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Burdwan Wholesale Consumers' Co-Operative Society Ltd. v. Commissioner Of Income-Tax.
Concise Analytical Summary of the Opinion (S. C. Sen, J.)
Factual and Procedural Background
The Tribunal referred a question to the High Court under section 256(1) of the Income-tax Act, 1961. The referred question asked whether the Tribunal was justified in declining to allow the benefit of carry forward and set off of losses for earlier assessment years on the ground that returns of income for those assessment years were not furnished in terms of section 139 although they were furnished in terms of notice under section 148.
The facts, as set out by the Tribunal, show that assessments for the assessment years 1970-71, 1971-72 and 1972-73 were completed under section 143(3) determining losses for those years (Rs. 29,656; Rs. 14,072; Rs. 41,819 respectively). There was no assessment for 1974-75. For assessment year 1975-76 the Income-tax Officer assessed income of Rs. 74,828 and declined to set off the earlier losses because the earlier assessments were completed pursuant to alleged notices under section 148. The Appellate Assistant Commissioner confirmed that decision and the assessee appealed to the Tribunal. The Tribunal upheld the revenue's position and framed the legal question that it then referred to the High Court under section 256(1).
After the Tribunal's order there were miscellaneous applications and the Tribunal considered submissions and proceeded with the reference as framed. The High Court (per S. C. Sen, J., with Bhagabati Prasad Banerjee, J. concurring) considered statutory provisions and authorities and answered the referred question in part for the respective assessment years.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in declining to allow the benefit of carry forward and set off of the losses for the earlier assessment years on the ground that returns of income for those assessment years were not furnished in terms of section 139 although they were furnished in terms of notice under section 148?
Arguments of the Parties
Assessee's Arguments
- The assessee's counsel submitted that there is no difference between a return filed in response to a notice under section 148 and a return filed under section 139; implicitly, therefore, the assessee should be entitled to carry forward and set off the losses determined in pursuance of returns filed after notices under section 148.
Revenue's Arguments
- The Revenue maintained (as reflected in the Tribunal's and lower authority's conclusions) that section 80 requires that losses must have been determined in pursuance of a return filed under section 139 in order to be carried forward and set off; because the returns at issue were filed pursuant to notices under section 148 (and not under section 139(1) or within the relevant time limits under section 139), the assessee was not entitled to carry forward or set off those losses.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Godavari Sugar Mills Ltd., [1967] 63 ITR 310 | Explaining the scope and effect of deeming provisions and the treatment of an imaginary state of affairs as real (legal fiction); used to support giving full effect to statutory deeming language. | The Court relied on this authority to justify treating a notice under section 148 as, for practical purposes and consequences, a notice under section 139(2) where the statute so provides; the legal fiction in section 148 must be given full effect. |
| East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] AC 109 | Quoted (via Godavari Sugar Mills) for the proposition that when statute requires treating an imaginary state of affairs as real, one must also treat the inevitable corollaries of that state of affairs as real. | Quoted to support the view that consequences flowing from the deeming provision should be given effect, thereby supporting the treatment of section 148 notices as equivalent to section 139(2) notices for relevant consequences. |
| CIT v. Kulu Valley Transport Co. P. Ltd., [1970] 77 ITR 518 | Authority for the proposition that an assessee could file returns of loss before assessment orders are passed in proceedings initiated by notice under section 148. | The Court relied on this decision to note that it was open to the assessee to file returns of loss before the assessment orders pursuant to section 148 were passed. |
| Co-Operative Marketing Society Ltd. v. Commissioner of Income-Tax, M.P.-I, Bhopal, [1983] 143 ITR 99 (Madhya Pradesh High Court) | Held that section 80 must be read with section 148 and the provisions of section 139(1) and (4); where returns are filed in response to section 148 notices but within the time allowed under section 139(4), carry forward and set off may be permitted. | The Court expressed respectful agreement with this decision and its construction that section 148 operates so far as may be as a notice under section 139(2) and that subsections of section 139 should be read together for the purpose of determining entitlement to carry forward losses. |
Court's Reasoning and Analysis
The Court proceeded by textual and purposive construction of the relevant statutory provisions and by application of established authorities on deeming/fictitious provisions:
- Statutory starting point: Section 80 of the Income-tax Act states that no loss which has not been determined in pursuance of a return filed under section 139 shall be carried forward and set off under specified sections. Thus, prima facie, section 80 requires a loss to be determined in pursuance of a return filed under section 139 for carry forward/set off.
