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  • P. Chakravartti, C.J
  • B.K Guha, J.
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  • P. Chakravartti, C.J
  • B.K Guha, J.
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Smart Summary

Structured Summary of the Opinion delivered by Chakravartti, C.J.

Factual and Procedural Background

On 4 September 1951 Govindalal Dutta filed voluntary returns of income for five consecutive assessment years (1946-1947 to 1950-1951). The returns for assessment years 1946-1947 and 1947-1948 showed losses (Rs. 37,925-2-9 and Rs. 36,033-15-0 respectively); 1948-1949 showed a small profit (Rs. 75-3-3). The Income-tax Officer (ITO) ignored the returns for 1946-1947 and 1947-1948 and proceeded to assess the year 1948-1949 on an income of Rs. 5,545/-.

The assessee raised, in appeal to the Appellate Assistant Commissioner, a ground (Ground No. 4) that the ITO ought to have carried forward losses of the earlier years against the profits of 1948-1949. No oral argument on that ground was heard at the Assistant Commissioner's hearing because the assessee's pleader withdrew after an adjournment was refused. The Appellate Assistant Commissioner dismissed the ground on the short basis that no claim of earlier loss had been made in the return for 1948-1949.

On further appeal the Appellate Tribunal accepted the assessee's contention that the ITO should have finalised assessments (or at least determined losses) for 1946-1947 and 1947-1948 before assessing 1948-1949 and set aside the assessment, directing the ITO to deal with the earlier returns and then make the assessment for 1948-1949. The Commissioner of Income-tax referred the matter to this Court under the reference procedure, posing a specific question of law for opinion.

Legal Issues Presented

  1. Whether, in making the assessment for assessment year 1948-1949, the Income-tax Officer was bound in law to set off the losses sustained in the assessment years 1946-1947 and 1947-1948 and for such purposes determine the losses for these two years (the question as referred by the Tribunal to this Court).
  2. Whether voluntary returns showing losses (filed under S.22(1) or as "voluntary returns") are valid returns in law and therefore require the ITO to make assessments on them.
  3. Whether S.24(2) (carry forward of business losses for six years) applies when there has been no assessment for the earlier year(s) in which the loss occurred, i.e., whether the right to carry forward depends on an earlier assessment having been made and losses determined.

Arguments of the Parties

Assessee's Arguments

  • The assessee argued that he had filed returns for 1946-1947 and 1947-1948 and was entitled to have those returns assessed; by determining losses in those assessments he would be entitled to carry forward those losses under S.24(2) and set them off against profits of 1948-1949.
  • Before the Tribunal, the assessee proceeded on the assumption that losses could be carried forward only if the losses for earlier years had been determined in assessments for those years.

