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B.B. Iranee Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 27 of 1959
Judge
Reported in[1963]50ITR366(Bom)
ActsIncome Tax Act, 1922 - 4(1)
AppellantB.B. Iranee
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateB.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - set off - section 4 (1) of income tax act, 1922 - whether the amount of loss incurred to assessee from his branch in abroad can be set off against profits of his branch in india - found that at the time when losses were incurred the income from abroad branch not subject to provisions of indian income tax act - losses for said period cannot carried forward and set off. - - in paragraph 3 of its order the tribunal has observed :it is contended that the burden to prove that the business was controlled in india is on the department and the department failed to discharge that burden. a perusal of these clearly show that the business was controlled in india where the proprietor resided for about eight months. he, however, failed to notify the assessee that the loss that.....tambe, j. 1. this is a combined reference. one question has been referred to this court by the tribunal under sub-section (1) of the section 66 of the act and the other question has been referred on a direction issued to the tribunal by this court under sub-section (2) of section 66 of the act. facts giving rise to this reference in brief are : 2. we are here concerned with the assessment year 1947-48, the relevant previous year being the calendar year ended on 31st december, 1946. the assessee, shri b. r. iranee, proprietor of m/s. c. m. karanjia & co., has been carrying on a fairly large business of export and import both in hongkong and bombay. he was formerly residing in hongkong and came to india on 29th of june, 1941, leaving an employee to look after his business there. similar.....
Judgment:

Tambe, J.

1. This is a combined reference. One question has been referred to this court by the Tribunal under sub-section (1) of the section 66 of the Act and the other question has been referred on a direction issued to the Tribunal by this court under sub-section (2) of section 66 of the Act. Facts giving rise to this reference in brief are :

2. We are here concerned with the assessment year 1947-48, the relevant previous year being the calendar year ended on 31st December, 1946. The assessee, Shri B. R. Iranee, proprietor of M/s. C. M. Karanjia & Co., has been carrying on a fairly large business of export and import both in Hongkong and Bombay. He was formerly residing in Hongkong and came to India on 29th of June, 1941, leaving an employee to look after his business there. Similar business was started by the assessee in Bombay in March, 1941, and one Mr. K. M. Vazifdar, an employee of the assessee, was looking after the Bombay business. From 29th June, 1941, till about 9th June, 1946, the assessee remained in India. Thereafter for a short time he went to Hongkong and again returned to Bombay some time in September, 1946. The assessee, was for the, first time, assessed in the assessment year 1942-43. In that assessment, i.e., the assessee claimed a set-off for the alleged losses incurred by him in respect of the business conducted by the Hongkong branch. This claim, however, was not allowed by the Income-tax Officer. In appeal the Appellate Assistant Commissioner in his order date July 1, 1948, dealing with this claim of the assessee observed :

'The loss in the Hongkong branch for the year of account has not been satisfactorily proved and it cannot therefore be considered.'

3. For the assessment years 1943-44 to 1946-47 the assessee was assessed as a resident and no dispute as regards the aforesaid loss was raised by the assessee in any of these years. In the assessment year 1947-48 the assessee again claimed that there were losses in the year 1941 and it should be ascertained and set off under the provisions of section 24(2) of the Act against his income for the previous year relating to the assessment year 1947-48. The Income-tax Officer disallowed the assessee's claim on the ground that the factum of loss was not established. The assessee again raised this question before the Appellate Assistant Commissioner in appeal but the Appellate Assistant Commissioner did not deal with it. In the further appeal before the Tribunal again, this question was raised by the assessee. The Tribunal rejected it observing :

'As regards the loss alleged to have been suffered in and prior to 1941, we would content ourselves by confining that there was no determination of such loss anywhere. Secondly, it is manifest that the business at that time was carried on in Hongkong and it was not subject to Indian income-tax. What was not subject to Indian income-tax cannot be deducted as an allowable loss. The income or loss during that period was completely out of the pale of the Indian income-tax. There is no evidence anywhere that the business at that time was controlled in India and that the loss occurred on account of the business controlled in India. Mr. Iranee, at that time, was in Hongkong and controlled the business there. We agree with the Appellate Assistant Commissioner that the assessee's claim for setting off the loss is not established. In fact, the loss was not determined as such and, therefore, the assessee is not entitled to any relief on this account.'