- Nature of returns: The Court noted that a return may be filed voluntarily under section 139(1) or in pursuance of a notice under section 139(2). If a return is filed in either manner, the assessee can claim carry forward/set off of losses computed on the basis of that return.
- Construction of section 148: Section 148(1) prescribes that before making assessment/reassessment under section 147, the Income-tax Officer shall serve a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of the Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. The Court treated this language as creating a legal fiction that the notice under section 148 is, for relevant purposes, a notice under section 139(2).
- Deeming provision principle: Relying on CIT v. Godavari Sugar Mills Ltd. (and the passage from East End Dwellings quoted therein), the Court emphasized that a legal fiction/deeming provision must be given full effect, including its consequences and incidents, unless prohibited by statute.
- Consequences of the above construction: If a notice under section 148 operates as a notice under section 139(2), then a return filed pursuant to such a notice should, in principle, permit the same relief of carry forward/set off as a return filed under section 139(2).
- Safeguard for taxpayers: The Court rejected an interpretation of section 148 that would defeat existing taxpayer rights by denying the opportunity to claim carry forward/set off merely because a section 148 notice had been issued. The Court characterized section 148 as a machinery provision not intended to cut down substantive rights that a taxpayer otherwise possessed.
- Temporal limits and application to the present facts: The Court observed that in the present case, returns of loss for the assessment years 1970-71 and 1971-72 were ultimately furnished on 9 August 1974, which was beyond the periods prescribed by section 139(1), section 139(2) or section 139(4). The Court acknowledged authorities (including Kulu Valley Transport) indicating that filing before assessment orders are passed is permissible, and it followed the Madhya Pradesh High Court decision that read section 80 together with the provisions of section 148 and section 139 subsections.
- Application to the three assessment years: Applying these principles, the Court concluded that, because the returns for 1970-71 and 1971-72 were filed beyond the relevant prescribed periods, those losses could not be carried forward or set off (answering the question in the affirmative in favour of the Revenue). For assessment year 1972-73 the Court answered the question in the negative and in favour of the assessee. The opinion does not elaborate further factual detail about the timing or basis for the favourable result on 1972-73 beyond the Court's conclusion as recorded.
Holding and Implications
Core Ruling: The Court answered the referred question partially in favour of the Revenue and partially in favour of the assessee:
- So far as assessment years 1970-71 and 1971-72 are concerned: The question is answered in the affirmative and in favour of the Revenue — the Tribunal was justified in declining to allow carry forward and set off of the losses for those years (the returns of loss were filed on 9 August 1974, beyond the relevant statutory time limits).
- So far as assessment year 1972-73 is concerned: The question is answered in the negative and in favour of the assessee — the assessee is entitled to the benefit (the opinion records this result without further factual elaboration in the text provided).
- No order as to costs was made.
Implications:
- The Court confirmed that notices issued under section 148 are, by statutory language and legal fiction, to be treated as notices under section 139(2) for relevant consequences and that the deeming provision is to be given full effect (subject to the applicable time limits in section 139).
- The decision emphasizes that a section 148 notice is a machinery provision and should not be construed so as to defeat substantive entitlements that an assessee otherwise enjoys — but compliance with the temporal provisions of section 139 (and related subsections) remains material to entitlement to carry forward and set off.
- The immediate practical effect is that the assessee may not carry forward or set off the losses for 1970-71 and 1971-72 (because returns were filed late), but may do so for 1972-73 as determined by the Court. The opinion applies existing precedents and does not purport to create an entirely new rule beyond giving full effect to the statutory deeming in section 148 in line with established authorities.
This summary has been prepared strictly from the content of the provided opinion. No facts or inferences not contained in the opinion have been added.
