The Income-tax Appellate Tribunal has referred this case for decision on the following questio :
'Whether, on the facts and circumstances of the case, and on a true construction of section 25(4) of the Income-tax Act, the loss of Rs. 13,277 suffered by the assessee during the period April 1, 1948, to March 30, 1949, should be allowed to be set off against the assessees income under other heads under section 24(1) in the assessment for 1949-5 ?'
The assessee is a Hindu undivided family. It enjoys income from property and interest on securities. It also derives income from business. Income from this business has suffered tax under the Income-tax Act, 1918. On March 30, 1949, by virtue of a partial partition of the family assets, the business passed from the hands of the family to a partnership firm.
For the assessment year 1948-49, the relevant previous year being the financial year ending March 31, 1948, the assessee claimed the benefit of section 25(4) by the substitution of the income of the broken period, April 1, 1948, to March 30, 1949, in place of the income actually earned in the previous year April 1, 1947, to March 31, 1948. During the broken period, April 1, 1948, to March 30, 1949, the assessee had suffered a net loss of Rs. 13,277. The Income-tax Officer allowed the relief claimed by the assessee. He substituted this net loss of Rs. 13,277 for the income actually earned during the previous year relevant to the assessment year 1948-49. There was yet a second relief to which the assessee was entitled under section 25(4), and that was to the exemption from tax of the income from the business during the broken period considered in relation to the assessment year 1949-50. As the business had resulted in a loss during the broken period, no actual benefit accrued to the assessee for the assessment year 1949-50, if the business alone was considered for assessment. But the assessee claimed that it was entitled to set off the loss from the business against the income under other heads by virtue of section 24(1) in the assessment proceedings for the assessment year 1949-50. This claim was rejected by the Income-tax Office, and he did not set off the loss against the income under other heads for the assessment year 1949-50. The Appellate Assistant Commissioner, however, on appeal, held in favour of the assessee but the Appellate Tribunal reversed the finding of the Appellate Assistant Commissioner and restored that of the Income-tax Officer.
The question, therefore, before us is whether the loss of Rs. 13,277 suffered in the business during the period April 1, 1948, to March 30, 1949, can be set off against income under other heads in the assessment for the assessment year 1949-50. We are of opinion that the set-off cannot be allowed.
The Indian Income-tax Act, 1922, expressly exempts certain items of classes of income from its operation. Such income is not liable to be considered for the purposes of the Act at all, unless some other provision of the Act brings it within its scope for some specific purpose. The Act contained from time to time various provisions which provided for exemption. There were the provisos to section 7 before it was amended in 1955. There are the provisos to section 8. Section 14 sets out a number of exemptions of general nature. Sections 15, 15A, 15B and 15C similarly provide for exemption. Although the language generally employed is that the 'the tax shall not be payable' in respect of such sums, the actual language employed is immaterial. What is to be ascertained is whether the language clearly intends an exemption from the operation of the Act. Now, the several sums covered by these provisions would lie outside the scope of the Act altogether, were it not that certain provisions of the Act expressly include them within its scope for a certain purpose. One such provision is section 16(1)(a) which declares that in computing the total income of an assessee any sums exempted under some of the provisions mentioned above shall be included. These sums are included in the total income for the purpose of determining the true rate applicable to the rate applicable to the taxable income of the assessee. The sum exempted under section 25(4) is not referred to in section 16(1)(a) and is not liable to be included in the total income of the assessee. It is exempt altogether from the operation of the Act. The Bombay High Court took this view in Commissioner of Income-tax v. N. M. Raiji, and we are in respectful agreement with that decision.
The assessee points out that before its amendment by the Income-tax (Amendment) Act, 1939, the definition of 'total income' wa :
'Total income means total amount of income, profits and gains from all sources to which this Act applies computed in the manner laid down in section 16.....'
As a result of the Amendment Act of 1939, the present definition of 'total income' i :
'Total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act....'
It is contended that the amendment extended the scope of the definition of 'total income' so that it covered not only the sums specifically referred to in section 16, but also those sums mentioned other provisions of the Act in respect of which it was declared that no tax was payable. It appears to us that the contention is stated rather widely. It is not every sum declared by the Act to be exempt which is liable to be included in the total income. It is only those sums which the Act specifically requires to be so included. To our mind, the amendment of the definition of 'total income' does not eliminate the distinction between the two categories of exempted sums, those which are exempt from charge as well as from inclusion in the total income and those which are exempt from charge but are liable to be included in the total income. Nothing has been shown to us to take us to the conclusion contended for by the assessee.
If, as it seems to us, the income of the broken period is exempt altogether from the operation of the Income-tax Act, then there is no basis for applying the provisions of section 24(1) to that sum. If the assessee has earned a profit during the broken period, it is not liable to be considered for any purpose in respect of the assessment year to which the broken period relates. If the assessee has suffered a loss, then equally it cannot be considered for any purpose in proceedings for that assessment year. For section 24(1) to apply, loss of profits must be a loss of taxable profits. The Supreme Court in Indore-Malwa United Mills Ltd. v. Commissioner of Income-tax has pointed ou :
'.... section 24 itself has no application because sub-section (1) of section 24 when it refers to loss of profits or gains, has reference to taxable profits or taxable gains....'
If the profits of a business are not taxable at all under section 25(4), any loss of profits cannot be considered for the purpose of invoking section 24(1).
The revenue point out that if we were to accept the contention of the assessee that it is entitled to the set-off claimed by it in the proceedings for the assessment year to which the broken period relates, then we shall extend to the assessee the benefit of setting off that loss twice over. In the first instances, the assessee is entitled to the benefit of setting off the loss, when the loss is considered in substitution of the income of the previous year for the preceding assessment year. In other words, the assessee will be entitled to set off the loss against the income under other heads in the proceedings for the assessment year 1948-49. The second instance is when the same loss is allowed to be set off against the profits under other heads in the proceedings for the assessment year to which the broken period relates. The revenue urges that it was never contemplated by the legislature. We think there is substance in that contention. If the legislature had intended to confer the benefit twice over in respect of the same loss, it would have said so. It seems to us that express language is necessary to bring about that object. There is nothing to indicate that the legislature intended a double benefit to the assessee in respect of the same loss.
We have been referred by the assessee to Seth Jamnadas Daga v. Commissioner of Income-tax. In that case, however, the sum under consideration was the assessees share of profit exempt under section 14(2)(a) but liable to be included in his total income under section 16(1)(a). The Supreme Court held that although section 14(2)(a) operated to save the profits of an unregistered firm from liability to tax in the hands of the partners, it did not affect the computation of their total income for the purpose of determining the rate applicable under section 3 in the light of section 16(1)(a). The nature of the sum in the case was wholly different from that in the instant case. There, the sum was liable to be included in the total income of the assessee by reason of section 16(1)(a). In the instant case, it is not.
We are of the opinion that the assessee is not entitled to have the loss suffered during the period April 1, 1948, to March 30, 1949, set off against the income under other heads under section 24(1) in the assessment for the assessment year 1949-50. We answer the question referred to this court in the negative.
We direct that a copy of this judgment under the seal of the court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal.
The Commissioner of Income-tax shall be entitled to his costs of this reference which we assess at Rs. 200. Counsels fee is assessed at Rs. 200.
Question answered in the negative.