1. This appeal is directed against the order of the Commissioner (Appeals) passed in Appeal No. 4 of 1982-83 dated 18-1-1984. The assessment year involved is 1978-79. According to the facts of this case for the above assessment year, the residential status of the assessee was that of a non-resident. In the assessment year 1978-79, originally the ITO while computing the assessee's income under the head 'Profits and gains of business or profession' had allowed set off of carried forward loss, which had arisen to the assessee outside India, for the assessment year 1976-77 and which could not be fully absorbed in 1977-78. Since the Commissioner was of the view that as a non-resident is not taxable on any income which has arisen outside India, he came to the conclusion that the set off of loss that had arisen to the assessee outside India in an earlier year in the assessment made for the assessment year 1978-79 by the ITO was not in order. Accordingly, he resorted to proceedings under Section 263 of the Income-tax Act, 1961 ('the Act') and eventually, set aside the assessment for the assessment year 1978-79 with a direction to the ITO to redo the assessment in accordance with law after giving the assessee a reasonable opportunity of being heard in the matter.
2. Thereafter, the ITO proceeded to complete the assessment in accordance with the abovesaid order of the Commissioner. Before the ITO, the assessee claimed a sum of Rs. 19,967 as loss to be set off in this year against the Indian income since it was a loss determined in accordance with the provisions of the Act in the earlier years when the assessee's status was resident. The ITO has pointed out that a nonresident assessee suffers taxation only on income received, or which has arisen or has accrued in India in accordance with the provisions of Section 5 of the Act. Accordingly, he came to the conclusion that since a non-resident is not taxable on any income which has arisen outside India, the set off of loss that had arisen to the assessee outside India was not in order. Accordingly, the loss of Rs. 19,967 allowed in the original assessment was withdrawn.
I have looked into the facts. When the loss was determined for the year 1977-78, the appellant was a resident. In accordance with the provisions of Section 72 [of the Income-tax Act, 1961] the loss was determined and a finding has been given that it will be carried forward and set off against the income in future years. Once the loss is determined, it ceases to be the loss from foreign sources and gets merged with the income/loss. In others words, once the carry forward is permitted the Income-tax Officer has no choice but to adjust it against the income if any of the subsequent years as Section 72 contains no provision prohibiting the set off of the loss against the Indian income. Where the words of a statute are neutral in import, the construction beneficial to the assessee has to be given. In the absence of any patent prohibition against the set off, the appellant is entitled to a set off.
4. As against this order, the department is in appeal before us. Before us, the learned departmental representative submitted that the Commissioner (Appeals) is not correct in allowing the assessee's claim for the carry forward and set off of loss relating to the earlier year, especially when he is a non-resident for the year. It was further submitted that the earlier year's loss relates to the assessee's foreign source of income and being this year a non-resident in which case foreign income is exempted, he is not entitled to have this loss carried forward and set off against this Indian income. Therefore, it was submitted that the order of the Commissioner (Appeals) may be set aside and that of the ITO be restored. On the other hand, the learned counsel for the assessee supported the order passed by the Commissioner (Appeals).
5. We have heard the rival submissions made by the parties. The fact remains that in the assessment year 1978-79, now under consideration, the assessee is a non-resident. In the assessment year 1976-77, the residential status of the assessee was that of a resident. The claim made is that a sum of Rs. 19,967 should be deducted though it be carried forward loss which has arisen to the assessee outside India since was determined in the assessment year 1976-77. (The amount of Rs. 19,967 is that portion of the loss determined in 1976-77 which could not be fully absorbed in 1977-78 and which is carried forward further to this year.) The case of the assessee is that the abovesaid loss is to be set off this year against the Indian income since it was determined in the earlier years when the assessee's status was resident. A non-resident assessee suffers taxation only on income received arising or accruing in India in accordance with the provisions of Section 5. The department was of the view that since the assessee is a non-resident for 1978-79, the foreign income/loss should not be taken into account. The case of the assessee was that as per Section 72 of the Act, once the loss is determined under the head 'Profits and gains of business or profession' the same is a consolidated loss to the assessee and there is no distinction drawn of Indian loss or foreign loss under Section 72. As per Section 72(1), according to the assessee, such loss shall be set off against the profits and gains of any business assessable for that assessment year. Another submission of the assessee was that when Section 72 was silent with regard to the residential status of the assessee, the construction beneficial to the assessee is to be given.