Department's Arguments

  • The Department contended that the returns for 1946-1947 and 1947-1948 were voluntary returns showing loss and therefore were not valid returns in law; consequently no assessment could be made on them and no losses for those years could be carried forward for the purposes of S.24(2).
  • The Department also advanced an argument based on the statutory definition of "assessee" (as “a person by whom income-tax is payable” at the relevant time) to support the contention that S.24(2) did not apply to persons who were not "assessees" (i.e., persons who had only losses and were not liable to tax in those years).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Harakchana Makanji & Co. v. Commr. of Income-tax, Bombay City, (1948) 16 ITR 119 : AIR 1948 Bom 401 The Tribunal relied on this decision as supporting the proposition that a voluntary return showing loss could be treated as a valid return. The Court observed that in that case the question whether a voluntary return showing loss was a valid return was neither raised nor decided; the voluntary return was treated as valid in the facts of that case without any challenge. Therefore the case does not decide the legal point now under consideration.
All India Groundnut Syndicate Ltd. v. Commr. of Income-tax, Bombay City, (1954) 25 ITR 90 : AIR 1954 Bom 232 The Tribunal relied on it to support the proposition that an ITO cannot ignore returns showing loss and that losses must be determined and notified under S.24(3). The Court held that that decision does not bear on the present question because in that case the returns were not shown to be voluntary returns under S.22(1); instead the Bombay High Court there dealt with a duty of the ITO to determine losses and notify them under S.24(3) where assessments had been made. It did not decide the separate question whether voluntary loss-returns under S.22(1) are valid returns.
Commissioner Of Agricultural Income-Tax v. Sultan Ali Gharami, (1951) 20 ITR 432 (Cal) Interpretation of the corresponding provision to S.22(3) — explained earlier by Chakravartti, C.J. — regarding the scope of S.22(3) for late returns. The Court (Chakravartti, C.J.) referred to his prior explanation in that case to support the view that S.22(3) allows the filing at any time before assessment of a return which the person was under a duty to file (i.e., a return of taxable income) and does not allow a person who suffered a loss voluntarily to file a return of loss under S.22(3).
O. M. Ahamed Sahib v. Commr. of Income-tax, (1952) 22 ITR 87 : AIR 1953 Mad 340 Held by the Madras High Court that S.24(3) contemplates an "ascertained loss" determined by earlier assessment proceedings and not loss left at large; the Madras decision concluded that investigation of an earlier year's loss could not be undertaken in the course of a later assessment when the earlier year had been the subject of a S.34 notice rather than an assessment. The Court noted this decision (not cited before them) and expressly disagreed with its reasoning, holding that S.24(3) should not be read to require an earlier formal assessment before a loss may be investigated and established in the course of a later assessment for the purposes of S.24(2).

Court's Reasoning and Analysis

The Court proceeded in sequential legal analysis, addressing particular statutory provisions and factual points in the material:

  1. S.22(1) and S.22(3): The Court analysed the scope of S.22(1) (returns required when total income exceeds the exempt limit) and S.22(3) (late returns). It held that under the law as it stood then a person was not required and did not have a right to file a voluntary return showing loss under S.22(1). S.22(3) permits late filing only of returns which the person was under a duty to file (i.e., returns contemplated by S.22(1) or S.22(2)), and does not permit a return of loss to be filed voluntarily. Therefore the returns for 1946-1947 and 1947-1948, being voluntary returns showing loss, were "no returns at all in law" and the ITO was not required to make assessments on them.
  2. Precedent review: The Court examined the authorities relied upon by the Tribunal and found none to decide the narrow question whether a voluntary loss-return under S.22(1)/S.22(3) is valid. One Bombay decision had simply treated such a return as valid in the particular facts without deciding the point; another Bombay decision (All India Groundnut) related to an ITO's duty to determine and notify losses in the context of assessments and did not decide the voluntary-return point. The Court also relied on the earlier Calcutta decision by the same judge to explain S.22(3).
  3. Construction of S.24(2): The Court addressed whether S.24(2) (carry forward of business losses for six years) required that an earlier year's loss be determined by an assessment before it could be carried forward. The Department had argued that the word "assessee" (defined then as "a person by whom income-tax is payable") limited S.24(2) to persons liable to tax. The Court rejected that literal approach: if "assessee" were so strictly read, the section would be inapplicable in all cases where there was a surplus business loss (since a person with a surplus loss is not a person by whom tax is payable). The Court held the word "assessee" in S.24(2) should be read in a loose and general sense to mean a person whose income-tax affairs are under consideration.
  4. Construction of "previous year": The Court examined the definition of "previous year" (a year ending on 31 March or other accounting year "preceding the year for which the assessment is to be made") and rejected an unduly literal interpretation that would limit carry-forward rights only to the immediately preceding accounting year for which an assessment was being made. The Court held "previous year" in S.24(2) is used in a loose and general sense to include any accounting year within the six-year carry-forward period, irrespective of whether an assessment for that earlier year had actually been made.
  5. S.24(3) and practical effect: The Court read S.24(3) (which requires the ITO to notify losses established in the course of assessment) as consistent with allowing an assessee in the course of a current assessment to establish losses of the preceding six years and have them computed and notified even if formal assessments for those earlier years had not been made. Sub-s. (3) does not confine the loss to those already determined by earlier assessments.
  6. Conclusion on the ITO's duty: Putting these constructions together, the Court concluded that although the ITO was not required to make formal assessments for the earlier years (because the returns were voluntary loss-returns and in any event one return was filed after four years had elapsed), once the ITO had notice of the earlier returns and the assessee had (for present purposes) made a claim to set off earlier losses, the ITO was required to investigate the claim. The ITO must determine whether losses had in fact occurred in the relevant earlier accounting years that were eligible to be carried forward under S.24(2), and if established, compute and give effect to them in the assessment for 1948-1949.
  7. Scope of the investigation: The ITO's investigation must address whether parts of the claimed losses fell outside the six-year period, whether the losses were of the class that may be carried forward (business losses), and whether other heads of income in the relative years would affect the carry-forward. The Court emphasised that although the investigative process might practically resemble making an assessment, no formal assessment for those earlier years could be required or made in law.