4. The assessee in his application under sub-section (1) of section 66 of the Act had asked the Tribunal to refer to this court a question of law arising on this aspect of the case. But that request was not allowed by the Tribunal. On a direction issued by this court under sub-section (2) of section 66 of the Act the Tribunal has referred to this court the following question :

'Whether, on the facts and in the circumstances of the case, the Tribunal erred in law or misdirected itself in rejecting the assessee's claim to set off the alleged losses of 1941 of Hongkong business against the income of the assessment year ?'

5. The question we will number as question No. 1. This brings us to the other aspect of the case. As already stated, the assessee had returned from Hongkong to Bombay on 29th June, 1941, leaving an employee to look after the business there and had already started similar business in Bombay in March, 1941. For the first time he was assessed in the assessment year 1942-43 and during the years 1943-44 to 1946-47 he was assessed as a resident. Coming to the relevant assessment year 1947-48, the previous year being the year ending on 31st December, 1946, the assessee resided in India for about 8 months during the said year. On 9th June, he went on a short visit to Hongkong and had returned to Bombay some time in September, 1946. In the relevant accounting year the business in Hongkong had been restarted after it had been temporarily closed during the operation of the war. The Income-tax Officer asked the assessee to produce books of account relating to the Hongkong business. These books, however, were not produced by the assessee and he was, therefore, assessed in respect of that income on an estimate basis. The Income-tax Officer estimated the income from the Hongkong business at Rs. 1 lakh. The amount, however, was further increased by the order of the Appellate Assistant Commissioner but with that amount we are not here concerned. The case then came up before the Tribunal in second appeal, and on this aspect of the case, various contentions were raised by the assessee before the Tribunal. In the first instance it was contended that the income of the business of the Hongkong branch was not liable to be included in the total income of the assessee. The Tribunal, however, found that during the accounting year relevant to the assessment year 1947-48, the assessee was a 'resident but not ordinarily resident' in the taxable territories, but the Hongkong business was controlled by the assessee in India and, therefore, the income of the Hongkong branch was liable to be included in the total income of the assessee under the second proviso to sub-section (1) of section 4 of the Act. The other contention raised before the Tribunal was that the Tribunal was that the departmental authorities ought to have estimated the income for the period of control and not for the entire year. In this case since the assessee resided in India only for 8 months out of 12 months, roughly 2/3rds of the income should only be brought to tax in India. This contention was not accepted by the Tribunal for the following reasons :

'It appears to us that there is no authority to dissect the income of the previous year on the basis of control in British India. Section 3 of the Act, which is the principal section charging income-tax, speaks of the income of the previous year. Section 4, which deals with the application of the Act, again speaks of the income of the previous year. Section 4(1) speaks of the income of the previous year. Proviso(2) to clause(c) of that sub-section, which is the material one in question, speaks of the income 'derived from a business controlled in or a profession or vocation set up in India'. The proviso is in section 4(1) and, in our opinion, it embraces the income of the previous year of the assessee. The business is one and whole and if the control was exercised in India, it is caught by virtue of the above referred second proviso. In order to accept the learned counsel's arguments, much has to be read in provisions which is not there. Neither time factor, nor fractional part of business is envisaged in that proviso. For instance, it is not mentioned 'that part of the income or profits and gains which accrues or arises'. It simply reads 'income, profits and gains which accrue or arise'. Similarly, it does not also speak of income derived from that part of business controlled in India. It speaks of income derived from a business controlled in India. We have shown above that the business was controlled in India and indeed Mr. Iranee went out to Hongkong only for a preliminary survey. We are, therefore, unable to accept the first argument of Mr. Palkhivala.'

