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J.P. Srivastava and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberMiscellaneous Income-tax Reference No. 391 of 1966
Judge
Reported in[1972]86ITR730(All)
ActsIncome Tax Act, 1922 - Sections 6, 12B, 12B(2), 24(2A) and 24(2B); Income Tax and Excess Profits Tax (Amendment) Act, 1947 - Sections 5; Finance Act, 1949
AppellantJ.P. Srivastava and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateB.L. Gupta and ;Ashok Gupta, Advs.
Respondent AdvocateR.R. Misra, Adv.
Excerpt:
.....by the income-tax officer on the ground that failure to realise that amount resulted into a loss of capital nature. subsequently only a part of the deposit was returned to the assessee and the rest became irrecoverable, the amount that became irrecoverable was written off in the assessee's books as bad debt. the third proviso to subsection (2) of section 12b, however, provides that in a case where the asset was acquired by the assessee before the 1st day of january, 1954, and the transaction which resulted into capital gains was entered into after 1st day of january, 1954, it is open to the income-tax officer if he is so satisfied about the fair market value of that asset as on january 1, 1954, to take the fair market value instead of the actual cost of acquisition of the asset..........were added. these sections provided that where the loss sustained was loss falling under the head capital gain, such loss was not to be set off except against any profits and gains falling under that head, and where such loss could not be wholly set off it had to be carried forward to the following year and set off against capital gains for that year and if it could not be set off, the amounts thereof not so set off could be carried forward to the following year and so on for a period of six years. by the finance act of 1949, section 12b as introduced in the year 1947 was amended. according to the amendment, income-tax was to be payable under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of capital asset effected after the.....
Judgment:

H.N. Seth, J.

1. The Income-tax Appellate Tribunal, Allahabad, has made this reference under Section 66(2) of the Indian Income-tax Act, 1922, at the instance of the assessee, Messrs. J. P. Srivastava and Sons, Kanpur.

2. The assessee is an association of persons and the relevant assessment year is 1959-60. In January, 1951, the assessee purchased 3,040 shares of Messrs. Gwalior Agriculture Co. Ltd. for a sum of Rs. 1,52,000. Out of these shares, it transferred 700 shares to Messrs. J. P. Srivastava and Sons Private Ltd. for a sum of Rs. 35,000 on 1st of April, 1953. Balance of 2,340 shares valued at Rs. 1,17,000 remained with the assessee. Due to certain reasons, on 15th December, 1954, the assessee wrote off a sum of Rs. 1,16,999 from the value of 2,340 shares amounting to Rs. 1,17,000. The result was that in the assessee's books the value of these 2,340 shares was shown as rupee one only. The assessee claimed the amount written off in its assessment for the year 1955-56, which claim was disallowed. Subsequently, the assessee repurchased 700 shares which had been sold to Messrs. J. P. Srivastava and Sons Private Ltd. for a sum of Rs. 35,000. In the result it again became possessed of 3,040 shares, but in the account books these shares were valued at Rs. 35,001. In the relevant accounting year, the assessee sold these 3,040 shares for a sum of Rs. 3,04,000. After deducting the sum of Rs. 35,001, the book value of these shares, there was a surplus of Rs. 2,68,999. It may also be mentioned that during the year 1951-52, the assessee had made a claim for a sum of Rs. 1,05,067 as loss suffered by it. This claim was rejected by the income-tax authorities on the ground that the loss claimed by the assessee was of a capital natupe and as such it could not be deducted from the assessee's income for that year. The assessee purported to carry forward this loss of Rs. 1,05,667 all through and up to the assessment year involved in this case. The assessee claimed that, in computing its capital gains for the year in question, following factors should be considered :

(1) It should be given the benefit of the amount of Rs. 1,16,999, the amount written off from the value of the shares in its books.

(2) In computing the capital gains made by the assessee the fair market value of the shares should be taken into consideration under the third proviso to Section 12B(2); and

(3) That capital loss of Rs. 1,05,067 incurred by it, in the year 1951-52 and not adjusted in subsequent years, should be carried forward and adjusted against the surplus amount of Rs. 2,68,999 under Section 24(2B).