The Judgment of the Court was delivered by
Suhas Chandra Sen, J.:— The Tribunal has referred the following question of law to this court under section 256(1) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in declining to allow the benefit of carry forward and set off of the losses for the earlier assessment years on the ground that returns of income for those assessment years were not furnished in terms of section 139 although they were furnished in terms of notice under section 148?”’
2. The facts of the case, as stated by the Tribunal, are as follows:
“For the assessment years 1970-71, 1971-72 and 1972-73, income-tax assessments were completed under section 143(3) determining losses as stated below:
Assessment year Loss Rs. 1970-71 29,656 1971-72 14,072 1972-73 41,819
3. There was no assessment for the assessment year 1974-75. For the assessment year 1975-76, the Income-tax Officer, A-Ward, Burdwan, made an assessment determining an income of Rs. 74,828. On a prayer of the assessee, the said officer declined to set off the losses for the years mentioned above against the above income for this year on the ground that the assessments for the said years were completed in pursuance of alleged notices under section 148 of the Income-tax Act, 1961. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer in this respect. The assessee preferred a second appeal before the Tribunal. The Tribunal upheld the order of the Appellate Assistant Commissioner by observing as under:
“We have heard the rival submissions and gone through the facts on record. A perusal of the assessment orders would show that the assessee filed returns for the assessment years 1970-71, 1971-72 and 1972-73 in compliance with the notice under section 148 and no returns of income for those three years were filed under section 139. In accordance with the clear provision of section 80, no loss which has not been determined in pursuance of a return filed under section 139 shall be carried forward and set off against future profits. We are unable to concede to the submissions of the assessee's counsel that there is no difference between a return filed under section 148 inasmuch as section 148 is to apply in a case where income has escaped assessment whereas section 139(2) empowers the Income-tax Officer to issue notice to any person who, in the opinion of the Income-tax Officer, has taxable income. Viewed thus, we would hold that the assessee was not entitled to the benefit of carry forward of losses for the aforesaid three assessment years.”
4. After the order of the Tribunal, there were two miscellaneous applications filed by both the assessee and the Revenue in which the Tribunal had passed the following order:
“We have considered the submission made by both the sides and it is seen that the Appellate Tribunal referred to the statement of the Income-tax Officer that, for the assessment years 1973-74 and 1974-75, the assessee filed a return under section 139 but not within the time prescribed under section 139(1). But, as indicated earlier, the reference application related to the assessment years 1975-76 and 1976-77. After taking into account the findings of the Appellate Tribunal and its directions and after considering the submissions made by both the sides before us, we are of the opinion that the question as framed by the Appellate Tribunal in the draft statement of the case requires no modification. We are also of the opinion that, in drafting that question, the Tribunal has taken into account the questions proposed by the assessee as set out at para 1 above. In this view of the matter, the question as drafted and as being reproduced in the following paragraph is referred to the Hon'ble High Court under section 256(1) for the esteemed opinion of the Hon'ble High Court.”
5. The provisions for set off and carry forward of losses are contained in sections 70 to 79 of the Income-tax Act. Section 80 provides as under:
“80. Submission of return for losses.— Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed under section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) of section 74 or sub-section (3) of section 74A.”
6. Section 80 merely makes it clear that for the purpose of carry forward and set off of losses under section 72(1) or section 73(2) or section 74(1) or section 74A(3), there has to be computation of losses on the basis of a return filed under section 139. The question is whether, in the instant case, the return of income has been filed under section 139 of the Income-tax Act? A return of income may be filed voluntarily under section 139(1) or pursuant to a notice given by the Income-tax Officer under section 139(2) of the Income-tax Act. In both the cases, the assessee can claim carry forward or set off of losses incurred by the assessee which has been computed on the basis of the return filed.
7. In the instant case, the assessee was served with a notice under section 148 of the Income-tax Act, which is as under:
“148. Issue of notice where income has escaped assessment.— (1) Before making the assessment, reassessment or recomputation under section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.”
8. It is well settled that a notice under section 148 is in effect a notice under section 139(2) of the Income-tax Act. Section 148 itself says that the Income-tax Officer shall serve a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139. Thereafter, the provisions of the Act will apply as if the notice were a notice under section 139(2).