Holding and Implications

Holding:

Yes, but not to make assessments for the years 1946-1947 and 1947-1948, but only to investigate into the claim of losses and find whether it was established that losses had taken place during the years in question which the assessee was entitled in law to have carried forward and set off against the profits of 1948-1949.

Immediate consequences and practical effect:

  • The Tribunal's order directing formal assessments to be made for 1946-1947 and 1947-1948 was erroneous and cannot stand.
  • The Income-tax Officer is required to investigate the assessee's claim of earlier losses and, if such losses are established and eligible under S.24(2), compute and give effect to them in the assessment for 1948-1949 (including notification as required under S.24(3)).
  • No formal assessment for the earlier years is required or permissible in law where the returns were voluntary loss-returns or otherwise not returns in law; the ITO's duty is to determine the existence and quantum of eligible losses for carry-forward purposes within the current assessment proceeding.
  • The Court set aside the Tribunal's order to the extent it directed assessments and made no order as to costs ("there will be no order as to costs").

Wider precedent: The opinion contains legal constructions of S.22(1), S.22(3), S.24(2) and S.24(3) and disagrees with the reasoning of the Madras decision cited (O. M. Ahamed Sahib). The Court did not purport simply to limit itself to procedural relief but supplied interpretative conclusions about the statutory provisions relied upon; the opinion does not state that it is creating a novel, separate precedent beyond its application to the facts and statutory construction in this reference.

Reference answered accordingly.

Show full summary ...

    Commissioner Of Income-Tax v. Govindalal Dutta

    The Judgment of the Court was delivered by

    Chakravartti, C.J:— 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 1947-1948 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. 5,545/-.

    2. It does not appear from the Income-tax Officer's order that he was asked to take into account the losses of the earlier years and set them off against the profits for the assessment year 1948-1949, if he found that losses incurred in earlier years had been made out. In Erie assessee's appeal to the appellate Assistant Commissioner, however, a specific ground relating to the question was taken. Ground No. 4 was that the Income-tax Officer ought to have carried forward the losses for the two earlier years, that is to say, the accounting years 1945 and 1946 respectively, against the profits of 1948-1949. Though that ground was taken, there was no oral argument in its support at the time of the hearing, because the pleader who appeared for the assessee withdrew from the case after his prayer for an adjournment had been refused. It appears that the adjournment was asked for on the ground that notice of the hearing had been received by the appellant only two days earlier, but it occurred to the Appellate Assistant Commissioner to call for the envelope in which the notice served on the assessee had been enclosed and when the envelope was produced, it was found that in fact the notice had been served much earlier. In those circumstances, the Appellate Assistant Commissioner was not disposed to grant the adjournment prayed for and the result was that the pleader withdrew/from the case.

