S. 24(2) it must be established that there was a loss which was already ascertained but which could not be completely wiped out by setting it off against the profits under a different head under S. 24(1) and that there was a balance which was carried forward to the subsequent year. The balance of loss therefore contemplated under S. 24(2) is an ascertained balance and not an undetermined balance. Where a right is claimed under S. 24(2), the question therefore of ascertaining the loss of a previous year would never arise and cannot arise and therefore there would be no duty where a right under S. 24(2) exists compelling the Income-tax Officer to determine the loss of the previous assessment year………… S. 24(3), in our opinion, does not help the assessee in his claim that he is entitled to the benefit of S. 24(2) and to compel the Income-tax Officer to determine the loss of the previous assessment year 1942-1943. The policy underlying the provisions of the Income-tax Act is that generally there is no case where during a given assessment year the revenue authorities are called upon to determine either the loss or the income of the previous year except to the limited extent recognised under S. 34 of the Act. It is therefore difficult to accept the contention that under S. 24(3) the Income-tax Officer was bound to determine during the assessment year 1943-1944 the loss which accrued to the assessee in the accounting year corresponding to the assessment year 1942-1943.”
A Bench of the Andhra High Court followed the decision in O.M Ahmed Sahib…Applicant; v. Commr. Of Income-Tax, Madras…. , and distinguished the Bombay Case on the ground that that decision proceeded on the principle that a person who committed default cannot take advantage of it to deprive the other of his rights [Vide Narasimhalu v. Commissioner of Income-tax ].
It is necessary to refer to one other case that was cited before us. That is reported in Anglo French Textile Co., Ltd. v. Commissioner of Income-tax . The facts there were as follows: The assessee was the Anglo-French Textile Co. Ltd., a company incorporated in the United Kingdom. It owns spinning and weaving mills at Pondicherry and manufactures yarn and cloth. It used to obtain its requirements of raw cotton mostly from Best and Co., Ltd., Madras. The bulk of the manufactured goods were sold in British India, the rest being sold elsewhere. In the year material to the case it had no business in India and accordingly it submitted no return to the Income-tax Authorities. On 25th April 1941 the Income-tax Officer issued a notice to the company and called for a return of its income. The company replied that at all material times it had no business in India and consequently no profits arose or accrued or were received in India and that therefore the assessee was not liable to comply with the provisions of the Indian Income-tax Act. Nevertheless and without prejudice the company submitted a nil return.
In March 1942, the Income-tax Officer accepted the nil return and declared the company was not liable to tax. A year later the Income-tax Officer sent the company a notice under S. 34 of the Act. In reply to this the assessee again submitted a nil return and filed a statement showing a loss of over Rs. Three lakhs on its total income. The Income-tax Officer accepted the statement of the company and added:
“Hence there is no assessment for 1941-1942. As this is a non-resident company the loss need not be carried forward under S. 24(2) as that section in terms does not apply to nonresidents.”
The company complained against the last portion of this order; it insisted that the Income-tax Officer having accepted its statement of loss was bound to record it and carry it forward.
The appeals which the assessee filed before the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal, both failed. The assessee obtained a reference to this Court and here also it failed. It finally went to the Supreme Court. That Court ruled:
“A set off under S. 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course, the loss can be deducted but that is done under S. 10 and not under S. 24(1)………In the present case, the loss is computed by striking a balance in the profit and loss account of just the one business and consequently no question of different heads arises. On both these grounds, therefore, the assessee's contention must fail because, unless the loss can be set off under Sub-S. (1) of S. 24, it cannot be carried forward under Sub-S. (2) and if it cannot be carried forward the question of its determination and computation becomes irrelevant.”
Earlier in the course of judgment the Court observed:
“There is no provision in the Act which entitles the assessee to have a loss recorded or computed, unless something is to be done with the loss.”
This observation seems to suggest that where something has to be done with the loss as for instance setting it off against the profits of a subsequent period, the assessee can claim, subject of course to the other provisions of the Act, that the loss should be computed and ascertained.
We may here refer to the last argument which Mr. Jagadisa Aiyar urged. The assessee filed a refund application under S. 48 of the Act. R. 37 requires that such an application shall be accompanied by a return of total income and total world income in the form prescribed under S. 22—unless of course such a return has already been filed. When such a return was filed it was the duty of the Income-tax Officer to scrutinies the return and if a loss was claimed in it, to compute how much it was; a duty rested on him to ascertain the loss. If in this case the Income-tax Officer had discharged this duty the loss sustained by the assessee would have been ascertained and the requirements laid down in O.M Ahmed Sahib…Applicant; v. Commr. Of Income-Tax, Madras…. , complied. The assessee cannot be penalised for the default of omission of the Income-tax Officer. So ran the argument.