6. The concept of carry forward of loss does not stand in vacua. It involves the notion of set off. Its sole purpose is to enable set off of the loss against the profits of a subsequent year. It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year, provided the express statutory conditions are satisfied. There is no room for any bar to such set off being imposed by inference. If the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source. For example, in respect of profits or gains arising from the sale, exchange, or transfer of a capital asset effected on or after 1-4-1948, up to 31-3-1956, there was no capital gains tax levy. If a loss under the head 'Capital gains' happened during this period, that could not be carried forward for a set off against capital gains resulting from sale, etc., effect on or after 1-4-1956-CIT v. Harprasad & Co. (P.) Ltd.  99 ITR 118(SC); J.P. Srivastva & Sons v. CIT  86 ITR 730 (All).
7. In this context, there is a decision of the Supreme Court in the case of Indore Malwa United Mills Ltd. v. CIT  45 ITR 210.
According to the facts appearing in this case the assessee-company carried on the business of manufacture and sale of textile goods. Its mills were situated in Indore, an Indian State, and sales were made in various places in India within and outside the taxable territories. Up to the assessment year 1949-50, the assessee was treated as a non-resident. In the next two assessment years, Indore became part of the taxable territories and the assessee claimed in the assessment proceedings for 1950-51 that it was entitled to carry forward and set off of the loss of the assessment year 1948-49, against the assessee's business income for the assessment years 1950-51 and 1951-52. On these facts, the Supreme Court, affirming the decision of the High Court, held as under : ... that reading the provisions of Section 24 with the provisions of Section 4(1)(a) and (c) and Section 14(2)(c) it was clear that Section 24(1) when it talks of profits or gains refers to taxable profits or taxable gains ; in other words, it has reference to such profits and gains as would have been assessable in British India, or the taxable territories. It has no reference to income accruing or arising without British India or without the taxable territories which were not liable to be assessed as in the case of non-residents and the loss claimed could not be carried forward and set off. (p.
211) 8. A similar situation arose in the case of M.C.T.M. Corpn. (P.) Ltd. v. CIT  47 ITR 478 (Mad.). According to the facts appearing in this case, the assessee was a company incorporated in the Pudukottah State, outside India, in which there was no law imposing income-tax until it merged with India in 1949 when the Indian Income-tax Act, 1922 ('the 1922 Act) became applicable to the State. The assessee carried on business in the Federated Malay States and sought to carry forward the losses incurred by it there before 1949 in its assessment for the year 1950-51, and subsequent years, under the 1922 Act. There was no evidence that the assessee had any income in the taxable territories before 1949. On these facts, the Madras High Court held as under : ...that since the assessee had no income in the taxable territories during the years in which loss had occurred the loss was not one liable to be set off under Section 24(1) ; Section 24(2) was not, therefore, applicable and the loss could not be carried forward and set off in the assessment for the year 1950-51 and the subsequent years. (p. 478) 9. In both the aforesaid cases, the assessee had not acquired the right of carry forward of loss under the 1922 Act in the earlier assessment year and, therefore, the second stage of set off of carried forward loss had not been reached. Here, however, the converse is the position.
The assessee in the assessment year 1976-77 had acquired the right of carry forward and set off of loss of Rs. 19,967. The question is : can that right be nullified in the assessment year 1978-79 It is settled law that in the assessment year 1978-79, it can again be examined whether the computation of loss in 1976-77 was in order. In the present case, there is no material to show that such computation as made in 1976-77 was not correct. So we have in the assessment year 1978-79 loss of Rs. 19,967, correctly determined and brought forward. At this stage, the provisions of Section 72(1)(i) come into play. These provisions read : (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year : Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year ; and (a) Is there any business carried on by the assessee and assessable for the assessment year 1978-79 (b) Was the business from which the loss was originally computed in the assessment year 1976-77 still carried on in the previous year relevant to the assessment year 1978-79 by the assessee The answers to both questions in the present case are in the affirmative. There is no scope for reading in any further condition, i.e., that the income from the business carried on in 1976-77 admittedly carried on in 1978-79 also should further be actually assessable to tax also in 1978-79 before a set off can be made. For example, even if there is a loss in the said business in 1978-79, as long as the business was continued to be carried on, brought forward business loss for 1976-77 can be set off against other assessable incomes from business. So also, if consequent to the assessee becoming non-resident in 1978-79, income from business assessable in 1976-77 and continued in 1978-79 becomes non-taxable, there is no bar to earlier carried forward loss from that business being set off against other taxable business income. This is because the requirements of set off, which in this case are contained in Section 72, are fully satisfied. Accordingly, we hold that the order passed by the Commissioner (Appeals) is in order.