    3. The Appellate Assistant Commissioner disposed of the fourth ground taken on behalf of the assessee shortly. He held that no claim of any earlier loss had been made in the return and, therefore, the action of the Income-tax Officer in not engaging himself in any enquiry about earlier losses had been perfectly in order. The statement of the Appellate Tribunal that the Appellate Assistant Commissioner did not decide this contention of the assessee, as remarked by them in the appellate order, or that he rejected the assessee's appeal “without going into this point”, as observed in the Statement of the Case, is correct only to the extent that the Appellate Assistant Commissioner did not deal with the contention on its merits. In his further appeal to the Tribunal, the assessee contended that the Income-tax Officer was bound to finalise the assessments for 1946-1947 and 1947-1948 first and then, if he found that there were losses to be carried forward, to give the assessee the benefit of those losses in his assessment for the year 1948-1949. That contention was accepted by the Tribunal. It appears to have been contended on behalf of the Department that the returns for the years 1946-1947 and 1947-1948 being voluntary returns, showing loss, were not valid returns at all and, therefore, the Income-tax Officer was not required by law to take any notice of them. The Tribunal repelled that argument by holding that the returns for the two years in question were not returns in pursuance of either S. 22(1) or S. 22(2) and not being such returns, could be filed as valid returns at any time before the assessment was made. They thought that the view they were taking had the support of the decision in Harakchana Makanji & Co. v. Commr. of Income-tax, Bombay City, 1948-1916 ITR 119 : (AIR 1948 Bom 401) (A). In the Statement of the Case, they have given a further reason and said that S. 22(3) of the Act provides for the submission at any time before the assessment of a return which is not a return under either S. 22(1) or S. 22(2) of the Act. Having thus disposed of the objection taken on behalf of the Department, the Tribunal proceeded to hold that the right given to assessees under S. 24(2) of the Act to carry forward losses for a period of six years was an absolute and unqualified right and there could be no justification for refusing to give effect to that right on the ground that the returns for the years, in which the losses were claimed to have occurred, were voluntary returns, showing loss. The Income-tax Officer, the Tribunal thought, had no right to ignore such returns' and, according to them, it had been so held in the case of All India Groundnut Syndicate Ltd. v. Commr. of Income-tax, Bombay City, (1954) 25 ITR 90 : (AIR 1954 Bom 232) (B). In that view, the Tribunal held that since the years in respect of which losses had been claimed were years immediately preceding the assessment year in question, the Income-tax Officer could not make a valid assessment for that year until and unless he had determined the losses in respect of the earlier years, because if there had been in fact losses in those years, such losses would have to be set off against the income of the assessment year in question. In the result, the Tribunal set aside the assessment and directed the Income-tax Officer to deal with the returns filed by the assessee for the assessment years 1946-1947 and 1947-1948 and then to make the assessment for the year 1948-1949.

    4. The Commissioner of Income-tax was unable to accept the decision of the Tribunal and required them to refer the matter to this Court for its opinion. Accordingly, the Tribunal have referred the following question of law:

    “Whether on the facts and in the circumstances of this case, in making the assessment for the assessment year 1948-1949, the Income-tax Officer was bound in law to set off the losses sustained in the assessment years 1946-1947 and 1947-1948 and for such purposes determine the losses for these two years?”

    5. Before the Tribunal, it seems to have been assumed by both parties that in order that losses of an earlier year could be allowed to be carried forward and set off against the profits of a subsequent year, it was necessary, that, in respect of the earlier year, there should have been an assessment. It was on the assumption of that position in law that the parties advanced their rival contentions regarding the validity of the return filed by the assessee. The assessee insisted that since he had filed returns of his income for the years 1946-1947 and 1947-1948 and since those returns were returns which he was entitled to file, the Income-tax Officer was bound to make assessments on them and, by determining his losses in such assessments, give him the right to have the losses carried forward and set off against the profits of the year 1948-1949. On the other hand, the Department contended that the returns filed, being voluntary returns showing loss, were no returns at all and, therefore, since there could be no assessment on them in law, no losses of the years to which the returns related could be carried forward to be set off against the profits of the assessment year in question. Both sides thus proceeded on the view that there had to be an assessment.