6. On this aspect of the case at the instance of the assessee the Tribunal has referred the following question to this court :

'Whether, the facts and in the circumstances of the case, the income of the assessee from Hongkong branch should be apportioned either on a time basis or in any other manner for the purposes of inclusion in the total income of the assessee ?'

7. This question we will number as question No. 2.

8. We will deal with the second question first as arguments were advanced before us by counsel in that order. It would be convenient to read the provisions of section 4, material for purposes of this reference :

'4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which - ...

(b) if such person is resident in the taxable territories during such year....

(ii) accrue or arise to him without the taxable territories during such year....

Provided further that, in the case of a person not ordinarily resident in the taxable territories, income, profits and gains which accrue or arise to him without the taxable territories shall not be so included unless they are derived from a business controlled in or a profession or vocation set up in India or unless they are brought into or received in the taxable territories by him during such year.'

9. It is the contention of Mr. B. A. Palkhivala appearing for the assessee that the Tribunal has erred in rejecting the claim of the assessee. Laying that emphasis on the sentence, 'it appears to us that there is no authority to dissect the income of the previous year on the basis of control in British India' occurring in the aforesaid observations of the Tribunal, Mr. B. A. Palkhivala contends that the Tribunal has found as a fact that the business in Hongkong was controlled for part of the year in India and for the part of the year in Hongkong and that being the fact found by the Tribunal, the Tribunal was in error in holding that that the income of the year in question could not be apportioned as attributable to the control of the Hongkong business exercised outside in India and attributable to the control of the Hongkong business exercised outside British India. According to Mr. Palkhivala, on a true construction of the proviso, it is only that income, which is derived from a business controlled in India, that could only be included in the total income of an assessee, who is a resident but not ordinarily resident in British India. To enable this income-tax authorities to claim the income of the entire year of a business arising outside the taxable territories, the income-tax authorities must establish that during the entire period of business was controlled in India.

10. Mr. Joshi, on the other hand, contends that it will not be correct to infer from the aforesaid sentence that the Tribunal has recorded any finding that the business was not controlled for the part of the year in British India. That sentence will have to be read in the context of the arguments advanced before the Tribunal. The only argument advanced was that the business was not controlled from India, because the assessee did not reside in India throughout the year. The assessee resided in India for only eight months out of the twelve months and, therefore, roughly 2/3rds of the income alone could be brought to tax in India. The Tribunal in refuting that part of the argument has made the above observations and the sentence has to be read in that context. Apart from it, according to Mr. Joshi, when the order of the Tribunal is read as a whole, it is clear that the finding recorded by the Tribunal is that during the entire year, the business was controlled in India and in view of this finding, according to Mr. Joshi, the mere absence of the assessee from British India for a period of four months would not entitle the assessee to claim that only 2/3rds income of the Hongkong business should be taxed in India.

11. According to Mr. Joshi, on a true construction of the proviso, it is not necessary that the control of the business should be exercised throughout the year in India. If the business is controlled in India at any point of time in a year, it is sufficient to include the entire income of that business in his total income even though the income accrued to him without the taxable territories. At any rate, according to Mr. Joshi, if the control has been exercised in India for a substantial part of the year, that would be sufficient to entitle the income-tax authorities to claim that the income of the entire year should be included in the total income of an assessee, who is a resident but not ordinarily resident in British India.

12. We may observe that as presently advised we are inclined to agree with the submissions of Mr. Palkhivala as regards the construction of the proviso. The proviso in the first instance excludes the income, profits and gains which accrue or arise to a person not ordinarily resident in the taxable territories from his total income. To this three exceptions are made and those exceptions are : (i) if that income is derived from a business controlled in India then it could be included in the total income of the assessee; (ii) if that income is derived from a profession or vocation set up in India, then that income could also be included and (iii) if that income is brought into Indian that it could also be included in the total income of an assessee. It would thus appear that unless the income, which accrues or arises without the taxable territories, is in some manner or other connected with any one of this three circumstances, the revenue cannot claim to include that in the income of a person who is not ordinarily resident in India. It would, therefore, follow that if in a part of the year the control of the business is not in India but is taken out of British India, then the income attributable to the control exercised in the territories without British India cannot on the language of the proviso be included in the total income of the assessee. On the facts and in the circumstances of the case, it is, however, not necessary for us to discuss further the question as to the construction of the proviso. In our opinion, mere temporary absence of a proprietor of a business from the headquarters of the business in British India cannot by itself have the effect of removing the control of the business from British India to the place where the proprietor has gone. It may be relevant piece of evidence but not conclusive. In addition to it there should be other evidence either direct or substantial to establish that fact. There does not appear to be any other piece of evidence on which reliance has been placed by the assessee. It is, therefore, difficult to accept the contention of the assessee, which had been raised before the Tribunal. The said contention was in the following terms :