3. The Income-tax Officer accepted the assessee's case that the amount of Rs. 1,16,999 written off in the assessee's account books should be taken into consideration while determining its capital gains for the year in question. In this connection he observed as follows :

'The assessee's first claim amounts to allowing it to adopt the assessee's cost of acquisition of these shares ignoring the earlier write off done in the assessment year 1955-56. This claim of the assessee is justified and while working out capital gains the cost of these shares will be taken to be the cost of acquisition of these shares by the assessee.'

4. So far as the assessee's claim that, while computing the capital gains, the Income-tax Officer should consider the fair market value of the shares and substitute it for the actual cost of those shares under the third proviso to Section 12B(2) is concerned, the Income-tax Officer observed that the assessee was given an opportunity to lead evidence for establishing the value of the shares as on January 1, 1954, but despite this opportunity, the assessee did not produce any evidence in support of this claim. He also observed that the assessee's own conduct in writing off the value of the shares in its account books showed that the value of these shares had not increased. The assessee also produced the balance-sheets of Messrs, Gwalior Agriculture Co. Ltd., for the years ending 30th June, 1953, and 30th June, 1954, which were the relevant years for determining the higher value under the third proviso to Section 12B(2). It was found that the company had suffered losses in both these years. In the circumstances, there was no case for placing a value higher than the cost of acquisition of the shares in question, as on January 1, 1964.

5. So far as the assessee's claim that the capital losses suffered by it in the year 1951-52 should be carried forward and set off against the surplus of Rs. 2,68,999 is concerned, the Income-tax Officer held that under the law it was not possible to carry forward that loss and to adjust the same in the capital gains for the year 1958-59. In the result he determined the capital gains of the assessee at Rs. 1,52,000 and included this amount while computing its taxable income. The assessee went up in appeal before the Appellate Assistant Commissioner, The Appellate Assistant Commissioner agreed with the Income-tax Officer. He rejected the assessee's case that it was entitled to carry forward the loss of Rs. 1,05,067 suffered by it in the year 1951-52 to the assessment year 1959-60 and to set it off against the capital gains for that year. So far as the question whether the assessee was entitled to the benefits of the third proviso to Section 12B(2) is concerned, the Appellate Assistant Commissioner observed that in the year 1951-52 there was no provision in the Income-tax Act for computing the capital gains. There was, accordingly, no determination of any such loss in that year. What had happened was that a claim for a bad debt of Rs. 1,05,067 had been rejected by the Income-tax Officer on the ground that failure to realise that amount resulted into a loss of capital nature. Although, after the change effected in the Income-tax Act, 1922, by the Finance Act of 1949, the provisions of Section 12B were not operative in respect of transactions taking place after April 1, 1948, and the provisions relating to set off and carry forward of capital loss as contained in Sections 24(2A) and 24(2B) of the Act were not changed, still those sections remained consequential Sections, and as after April, 1948, as the provision of Section 12B itself was suspended, the provisions relating to carrying forward and setting off loss could not remain operative.

6. In connection with the assessee's case that it was entitled to the benefit of the third proviso to Section 24(2B), it was urged before the Appellate Assistant Commissioner that the company had laid out large amounts for increasing its production capacity and, therefore, the market value of its shares, as on April 1, 1954, was higher. The Appellate Assistant Commis^ sioner did not accept the assessee's case that the balance-sheet of Messrs. Gwalior Agriculture Co. Ltd. showed a loss because of the developmental activities undertaken by the company He held that the Income-tax Officer was justified in not placing higher value on the shares of the company while computing the assessee's capital gains. The assessee then took the matter before the Income-tax Appellate Tribunal. The Tribunal also affirmed the orders passed by the two lower authorities. It observed that as between the years 1947-48 and 1956-57 there was no provision for computing income under the head 'capital gains' and as such the provisions relating to set off and carry forward of capital loss, as contained in Sections 24(2A) and 24(2B), were of no avail. The assessee could not carry forward the loss of Rs. 1,05,067 suffered by him in the year 1951-52 and to adjust the same as against the capital gains in respect of the assessment year in question.