    6. Before us Mr. J.C Pal, who appeared on behalf of the assessee, did not contend that under the law, as it stood at the relevant time, an assessee was entitled to file a voluntary return under S. 22(1) of the Act and show therein a loss. Indeed, Mr. Pal himself submitted that no such return could be filed under the law as it then stood. There can be no question that in making that submission, contrary to what had been contended on behalf of his client before the authorities below, Mr. Pal was entirely right. Under S. 22(1), as it stood before its amendment in 1953, a person was required to file a return only if his total income during the previous year exceeded the maximum amount which was not chargeable to tax. The return contemplated was thus only a return of income and not a return of loss and not even a return of income, but a return of taxable income, if the person concerned himself thought that his income of the previous year had reached the assessable limit. If, on the other hand, he had suffered a loss or even if he had earned an income but such income was below the taxable limit, he was not required to come forward with a return and proclaim his loss to the Income-tax Officer or proclaim the meagreness of the income which he had made. Not only had a person no duty to file a return voluntarily in compliance with a general notice under S. 22(1), if he had suffered a loss, but it is clear that he had even no right to report his loss to the Income-tax Officer by filing a return. The view of the Appellate Tribunal that S. 22(3) of the Act provides for the filing of a voluntary return, showing loss, at any time before the assessment is made, appears to me to be completely mistaken. What S. 22(3) says is that if a person has not furnished a return within the time allowed by or under S. 22(1) or S. 22(2), he may furnish a return at any time before the assessment is made. Obviously, what is contemplated is that if no notice under S. 22(2) was served upon a person, but, having had an assessable income in the previous year, he had a duty to file a return under S. 22(1) and yet had not filed it or if, having been required by a notice under S. 22(2) to file a return, he had failed to comply with the notice, he can file his return at any time before the completion of the assessment. The voluntary return which may thus be filed at any time before the assessment is completed must, it is clear, still be a return, as contemplated by S. 22(1), that is to say, a return showing a taxable income. As to a return filed in compliance with a notice under S. 22(2), such a return can obviously be either a return showing an assessable income or a return showing loss, because, having been required by a notice under the section to furnish a return of his income and total world income during the previous year, he was under a duty to file a return, whatever his condition as to profit or loss might be. The limitation contained in S. 22(1) to the effect that a return was to be filed only if the total income during the previous year “exceeded the maximum amount which is not chargeable to income-tax” does not find place in S. 22(2). What S. 22(3) plainly means is that if a person, being under a duty to file a return, which, in the case of a voluntary return must be a return of a taxable income and, in the case of a return in compliance with a notice under S. 22(2), may be a return, showing either profit or loss, failed to file it in time, he may file the return, which he failed to file in due time, before the completion of the assessment. Except granting an extension of time for the purpose of furnishing returns, S. 22(2) has no other effect and it certainly does not confer any new right on asses-sees to file returns of types not contemplated by S. 22(1). Dealing with the identical question with reference to the corresponding sections of the Bengal Agricultural Income-tax Act, I had occasion to explain the true meaning of S. 22(3) in the case of Commr. of Commissioner Of Agricultural Income-Tax v. Sultan Ali Gharami, (1951) 20 ITR 432 at p. 442 (Cal) (C). I see no reason to modify the view which I then expressed.

    7. The Tribunal has referred to two decisions, both of the Bombay High Court. In (1948) 16 ITR 119 : (AIR 1948 Bom 401) (A), the question was neither raised, nor decided and all that can be said is that a voluntary return, showing loss, was treated in that case as valid return without any question as to its validity being raised. What happened was that in the course of the assessee's assessment for the assessment year 1943-1944, he filed a voluntary return in respect of the year 1942-1943, showing a loss, and the date on which he did so was 18th of June, 1943, which was after the expiry of the assessment year 1942-1943. In those circumstances, it was contended on behalf of the assessee that no return having been filed within the assessment year in question, income for the year had escaped assessment and consequently the Department was not entitled in law to assess him in respect of the year in question without first issuing a notice under S. 34 of the Act. It was that contention which was repelled by the Court and the ground given was that since a return had in fact been filed by the assessee in respect of the year in question, it could not be said that in-come had escaped assessment and, therefore, the Department was not required to serve a notice under S. 34. No point as to whether a voluntary return, showing loss, could be a return in law at all, was taken or considered by the Court. The other decision relied upon by the Tribunal is the case of (1954) 25 ITR 90 : (AIR 1954 Bom 232) (B). In my view, that case has no bearing whatever on the present question. It appears that for the years 1944-1945, 1945-1946 and 1946-1947, the assessee filed returns, showing losses and the Income-tax Officer, in making assessments for the years in question, merely held that the income was nil, but did not either determine the losses, nor notify the assessee as to the amount he was entitled to carry forward under S. 24(3). The contention of the Department was that since no loss had been notified under S. 24(3) in respect of the three years in question, no loss incurred during any of them could be carried forward and set off against the profits of subsequent years. That contention was repelled by the Court which held that it was the duty of the Income-tax Officer, when he made the assessments, to determine the losses and to notify their amount to the assessee and that, not having done, what it was his duty to do, he could not turn round and take advantage of his own wrong. There is nothing in the report whatever to show that in respect of the three years in question, the returns filed by the assessee were voluntary returns filed under S. 22(1). Although it is not expressly so stated, the implication of the extremely detailed Statement of Case submitted by the Tribunal is that the returns were filed in compliance with a notice under S. 22(2). Be that as it may, no one ever suggested that the returns were voluntary returns and no question as to their being nonetheless valid was raised or decided.