'The departmental authorities ought to have estimated the income for the period of control and not for the entire year. In this case, the assessee resided in India for eight months out of twelve months and, therefore, roughly 2/3rds of the income alone should be brought to tax in India.'

13. It would be seen that what had been contended before the Tribunal was that because the assessee was in India only for eight months, the Tribunal should hold that the control of business was in India only for eight months. As already stated, we are unable to accept this contention.

14. In dealing with the question as regards the place of control of the business, the Tribunal has exhaustively dealt with the various pieces of evidence appearing in the correspondence. In paragraph 3 of its order the Tribunal has observed :

'It is contended that the burden to prove that the business was controlled in India is on the department and the department failed to discharge that burden. A mass of correspondence between the assessee and the proprietor and the manager of the Hongkong business was brought to our notice. Some of the passages contained in the correspondence have been reproduced by the Appellate Assistant Commissioner. A perusal of these clearly show that the business was controlled in India where the proprietor resided for about eight months. We give below a few extracts to illustrate the control exercised by the assessee in India.'

15. The Tribunal then produced certain extracts including two of the letters to which we will presently refer. The said two letters are of the period during which the proprietor was in Hongkong and the important letter is of September 10, 1946, which is one of the letters of the period during which the assessee was in Hongkong. It has been reproduced by the Tribunal in extenso :

'Until before the last war Hongkong was the headquarters of this firm. Due to our principal, Mr. Iranee, having gone to India just before the invasion, Bombay became our temporary headquarters during the war and various business developments took place in Bombay. Since the last six weeks Mr. Iranee is here on a preliminary tour to survey local affairs and will fly to India in about a week. After a short stay in India he will return to Hongkong when this will again become the headquarters of our entire organisation. This is for your information only.'

16. The letter was written to a firm, Messrs. Clarke & Smith (India) Ltd., London, and it is after considering these pieces of evidence that the Tribunal has recorded a finding :

'We, therefore, give the finding of fact that the business was controlled in India.'

17. In the context of the evidence by reason of which the Tribunal has recorded its finding, in our view, Mr. Joshi is justified in contending that the Tribunal has found as a fact that the business was controlled in India throughout the year and it is in this context and in the context of the contention raised in the first sentence in the Tribunal's observations that it appeared to the Tribunal that there was no authority to dissect the income of the previous year on the basis of control in British India has to be understood. As already stated, the observations are made repelling the contentions of the assessee that the absence of the assessee from British India shifted the control of the business. The position is further made clear by the Tribunal by observing at the end of the observations reproduced above :

'We have shown above that the business was controlled in India and indeed Mr. Iranee went out to Hongkong only for a preliminary survey.'

18. Thus in the opinion of the Tribunal during the absence of Mr. Iranee, who had gone to Hongkong only for a preliminary survey, the control of the business still remained in India. These being the findings of fact of the Tribunal, in our opinion, the Tribunal was right in holding that the entire income of the Hongkong business was liable to be included in the total income of the assessee.

Our answer to the second question, therefore, is in the negative and this brings us to the first question.