7. Before the Tribunal, the assessee tried to urge that in the relevant year there had been a lot of appreciation in the value of the company's assets and, therefore, the value of the shares of the company also increased. It was contended that in the circumstances fair market value of the shares as on January 1, 1954; should have been taken into account as provided in the third proviso to Section 12B(2). The Tribunal rejected this contention on the ground that from the submissions made on behalf of the assessee, it was not possible to know exactly what effect the appreciation of assets had on the intrinsic value of the shares of the company as on January 1, 1954. The connection suggested by the counsel for the assessee between the increase in the assets of the company and the increase in the market value of the shares was too remote and far-fetched. It also took into consideration other circumstances pointed out by the Appellate Assistant Commissioner and held that the assessee was not entitled to the benefits of the third proviso to Section 12B(2).

8. The assessee then moved an application before the Income-tax Appellate Tribunal and at its instance the Tribunal has referred the following questions for the opinion of this court :

'(1) Whether, on the facts and in the circumstances of the case and on interpreting the provisions of Sections 6(vi), 12B, 24(2A) and 24(2B) of the Indian Income-tax Act, 1922, the Tribunal was right in rejecting the claim of the assessee for the set off of the capital loss of Rs. 1,05,067 incurred in assessment year 1951-52 against the capital gain, if any, earned in assessment year 1959-60 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the claim of the assessee that the value of the 3,040 shares of the Gwalior Agriculture Co. Ltd. should be taken at higher figure under the third proviso to Section 12B(2) of the Indian Income-tax Act, 1922, as on 1st January, 1954, than the cost of Rs. 1,52,000?'

9. Before attempting to answer the first question referred by the Tribunal, it will be necessary to note certain legislative changes made in the Indian. Income-tax Act, 1922. Section 6 provided that, save as otherwise provided by the Act, certain heads of income, profits and gains were to be chargeable to income-tax. Prior to the year 1947, this section mentioned only five heads under which the income, profits and gains were to be chargeable to income-tax. By Section 5 of the Income-tax and Excess Profits Tax (Amendment) Act, 1947 (22 of 1947), a sixth head of income, namely, 'capital gains ', was also included in Section 6. By the same Act, the legislature added a new Section 12B providing that income-tax shall be payable by an assessee under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946, and that such profits and gains were deemed to be income of the previous year in which the sale, exchange or transfer took place. New Sections 24(2A) and 24(2B) were added. These sections provided that where the loss sustained was loss falling under the head capital gain, such loss was not to be set off except against any profits and gains falling under that head, and where such loss could not be wholly set off it had to be carried forward to the following year and set off against capital gains for that year and if it could not be set off, the amounts thereof not so set off could be carried forward to the following year and so on for a period of six years. By the Finance Act of 1949, Section 12B as introduced in the year 1947 was amended. According to the amendment, income-tax was to be payable under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of capital asset effected after the 31st day of March, 1946, and before the 1st day of April, 1948. The provisions of Sections 24(2A) and 24(2B), however, remained unchanged. The result was that no tax under the head 'capital gains' was payable in respect of transactions entered into after 31st day of March, 1948. Section 12B was substituted by a new Section with effect from 1st April, 1957, and it was provided that tax was to be paid by an assessee under the head 'capital gains' in respect of any profits and gains arising from sale, exchange, relinquishment of transfer, taking place after March 31, 1956. This history reveals that there was no liability to pay tax under the head 'capital gains' in respect of transactions entered into between 1st of April, 1948, and 31st of March, 1956. The provisions of Sections 24(2A) and 24(2B) which provided for the set off of and carry forward of loss falling under the head 'capital gains' remained on the statute book throughout.

10. Learned counsel for the assessee contended that, although capital gain in respect of the transactions entered into in the year 1951-52 was not chargeable to income-tax, but because of continued existence of Section 24(2B) the assessee was entitled to carry forward the loss under the head 'capital gain' for a period of eight years, and'to adjust the same against the capital gain for the year 1959-60. He contended that the right to carry forward capital loss under Section 24(2B) did not depend upon the chargeability to capital gains under Section 12B of the Act. The loss suffered by the assessee was capital loss and the assessee had an absolute right to carry it forward and adjust the same in the capital gains for the following years in view of clear wordings of Section 24(2B). He claimed that an assessment has to be made according to the law as it is in the year of assessment and not as it was at the time when profits or income sought to be assessed accrued. The carry forward of losse.8 of previous years and their set-off against the profits and income of the assessment year also has to be determined, in the absence of any express provision to the contrary, according to the law as it is in the assessment year and not as it was at the time the losses occurred. For this proposition he relied upon a decision of the Kerala High Court in the case of Helen Rubber Industries Ltd. v. Commissioner of Income-tax, [1959] 36 I.T.R. 544 (Ker.). He argued that it may be that when the capital loss in this case occurred capital gain was not liable to be taxed but in the assessment year in question capital gain was liable to be taxed and as the assessment has to be made in accordance with the law as it stood in the assessment year 1959-60, capital loss of earlier years has to be carried forward and adjusted in the capital gains up to a period of eight years.