We are unable to accept the contention of Mr. Jagadisa Ayyar that the Income-tax Officer is in every case bound to compute or qualify the loss which an assessee who has filed an application for refund under S. 48 claims to have suffered. Of course, there may be cases where that may have to be done; but that is not always so. When dealing with an application under S. 48, the Income-tax Officer has only to satisfy himself that the tax paid by or on behalf of the assessee or treated as paid on his behalf exceeds the amount with which he is chargeable. Ordinarily it will suffice for the Income-tax Officer to scrutinies the return to a limited extent, that is to say, to the extent necessary to determine what the tax properly chargeable on the assessee is. When the examination of the return shows that the income is nil or that it is a negative quantity he is not bound to proceed further with his examination and ascertain how much the loss amounts to. It is not possible on this objection of Mr. Jagadisa Aiyar to say that the decision in O.M Ahmed Sahib…Applicant; v. Commr. Of Income-Tax, Madras…. , does not apply.
It is also possible to say that the decision in Ahamed Sahib v. Commissioner of Income-tax , and the decision in Narasimhalu v. Commissioner of Income-tax , which followed it are distinguishable on the facts from the present case. The assessee before us had three sources of income and therefore under the terms of Sub-S. (1) of S. 24, it could set off the loss under one head against the income from another head. That will enable it to carry forward the loss under S. 24(2). In Ahamed Sahib v. Commissioner of Income-tax , the assessee had only one source of business, viz., trading in yarn and cloth, and therefore he could not get the benefit of S. 24(1) and consequently of S. 24(2). In Narasimhalu v. Commissioner of Income-tax , also the assessee appears to have only one source of business, viz., the business of an abkari contractor. But then the assessee in Commissioner Of Income-Tax, West Bengal Calcutta…Applicant; v. Govindalal Dutta…. , also had apparently only one source of income.
The decisions are clearly in conflict three are in one way and two in other way. In Commissioner Of Income-Tax, West Bengal Calcutta…Applicant; v. Govindalal Dutta…. Chakravarti, C.J, expressly dissented from the view taken up by this Court in Ahamed Sahib v. Commissioner of Income-tax .
We are inclined to take the view that the decision in Ahamed Sahib v. Commissioner of Income-tax , requires further examination and consideration and therefore, we refer to a Full Bench the entire question which the Income-tax Appellate Tribunal has referred to us. The papers will be placed before my Lord the Chief Justice for further directions.
(Pursuant to the above order of reference, this case coming on for hearing before the Court, the Court delivered the following):
JUDGMENT
Balakrishna Ayyar, J. The relevant facts have been set out in the order of reference to the Full Bench. All the decisions cited before us have also been referred to in it. There is no need to go over the same ground again and we shall therefore only give our reasons for the conclusion we have reached. These are in the main two.
Section 24(2) of the Indian Income-tax Act, as it stood at the time relevant to these proceedings, entitled an assessee to carry forward his losses for a period of six years. There was only one limitation on that right, viz., that imposed by the requirements of Sub-S. (1) which was that the assessee should have had more heads of income than one. If he satisfied this requirement and had more heads of income than one, he could carry forward his unadjusted losses for a period of six years. The decision of this Court in Ahamed Sahib v. Commissioner of Income-tax , which was followed by a Bench of the Andhra High Court in Narasimhalu v. Commissioner of Income-tax , proceeded not merely on the basis that before an assessee can carry forward his losses the amount of his losses should have been ascertained and determined, but that this ascertainment and determination should have been made by the department anterior to the time when the claim to carry forward the losses and set them oft against subsequent profits was made. For imposing this latter requirement, we can see no justification in the words of the Statute.
There is next this further consideration. A person whose income in a particular year was below the assessable limit was not bound to submit a return, and, even if he submitted one, the Income-tax Officer was not bound to deal with it. S. (2-A) was inserted in S. 22 of the Income-tax Act only in 1953, that is to say, subsequent to the period we are dealing with, and is not therefore applicable to the present case. So, an assessee who had made no profit at all but had on the contrary incurred a loss, would have had no right either to submit a return showing the losses or to insist that the amount of his losses should be ascertained and determined by the Income-tax Officer. That being so, to say that before a loss can be carried forward it must have been previously ascertained and determined would, in effect, be to deprive the assessee of the right to carry forward the loss conferred on him by the Act. An assessee may have sustained losses for say five years running. In the sixth year he may have made a profit. But, since in respect of the years in which his business was running at a loss he was not entitled either to submit a return or to insist that the amount of his losses should be ascertained and determined by the Income-tax Officer, he would not—if the view taken in Ahamed Sahib's case , were right be entitled to have that loss, carried forward and set off against any profit he might make in the sixth year. That would defeat the purpose of the provisions contained in S. 24 which was and is to enable an assessee to carry forward his unadjusted losses and set them off against the profits of future years.
We, therefore, think that the case of Ahamed Sahib v. Commissioner of Income-tax , was wrongly decided in this respect, and, overrule it. The assessee is entitled to have his losses-less those already adjusted for refund purposes—for the assessment years 1948-1949 and 1949-1950 determined and carry forward the loss so determined to be set off against the profits for the assessment years 1950-1951 and 1951-1952.
The assessee will be entitled to his costs. Advocate's fee Rs. 250.
V.C.S