19. Mr. Palkhivala raised two contentions before us. In the first instance he contends that in the assessment year 1942-43 the assessee had claimed that the losses suffered by him in his Hongkong business should be set off against his income. That claim of the assessee was rejected by the Income-tax Officer. That tantamounts to determination of the loss at figure zero. The Income-tax Officer, however, did not issue a notice to the assessee that the losses have been determined at figure 0 (zero). The assessee is, therefore, entitled to claimed that the quantum of loss be re-determined in the assessment year 1947-48. The Tribunal ought to have allowed an opportunity to the assessee to establish the loss and ought to have allowed the assessee to set off the loss which would have been established by him against his income. He places reliance in support of his contention on a decision in Commissioner of Income-tax v. Khushal Chand Daga. His second contention is that the assessee had suffered huge losses during the period of hostilities on account of enemy action. Japan invaded Hongkong some time at the end of the year 1941 and it remained in Japanese occupation till about the end of 1945. During this period due to Japanese action, the business of the assessee suffered considerable losses. Those losses were ascertained by the assessee only in the year 1946. The losses were therefore, the losses suffered by the assessee in the year of 1946. The Tribunal was, therefore, in error in not allowing the assessee to establish these losses and to set off these losses against the income of the assessee. In support of this contention Mr. Palkhivala placed reliance on a decision in G. Manavala Naidu v. Commissioner of Income-tax.

20. As regard the first contention raised by Mr. Palkhivala, Mr. Joshi contends that the decision in Commissioner of Income-tax v. Khushal Chand Daga has no application to the facts of the present case at all. The rejection of the assessee's claim to set off the alleged losses suffered by the assessee in 1941 does not tantamount to the determination of the losses at figure zero. There was, consequently, no obligation on the Income-tax Officer to serve on the assessee any notice under sub-section (3) of section 24 of the Act. The assessee cannot, therefore, claim to establish those losses again in the assessment year 1947-48.

21. As regard the second contention, Mr. Joshi contends the losses which could be set off against the income are the losses which have been incurred during the year of account or loss which has been carried forward in accordance with the provisions of law, i.e., the loss which had already been determined by the income-tax authorities were not able to adjust against the income of the assessee of the earlier years. Admittedly, the losses are not of the year 1946. Even assuming that the assessee chose to ascertain these losses in the year 1946, it would not entitle the assessee to claim those losses as loss of the relevant accounting year. The decision in G. Manavala Naidu v. Commissioner of Income-tax is distinguishable on facts. Mr. Joshi placed reliance on certain observation at page 742 in In the matter of Messrs. Chouthmal Golapchand, and Indore Malwa United Mills Ltd. v. Commissioner of Income-tax. Mr. Joshi further contends that the second contention raised by Mr. Palkhivala was not a connection which was raised before the Tribunal; on the other hand, the losses which were claimed before the Tribunal were the losses of the year 1941. An argument was also advanced by Mr. Joshi that assuming that there were any losses in the year 1941, those losses could not be claimed in the assessment year 1947-48, the claim being barred by time.

22. Turning to the first contention raised by Mr. Palkhivala, in our view, the decision on which reliance is placed is distinguishable on facts. In that case, Commissioner of Income-tax v. Khushal Chand Daga, in the assessment year 1941-42 the assessee had established that the business had resulted in loss. The Income-tax Officer had also held that the business has resulted in loss and determined the loss at Rs. 53,840 and that loss was carried forward. He, however, failed to notify the assessee that the loss that was being carried forward was Rs. 53,840 as required by sub-section (3) of section 24 of the Act. In the next assessment, i.e., in the assessment year 1942-43, the assessee claimed to re-open the question as the quantum of loss to be carried forward, stating that the loss was Rs. 2,11,760. The contention of the department was that the amount of loss that was being carried forward was determined at Rs. 53,840 and, therefore, the assessee could not claim to reopen the question. This contention of the assessee was accepted by the Tribunal and on reference of the High Court, the High Court also decided the question in favour of the assessee. In the appeal taken by the Commissioner of Income-tax to the Supreme Court, the decision of the High Court was affirmed. At page 178 of the report, it was observed :

'As regards the first question, the only contention raised was that the loss which had been determined and ordered to be carried forward must be deemed to have become final, because no appeal was filed against that determination. But it appears that the procedure laid down by section 24(3) under which the Income-tax Officer has to notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of that section was not followed. No doubt, under section 30 an appeal lies, if the assessee objects to the amount of loss computed and notified under section 24; but inasmuch as the Income-tax Officer had not notified the loss computed by him by order in writing, an appeal could not be taken on that point. In our opinion, the assessee was, therefore, entitled to have the loss redetermined in a subsequent year.'