11. Section 24(1) of the Act provides that where an 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 loss set off against his income, profits or gains under any other head in that year. The expression 'sustains a loss of profits or gains under any of the heads mentioned in Section 6 ', obviously, means that the net result of the assessee's activity contemplated under a particular head of Section 6, instead of resulting into profit, results into loss. Loss suffered by an assessee in respect of an activity not covered by any of the heads enumerated in Section 6 cannot be described as loss of profits sustained under any of the heads enumerated therein.

12. Section 24(2A) is an exception to the general rule enumerated in Section 24(1). It lays down that where loss sustained is a loss falling under the head 'capital gain' it cannot be set off except against any profit and gain falling under that very head. In other words, loss of profit under the head of capital gain cannot be set off against the profit or gain under any other head.

13. Section 24(2B) of the Act further provides that loss of profit sustained by an assessee, and which is not set off as provided in earlier Sub-section, is to be carried forward to the following year and set off against capital gains for that, year, and if it cannot be set off, the amount thereof not so set off is to be carried forward to the following year and so on up to a certain period.

14. What can be carried forward and set off in the following year is the loss of profit sustained by the assessee under the head 'capital gain'. What activity will result in earning profit under the head 'capital gain' is mentioned in Section 12B of the Act. Legislative history pointed out above indicates that at the time of introducing Section 12B in the Income-tax Act, 1922, the legislature intended that profits or gains arising from the activity of sale, exchange, relinquishment or transfer of capital assets effected after March 31, 1946, were to be considered to be the income under the head 'capital gains'. By the Finance Act of 1949, Section 12B of the Act was amended and it was provided that profits resulting as a result of a transaction of the nature described above, during the period March 31, 1946, and March 31, 1948, only were to be treated as income falling under the head 'capital gain'. Any profit earned by an assessee on account of the transactions of the nature described above, after March 31, 1948, could not be considered to be profits falling under the head 'capital gain'. In the circumstances, no question of sustaining any loss of profit under that head could possibly arise, in respect of a transaction effected after March 31, 1948. The loss suffered by the assessee in the year 1951-52, therefore, could not be considered to be loss of profit falling under the head 'capital gain'.

15. It was in the year 1957 that Section 12B was substituted by a new Section under which the profits or gains made by an assessee as a result of sale, exchange, relinquishment or transfer of capital asset effected after March 31, 1956, became taxable under the head 'capital gain'. Under the substituted Section it is only the profit resulting from certain transaction effected after March 31, 1956, that can be included under the head 'capital gain'. A fortiori loss suffered in respect of a transaction effected prior to March 31, 1956, would not be loss of profit falling under that head.

16. Since under Section 24(2B) it is only the loss of profit suffered under the head 'capital gain,' that can be carried forward and set off against the capital gains of the following year, and the loss suffered by the assessee in the year 1951-52 cannot be described as a loss falling under the head 'capital gain' even under the law as it stood in 1958-59, it cannot be carried forward to future years and set of? against capital gains of the year 1956 and onwards.

17. Moreover, after amending Section 12B of the Income-tax Act in the year 3 949 and by retaining Sections 24(2A) and 24(2B) in the Income-tax Act, 1922, the legislature could not possibly have intended that the loss suitered by an assessee after April 1, 1948, should be carried forward to the following year and adjusted against the capital gains of that year, when there could be no capital gains in the subsequent years. It was only in the year 1956 that the legislature decided to tax certain income falling under the head 'capital gains', which accrued after 1st April, 1956. In the year 1949 the legislature could not contemplate that it would re-introduce tax on income under the head 'capital gains' in the year 1956, and for that purpose the loss of profit under the head 'capital gains' should be carried forward from year to year. We are, therefore, of opinion that in the circumstances the assessee is not entitled to carry forward losses incurred by it in the year 1951-52 to the year 1959-60 and to adjust them against the profits under the head 'capital gains' in that year.

