1. This appeal raises an interesting question regarding carry forward of loss. The assessee's claim is that the unabsorbed development rebate and the business loss of 1971-72 should be carried forward and set off against the profits of 1980-81.
2. The assesseeis a limited company. It had adopted the financial year as the accounting year in the earlier years. The company was a subsidiary of National Electrical Industries Ltd. The parent company was amalgamated with another company. As a consequnce, the assessee-company had to change the accounting year. The change took place in the financial year 1978-79. Normally the assessee would have closed their accounts on 31-3-1979. However, on account of the change in the accounting year, the books were closed on 30-6-1979. As a result, there was no previous year for the assessment year 1979-80.
After the assessment year 1978-79, the next assessment year was 1980-81. 1980-81 is the year under appeal before us.
3. It is an admitted position that in respect of the assessment year 1971-72, the assessee had certain business loss and unabsorbed development rebate. While computing the assessment for 1980-81, the ITO found that there was a profit of Rs. 5,75,997. The carry forward of the business loss and development rebate up to and including 1971-72 were not adjusted against this income on the ground they have lapsed.
However, the losses arising in subsequent years had been so adjusted to the extent of the income available. The result was that the business income was computed at nil.
4. The assessee claimed before the Commissioner (Appeals) that the loss of 1971-72 should have been first adjusted. This claim was rejected.
The assessee is on further appeal before me.
5. Shri Palkhivala submitted that the issue was whether the assessment year mentioned in Section 72(3) of the Income-tax Act, 1961 ('the Act') has to be considered in abstract or with reference to the facts of each year. He submitted that the term should be understood with reference to the facts of each assessee and having regard to the corresponding accounting year of the assessment year. He submitted that the income to be computed is that of the accounting year. Therefore, in all these matters, the accounting has to be first considered. He referred to Section 4 of the Act, the charging Section, to show that there is always a link between the accounting year, i.e., the previous year and the assessment year. Turning to Section 33 of the Act, which allows development rebate, he submitted that the allowance of development rebate is not with reference to the assessment year but with reference to the previous year. The provisions regarding the carry forward of business losses contained in Section 72(1) also refer to the previous year. The proviso to Section 72(1) states that the business or profession for which the loss was originally computed should be continued in the previous year relevant to the assessment year. He submitted that here again the emphasis is not so much on the assessment year but on the previous year. He then submitted that the proviso to Section 72(1) contains an intrinsic evidence to support the assessee's case. He submitted that in a case where a change in the accounting year had taken place in a year for which there was no assessment year, the conditions in the proviso cannot be satisfied at all if the department's contention is accepted which means the assessee would be denied the right to carry forward any losses at all. This, he submitted, would be an absurd interpretation.
6. I am afraid the submissions of Shri Palkhivala have to be rejected.
The provision to be construed is Sub-section (3) of Section 72 which reads as follows : No loss other than the loss referred to in the proviso to Sub-section (1) of this section shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
The wording in the section is very clear. The Legislature had taken care to see that the eight years have to be considered in successive assessment years. This is why they have used the words 'immediately succeeding the assessment year'. When the Legislature has taken such care to indicate which are the assessment years for which the loss could be carried forward, the plain interpretation of the section cannot be rejected unless there is extremely weighty reasons for doing so. Shri Palkhivala had referred to certain other sections in the statute in support of his case. The reason why those sections emphasize the previous year in preference to the assessment year is easily explained. The charging Section 4 has to make clear what will be the income which will be charged in each assessment year. It is for that purpose that the charging section makes it clear that the income of a particular previous year will be assessed in the relevant assessment year. Section 33, which was next referred, is a section dealing with the allowance of development rebate. Here again, the emphasis has to be in the normal course on the year of installation of the plant or machinery available for development rebate. The fact of installation of machineries has necessarily to be connected with the previous year. If the conditions are satisfied, then the assessee would be eligible for the development rebate. Similarly, Section 72 has necessarily to refer to the loss of the previous year which could be set off in a subsequent year. However, Section 72 itself starts with a reference to the assessment year- Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee,....
Under Section 72(1), the emphasis is on the assessment year. In fact, in the entire Section 72, the emphasis is only on the assessment year.
7. A reference had been made to the proviso to Section 72(1). Now, this proviso says that the business or profession for which the loss was originally computed should continue to be carried on in the previous year relevant to the assessment year. It was submitted that if the change of the previous year had taken place in the previous year of loss, then the proviso would become inapplicable to any case. I do not find it to be so. Let us suppose the assessee had incurred a loss for the previous year ending 31-3-1971. The assessment year is 1971-72.
Suppose there is a change in the accounting year in the next year, i.e., the next accounting year was from 1-4-1971 to 30-6-1972; then there will be no assessment year for 1972-73. The next assessment year will be 1973-74. Now, Shri Palkhivala's contention is that since there was no assessment year following 1972-73, no loss could be carried forward. As far as the proviso is concerned, all that it says is that the business should have been continued in the previous year relevant to the assessment year in which the loss has to be set off, i.e., in the previous year relevant to the assessment year 1973-74. That position is satisfied. In a case, like this, all that will happen is that the carry forward of eight years calculated from the end of 1971-72 assessment year would be in effect only for seven assessment years because there was no assessment for 1972-73. This would be the correct interpretation of proviso to Section 71(2) read with the provisions of Section 72(3).