23. Now, sub-section (3) of section 24 casts an obligation on the Income-tax Officer to notify to the assessee by an order in writing the loss computed by him, which he had directed to be carried forward. This obligation arises when in course of an assessment of the total income of an assessee, it is established that a loss of profits or gains has taken place, which he is entitled to set off against profits of subsequent years under the provisions of this section. It would be seen that the obligation arises only when the loss is established and is carried forward. If no loss is established no obligation to so notify to the assessee arises under this sub-section. Where an obligation arises to notify to the assessee by an order in writing the amount of loss and the Income-tax Officer fails to do so, that, according to their Lordships' decision, gives an assessee a right to claim redetermination of the amount of loss. Such, however, is not the case here. In the assessment year 1942-43 the assessee claimed that he had sustained loss, but as found by the Appellate Assistant Commissioner, he had failed to establish it. That being a finding of fact, it can hardly be said that there was any obligation on the Income-tax Officer to comply with the provisions of sub-section (3) of section 24 of the Act. Redetermination of the quantum of loss when loss has been once established cannot be equated with a second opportunity to establish that loss had occurred. What the assessee is claiming here is a second opportunity to establish that he had sustained loss in the year 1941 after having failed to do so in the assessment year 1942-43. In our opinion, the decision of the Supreme Court on which reliance is placed is of little assistance to the assessee. Apart from it, this contention is based on an assumption that it has been found that notice under section 24(3) was not served on him. We do not find any such finding recorded. On the other hand, such a contention does not appear to have been raised at any stage either before the income-tax authorities or before the Tribunal. That being the position, the assessee would also not be entitled to raised it here before us.

24. Turning to the second contention, it is necessary to deal with the controversy raised before us as regards the nature of the contention raised by the assessee before the Tribunal. Mr. B. A. Palkhivala argued before us that the contention raised on the behalf of the assessee before the Tribunal was that the assessee had suffered losses not only in the year 1941 but also in the subsequent years till the hostilities ceased in 1946. In support of his argument Mr. Palkhivala first referred us to the following portion of the statement of the case :

'In the course of these proceedings, the assessee again claimed that the Hongkong income was not liable to be brought to tax in India and alternatively claimed adjustment of the losses said to have been sustained in Hongkong by reason of the hostilities at the end of 1941 as, according to him, those losses would wipe out any profits that may be liable to be brought to tax in the assessment for 1947-48.'

He then referred to us ground No. 5 which was argued before the Tribunal, and which has been reproduced in the statement of the case :

'The learned Appellate Assistant Commissioner has not considered the appellant's contention that whatever be the best judgment profit of the Hongkong business the same would be wholly wiped off by the colossal loss suffered by the appellant in the same business by reason of hostilities at the end of 1941.'

25. According to Mr. Palkhivala the words 'at the end of 1941' refer to the commencement of the hostilities and not to the year in which the losses were suffered. The ground raised is not so clearly and specifically worded as to indicate that the contention raised by the assessee was that losses have been incurred in the years 1941 to 1945 and not in the year 1941 only. The Tribunal also appears to have understood the ground raised as being one relating to losses alleged to have been sustained in the year 1941, as the Tribunal opens the discussion saying :

'As regards the losses alleged to have been suffered in and prior to 1941.'