    8. In my view, the returns filed by the assessee in the present case in respect of the years 1946-1947 and 1947-1948, being voluntary returns and returns which showed loss, were no returns at all in law and the Income-tax Officer was not required to make any assessments on them.

    9. This finding, however, does not dispose of the question which has been referred to us, because what we are asked to say is whether the Income-tax Officer was bound in law to determine the losses for 1946-1947 and 1947-1948 and set them off against the profits of 1948-1949. It may be that the Income-tax Officer was not bound to make an assessment in respect of the years 1946-1947 and 1947-1948 but whether he was still bound to determine the losses for those years for the purposes of S. 24(2), as applied to the assessment year 1948-1949, is a further question.

    10. Before I deal with that question, it may be convenient to dispose of a short point. I have already pointed out that in the return filed by him for the assessment year 1948-1949, the assessee did not claim any set off in respect of the losses of the earlier years. It would be recalled that was the sole ground on which the Appellate Assistant Commissioner disposed of the assessee's claim that the losses of the earlier years should have been determined. If there had been no further fact in the case, it would be difficult to allow the assessee to raise this question at subsequent stages of the assessment proceedings, since so far as the Income-tax Officer's order goes, it is not stated that he raised the question before him. If the returns filed for 1946-1947 and 1947-1948 were no returns in law, it could be argued that they were not before the Income-tax Officer at all and since his attention was also not drawn to them by any claim of set off in the return for 1948-1949, it could not be said that the Income-tax Officer had erred in not proceeding to determine the losses of the earlier years. It, however, appears that the Department's case throughout has been that the Income-tax Officer ignored the returns of the earlier years, because they were voluntary returns, showing losses. It is thus admitted that the returns came to the notice of the Income-tax Officer and he applied his mind to them and then decided not to deal with them in view of their invalidity. If so, I think it will not be right to answer the question referred to us in the negative on the short and technical ground that no set off in respect of the losses had been claimed in the return and, therefore, the Income-tax Officer was not bound in law to determine the losses and if he found any losses to exist, to set them off against the profits of the assessment year in question. That was even not the contention of the Department before the Tribunal and the question referred must be understood in the light of the contentions respectively advanced by the parties at the hearing of the appeal before the Tribunal.

    11. 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. I have already held that the Income-tax Officer was not bound to make an assessment in respect of the earlier years. The Department's contention before us was that he was not bound even to determine, for the purpose of S. 24(2), whether there had been any losses during the earlier years which the assessee was entitled to have carried forward and set off against the losses of 1948-1949, because S. 24(2) did not apply to the case of losses during years for which there had been no assessment. Mr. Meyer contended that such meaning of S. 24(2) was implicit in the use of the word ‘assessee’ and he drew our attention to the definition of that word, as it stood at the relevant time. The definition of assessee, given in S. 2(2), as it stood before the recent amendment, was “a person by whom income-tax is payable”. Mr. Meyer invited us to contrast the language of the definition with the language of S. 24(2) and pointed out that whereas the former used the word person’, the latter used the word ‘assessee’. He accordingly contended that in order that S. 24(2) would apply to a person and the benefit of it could be available for him, he had to be, as the section expressly stated, an assessee, that is to say, he had to be a person by whom income-tax was payable. A person who had suffered loss was not a person by whom income-tax was payable and, therefore, the section did not contemplate a person who had suffered losses, as the assessee in the present case had.