18. Learned counsel for the assessee contended that the question referred to this court implies a finding that loss suffered by the assessee was capital loss. No question about the correctness of that finding has been referred to us and, therefore, we should not answer the question referred to us, on the basis that the loss in question was not a loss falling under the head 'capital gain'. We are unable to agree with the submission of the learned counsel. In the question the amount in dispute has been described as 'capital loss' and not as 'loss' falling under the head 'capital gain'. The expression 'capital loss' cannot be equated with the loss falling under the head 'capital gain'. There is not a word in the order passed by the income-tax authorities which may indicate that they were of opinion that the loss was a loss falling under the head 'capital gain'. The loss was occasioned because the assessee had deposited some money with a mill. Subsequently only a part of the deposit was returned to the assessee and the rest became irrecoverable, The amount that became irrecoverable was written off in the assessee's books as bad debt. In the assessment year 1951-52 the assessee claimed the deduction of the amount as revenue loss. The claim of the assessee was rejected on the ground that the loss suffered by the assessee was of a capital nature as distinguished from revenue loss. In the circumstances, the finding that the loss in question was capital loss, merely means loss of capital. By no stretch ot imagination can it be said that the finding that loss of Rs. 1,05,067 was capital loss implied a finding that it was a loss occasioned by sale, exchange, relinquishment or transfer of a capital asset. The controversy whether the loss occasioned in the year 1951-52 falls within the ambit of loss of profit under the head 'capital gains' is within the ambit of the question referred to us.

19. Coming now to the second question we find that under the main provisions of Section 12B it is provided that tax shall be payable by an assessee under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset. Normally the profit or gain is to be calculated after deducting the cost of acquisition of the asset transferred from the value received as a result of sale, exchange or transfer of the asset or the value of the asset at the time of relinquishment of interest in it. The third proviso to Subsection (2) of Section 12B, however, provides that in a case where the asset was acquired by the assessee before the 1st day of January, 1954, and the transaction which resulted into capital gains was entered into after 1st day of January, 1954, it is open to the Income-tax Officer if he is so satisfied about the fair market value of that asset as on January 1, 1954, to take the fair market value instead of the actual cost of acquisition of the asset into consideration while determining the profits or gains made by the assessee as a result of the transfer of those assets. If, however, the Income-tax Officer is not in a position to determine the fair market value of the asset transferred as on 1st day of January, 1954, he will have to determine the gains or profits on the basis of actual cost of acquisition of the assets as provided in the substantive part of Section 12B.

20. In the present case the assessee urged before the income-tax authorities as also before this court that there was enough material on the record to show that the earning capacity of Messrs. Gwalior Agriculture Co. had substantially increased during the years 1953-54. He contended that the Tribunal misled itself into thinking that the connection between the assets of the company as suggested by the assessee and the fair price of the shares of the company as on January I, 1954, was too remote, and as such the assessee was not entitled to the benefits of the third proviso to Section 12B(2).

21. In our opinion, it is not possible to work out exactly fair market value of the shares of the company merely on the basis that due to certain reasons the assets and the profit earning capacity of the company increased to some extent. The circumstances pointed out by the assessee merely indicated a possibility of the increase in the value of the share but the material was not such on the basis of which it was possible for the income-tax authorities to have determined the precise fair value of the shares as on January 1, 1954. It is not possible for the Income-tax Officer to have given the benefit of the third proviso to Section 12B(2) merely because there was a possibility of increase in the value of shares without there being sufficient material for determining their fair market value as on January 1, 1954.

22. The Tribunal was, therefore, right in holding that, in the circumstances of the case, the capital gain of the assessee could not be calculated on the basis of the third proviso to Section 12B(2).

23. In this view of the matter, we answer both the questions referred to us in the affirmative and in favour of the department. The Commissioner of Income-tax is entitled to his costs of this reference which we assess at Rs. 200. Counsel's fee is also assessed in the same figure.


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