26. Mr. N. A. Palkhivala, however, at the end of the arguments, stated before us that he himself had argued before the Tribunal and had raised both the contentions. He had argued the case on the footing that the loss was incurred in the year 1941 and also on the footing that the loss was incurred in the year 1946. This question, as already stated, has been referred to us on a direction given by this court under sub-section(2) of section 66 of the Act. In the affidavit in support of the notice of motion, it has been stated that the assessee's Hongkong business had suffered huge losses from 1941 till the end of the war, i.e., till about the end of 1945 and in paragraph 6 of the affidavit it has been averred that the assessee had raised contentions that the profits of the Hongkong firm were not subject to the Indian Income-tax Act and in the alternative claimed to prove the aforesaid losses and that the said losses should be ascertained and set off against the Indian profits. The question on this aspect of the case suggested by the assessee are questions Nos. 6 and 8, which are in the following terms :

'6. Whether the Tribunal misdirected itself in law in refusing to carry forward and set off losses of the earlier years against the income of the relevant accounting year ?; alternatively,

8. Whether the losses of the earlier years having been ascertained in the relevant accounting year, the Tribunal should have treated those losses as losses of the relevant accounting year and allowed them to be set off or adjusted against the profits of the same year ?'

27. Mr. Palkhivala argued that we have allowed the notice of motion so far as this aspect of the case is concerned and directed the Tribunal to state the case. The question suggested by the assessee related to losses suffered in all these years and not in the year 1941 alone and, therefore, the question framed by us should be taken to include losses not of the year 1941 but in all the years 1941 to 1945. The question referred by Tribunal to this court has already been reproduced above and it would be seen that the question is confined to the losses of the year 1941. We would, however, proceed to consider the question on an assumption that it includes not only the losses of the year 1941 but the said subsequent years also, in deference to the statement made by the senior counsel before us that he had raised that question before the Tribunal. The first question that arises is whether the losses sustained during the years 1941-45 could be deemed to be losses of the year 1946 by reason of the losses having been ascertained by the assessee in the year 1946. The authority on which reliance is placed by the assessee, in our view, is hardly of any assistance to the assessee. In that case, G. Manavala Naidu v. Commissioner of Income-tax, the assessee had undertaken to prepare garments for the military. The material for making the garments was supplied by the military authorities at a certain price. In the accounting year relevant to the assessment year 1942-43 the military authorities demanded from the assessee a sum of Rs. 15,845 to make good the value of garments short delivered. The assessee claimed that amount as loss. In the assessment proceedings he, however, admitted that the garments, in regard to which the claim was made by him, might have been lost not only in the account of year but also in the previous year. On these facts the questions raised was whether the assessee was entitled to deduction of the loss claimed. The assessee's claim was upheld by the Madras High Court.

At page 728 of the report, it is observed :

'But the Tribunal apparently also found that it was only in that year that there was a demand made by a military authorities to make good the value of the garments short delivered, that is, garments lost by the assessee. The assessee maintained his accounts on the mercantile basis. Even if the loss had been spread over a number of years, till the loss was ascertained, there could be no possibility of his showing the in his accounts. The Tribunal apparently accepted the case of the assessee that it was only when the military authorities demanded the recovery of Rs. 15,845 in the year of account ending with March 31, 1943, that the loss was ascertained. Thus with reference to that year the position was that, though when precisely each garment or each set of garments was lost could not be fixed with precision, the loss was ascertained only in the year of account and it was only in the year of account that the assessee had to make good the value of the lost garments to the military authorities.'

28. It would be seen that the expression 'ascertained' is used in this case in the sense 'knowledge obtained about the loss by the assessee'. Till the demand was made by the military authorities, there was no liability on the assessee to pay any amount to the military authorities and had no reason also to think that there was any short delivery of clothes to the military authorities. It is only when the military authorities demanded, he got that knowledge and that fixed the year in which the loss was sustained. Such is not the case here. It is not the case of the assessee that prior to the year 1946 he did not know that any loss had occurred to him in any of the said years. As the statement of case would show, the assessee, when he came to Bombay, had left his business in Hongkong in charge of manager. It may be that in the year 1946 the assessee determined the extent of the loss. The year in which the assessee determines or chooses to determine the extent of loss, in our opinion, cannot be the year in which the loss is sustained. Admittedly, the losses in the present case were sustained not in the year 1946, but in earlier years. That being the position, it is difficult to accept the contention of M. Palkhivala that the loss was the loss sustained by the assessee in the year 1946.