    12. 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. If in order to qualify for the benefit of S. 24(2), a person has to be a person by whom income-tax is payable the section cannot apply to any case at all and there cannot be any loss to be carried forward from any year to any year. The stage of S. 24(2) is reached after the stage of S. 24(1) has been passed and it is only when the operation contemplated by S. 24(1), that is to say, the operation of setting off the loss under any of the heads mentioned in S. 6 of the Act against the income of any or all of the other heads has resulted in the final emergence of a business loss, that S. 24(2) comes into play. The loss which can be carried forward under the section is so much of the year's business loss as “cannot be wholly set off under sub-s. (1)” and, therefore, the person who has such a surplus loss in his hands, if I may use that expression, cannot in any circumstances be a person who will satisfy the definition of ‘assessee’ and be a person by whom income-tax is payable. There can be no doubt, it appears to me, that the word ‘assessee’ is used in S. 24(2) in a loose and a general sense and means merely a person whose income-tax affairs are being considered or who is himself considering the state of his profit and loss. The difficulty which the word ‘assessee’, as interpreted by its old definition, presented, if the definition was to be literally applied, has now been removed by a change in the definition, whereby not only a person by whom income-tax is payable under the Act, but also every person in respect of whom any proceeding has been taken for the I assessment of either his income or the loss sustained by him has been brought within the ambit of the definition.

    13. A greater difficulty, however, is presented by the expression “previous year” on which Mr. Meyer did not offer any argument. To turn to the definition clause again, ‘previous year’ is defined in S. 2(11) as, to omit the portions irrelevant for the present purpose, “the twelve months ending on 31st day of March”, or on some other day, according to the manner in which the accounts have been made up, “preceding the year for which the assessment is to be made”. A previous year is thus inter-linked with an assessment year or, to be more precise, a year for which an assessment is to be made. If one takes that definition literally, one may argue that S. 24(2) applies, only to losses of the year preceding the year for which an assessment is to be made and that, therefore, in the present case, if any loss of the earlier years could be taken into account at all, those would only be the losses of the accounting year 1947-1948, but not the losses of any earlier years. If that contention be correct, losses of accounting years earlier than the accounting year 1947-1948 could not be taken into account at all, because for the assessment years, relative to those accounting years, no assessment had been made or was going to be made. It appears to me, however, that it will not be right, nor consistent with the intention of the section to take the expression previous year in the literal sense of its definition. The section gives a person, who has in his hands some business losses which could not be set off against profits the right to carry it forward for six years. That right is not qualified in any manner and I cannot imagine that although it is not expressly so stated, the Legislature, nevertheless, intended, by the use of the expression ‘previous year’, to limit the commencement of the carrying forward to the first accounting year for which there would be an assessment. So regarded, the section would mean that if a person, starting a business in a particular year, went on making losses for five successive years but in the sixth year made some income, he would be entitled to set off against the income of the sixth year only the surplus loss of the fifth year, but not any earlier loss. To read the section in that sense would be, to my mind, to adopt a construction that would defeat its purpose. In my view, the expression ‘previous year’ has also been used in S. 24(2) in a loose and general sense and means only a year which, for income-tax purposes, would be an accounting year relative to an assessment year, irrespective of whether any assessment was actually made. I would, therefore, hold that the taking the view that the right given to an assessee under S. 24(2) of the Act to have his losses carried forward and set off against the losses of subsequent years, is an unqualified right, subject only to such limitations as the section itself contains, the Tribunal was right.

    14. It appears to me that such construction of the section also receives support from the terms of Sub-s. (3) of the section. That section 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 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”. 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 carried 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 loss of all those six years, or any or more of the years within that period. Sub-section (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 of subsequent years.