9. A legal fiction is to be given the fullest possible effect. In the case of CIT v. Godavari Sugar Mills Ltd., [1967] 63 ITR 310, the Supreme Court, while explaining the scope of deeming provisions, quoted with approval the observation of Lord Asquith of Bishopstone in the case of East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] AC 109, at 130, which is as follows (at p. 316 of 63 ITR):
“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of those in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”
10. The effect of issuing a notice under section 148 is to initiate an assessment proceeding. A new assessment has to be made in accordance with the provisions of the Income-tax Act. All the provisions, including the provisions of sections 70, 71, 72, 73 and 74 of the Income-tax Act will apply. If pursuant to the filing of a return under section 139(2), the asses-see was entitled to claim carry forward and set off of losses, then there is no reason why after the filing of return in pursuance of a notice under section 148 of the Act, the assessee cannot claim similar relief. The notice under section 148 gave him an opportunity to do so.
11. The notices under section 148 were issued at a point of time when it was still open to the assessee to file returns of income for the purpose of claiming loss. After the notices under section 148 were issued, the assessee could not voluntarily file any return of loss.
12. If we accept the contention made on behalf of the Revenue, then it will have to be held that, if the Income-tax Officer issues a notice under section 148 at a point of time when the time for filing of the return and claim of loss by the assessee had not run out, the assessee will lose his right to claim carry forward or setting off of the losses, which was otherwise available to him. A notice under section 148 is issued for the purpose of assessing the income which has escaped assessment. The provisions of section 148 cannot be construed in a way to defeat the existing rights of taxpayers. If the taxpayer had a right to file a return and claim carry forward or set off of losses, then such right is not brought to an end by the issue of a notice under section 148 which is merely a machinery section.
13. The assessment orders pursuant to the notice under section 148 were passed in respect of the assessment years 1970-71, 1971-72 and 1972-73 on August 29, 1974. It was open to the assessee to file returns of loss before the orders of assessment were passed in view of the judgment of the Supreme Court in the case of CIT v. Kulu Valley Transport Co. P. Ltd., [1970] 77 ITR 518.
14. We were referred to a judgment of the Madhya Pradesh High Court in the case of Co-Operative Marketing Society Ltd. v. Commissioner Of Income-Tax, M.P-I, Bhopal., [1983] 143 ITR 99. In that case, the assessment years involved were the assessment years 1972-73 and 1973-74. The assessee had filed returns declaring losses in response to notices issued by the Income-tax Officer under section 148 of the Income-tax Act, 1961. The assessee had not previously filed any returns nor was it assessed before the notices under section 148 were received. The question was whether the assessee could claim the benefit to carry forward and set off of the losses. But there was no dispute that the assessee had filed its returns within the time allowed by the provisions of sub-section (4) of section 139 of the Income-tax Act. It was held by a Division Bench of the Madhya Pradesh High Court that the provisions of section 80 of the Income-tax Act, 1961, made it clear that in order that loss could be carried forward and set off under section 72(1) or section 73(2) or section 74(1), such loss should have been determined in pursuance of a return filed under section 139. The provisions of section 148 made it clear that the provisions of the Act shall, so far as may be, apply to notices issued under the section as if the notices were issued under section 139(2). Sub-sections (1) and (4) of section 139 were to be read together and an assessee would be entitled to carry forward the loss if he had filed a return after the period prescribed by sub-section (1) of section 139 of the Act but within the time allowed under sub-section (4) of section 139 of the Act.
15. We respectfully agree with the views expressed by the Madhya Pradesh High Court in that case (Co-Operative Marketing Society Ltd. v. Commissioner Of Income-Tax, M.P-I, Bhopal., [1983] 143 ITR 99).
16. In the instant case, the returns of loss for the assessment years 1970-71 and 1971-72 were ultimately furnished by the assessee on August 9, 1974. This was beyond the period of time prescribed by section 139(1), section 139(2) or section 139(4).
17. In this view of the matter, the question is answered in the following manner:
So far as the assessment years 1970-71 and 1971-72 are concerned, the question is answered in the affirmative and in favour of the Revenue.
18. So far as the assessment year 1972-73 is concerned, the question is answered in the negative and in favour of the assessee. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.:— I agree.
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