29. The question that arises then is whether it is open to the assessee to claim those losses as a set-off against the income of the relevant assessment year Now, it is well settled that for purposes of computing yearly profits and gains, each year is a separate self-contained period of time; profits earned or losses sustained before the commencement of the year are not relevant. To this general principle, however, there is an exception and that exception is unless the assessee is allowed to carry forward the loss of the earlier years to subsequent years under any provision of law for purposes of its adjustment against the profits of the subsequent years. The general proposition as stated by Lord Russell of Killowen has been reproduced at page 742 in In the matter of Chouthmal Golapchand.

'Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of the business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. But the losses must be losses incurred in that year. You may not, when setting out to ascertain the profits and gains of one year, deduct a loss which had, in fact, been incurred before the commencement of that year. If you did, you would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains each year is a separate self-contained period of time in regard to which profits earned or losses sustained before its commencement are irrelevant.'

30. It is a matter of legal history. Prior to 1939 the unabsorbed losses of earlier years were not allowed to be carried forward for the purpose of being adjusted against the profits of the subsequent years. Such a provision for the first time was introduced some time in year 1941 by the Amending Act of 1941. It has, therefore, to be seen whether under the provision of law, the assessee could carry forward the losses of the earlier years being adjusted against the profits of the assessment year 1947-48. The claim made by the assessee before the income-tax authorities as well as the Tribunal and also before us is founded on the provisions of sub-section (2) of section 24 of the Act. The relevant provision as it then stood is in the following terms :

'24. Set-off of loss in computing aggregate income. - (I) where any assessee sustains loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year.'

It is not necessary to refer to the provisos of sub-section (1) for the purpose of this case.

'24. (2) 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 sub-section(I), 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 one, two, three, four and five years respectively.'

31. Now, the scheme appears to be that loss suffered in a year of account by an assessee under any of the heads of income, which could not be set off against the income under that head, are set off against the income of the assessee under any other head. If even after doing that any portion thereof remains unabsorbed then that is allowed to be carried forward to the subsequent years for being adjusted against the profits of the subsequent years, but then there are further two limitations : such carried forward loss could be set off only against the income of the business in which the loss has been sustained and the second limitation is that the said unabsorbed loss could be carried forward for a period of six years only. It is, therefore, clear that the loss that is allowed to be carried forward under sub-section (2) is the loss, which first has entire adjustment under sub-section (I), and it is only when it cannot be adjusted under sub-section (I) that it could be carried forward under provisions of sub-section (2) of section 24 of the Act. The clause and the loss cannot be wholly set off under sub-section (I) the portion not so set off shall be carried forward to the following year' makes this position abundantly clear. What can be carried forward is a loss which cannot be wholly set off under sub-section (I). The loss that can be set off under sub-section (I) is the loss that enters the computation of aggregate profits of an assessee in his assessment of previous years. Now, on the facts found the position is that in the year 1941 the income from the business in Hongkong was not subject to the provisions of the Indian Income-tax Act. It was restarted in the relevant account year, i.e., in the year 1946. During the intervening period also there was no question of the income of the Hongkong business being subject to the provisions of Indian Income-tax Act. That being the position, the losses, even if any, sustained during the period 1941-45 could not have entered the assessment of the assessee in any of the assessment years 1942-43 to 1946-47. The assessee, therefore, in this view of the matter also would have no right to carry forward these losses, even if there be any, to the assessment year 1947-48.

32. Mr. Joshi had also argued that even if the assessee is entitled to carry forward the losses, the losses sustained by him in the year 1941 cannot now be carried forward to the assessment year 1947-48 by reason of the bar of limitation of sub-section (2) of section 23 of the Act. This contention was, however, not raised before the Tribunal nor before the income-tax authorities. It is, therefore, difficult to deal with that question as arising out of the order of the Tribunal.

For the reasons stated above, in our opinion, the Tribunal was not in error in rejecting the assessee's claim to set off the alleged losses.

Our answer to the first question is, therefore, in the negative. Assessee shall pay the costs of the department.


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