    15. I think I ought to mention that the view I am taking is opposed to what was held by the Madras High Court in the case of O.M Ahamed Sahib v. Commr. of Income-tax, (1952) 22 ITR 87 : (AIR 19553 Mad 340) (D), which was not cited before us. The facts in that case were that during the assessee's assessment for the year 1943-1944, the Income-tax Officer discovered that he had carried on business even in the year 1942-1943 and, upon that discovery, he issued a notice under S. 34 of the Act. It was, however, found after the return had been filed that the assessee had not made an income in the year 1942-1943. When the assessment for 1943-1944 was resumed, it was contended on behalf of the assesses that the Income-tax Officer should have computed his loss for the year 1942-1943 in the proceeding under S. 34 in respect of the year. The contention was easily repelled, because S. 24(3) speaks of assessment proceedings and not proceedings under S. 34. It was next contended that the loss of the year 1942-1943 should be investigated in the course of the assessment for the year 1943-1944 and that the assessee had a right to such investigation under S. 24(3) of the Act, but that contention was also repelled on the ground that what S. 24(3) contemplated was an ascertained loss, that is to say, a loss determined by the taxing authorities in an earlier assessment proceeding and not loss left at large. With great respect to the very experienced Judge who delivered the judgment in that case, I am unable to accept the basis of the decision as correct, because there would be an ascertained loss determined by the taxing authorities for earlier years only when there could be an assessment for those years. Where no notice under S. 22(2) is served and the assessee has suffered loss, so that he cannot file a voluntary return and so that no assessment can take place, it cannot be right to exclude a claim of loss on the ground that it was not determined at an assessment. I can see no reason to import any such qualification in S. 24(3) which is not warranted by the language used and which, it would be impossible to satisfy in spite of there having been a loss in fact.

    16. I think, regarded from, whatever point of view the matter may be, the only right conclusion at which one can arrive is that in the facts of the present case and assuming, as it must now be assumed, that the assessee did make a claim of set off before the Income-tax Officer, the Officer was required by law to investigate the claim of loss in regard to the accounting years relative to the assessment years 1946-1947 and 1947-1948. He was, however, not required to make assessments in respect of those years and indeed, for reasons I have already given no assessment could in law be made on the returns filed. There is an additional reason in respect of the assessment year 1946-1947 why no assessment could be made, because the return was filed after the expiry of four years from the end of the assessment year. 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).

    17. The losses claimed in respect of the two earlier years appear to have been regarded in the course of the proceedings below as the loss of those years. We had occasion to refer to the returns themselves and it transpired that not the whole of the losses had been incurred in those particular years, but a large part had been brought forward from still earlier years. In any investigation which he might make, the Income-tax Officer would, therefore, have to see, since the assessee's right was limited to losses which he would be entitled to have set off under the provisions of the section, if any part of the losses had been suffered beyond six years. And so would he have to see whether the losses were such losses as could be carried forward in law and in that connection see whether there were other heads of income in the relative years and also whether the losses were business losses. This, however, bears only upon the question as to how the Income-tax Officer would have to determine the losses.

    18. In my opinion, although the view-taken by the Appellate Tribunal as to the true import and effect of S. 24(2) was correct, the-order directing assessments to be made on the returns for 1946-1947 and 1947-1948 was plainly not correct. The utmost which the Income-tax Officer could be required to do was to investigate into and determine the losses of the earlier years fit to be earned forward, if there were any.

    19. In effect, the process might not differ from making an assessment, but nevertheless, no formal assessment could in law be made.

    20. For the reasons given above, the answer to the question referred must, in my opinion, be:

    “Yes, but not to make assessments for the years 1946-1947 and 1947-1948, but only to investigate into the claim of losses and find whether it was established that losses had taken place during the years in question which the assessee was entitled in law to have carried forward and set off against the profits of 1948-1949.”

    21. As the actual order of the Tribunal is erroneous, there will be no order as to costs.

    22. Guha, J.:— I agree.

    R.G.D

    23. Reference answered accordingly.

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    Commissioner Of Income-Tax v. Govindalal Dutta
    (Sep 4, 1957)