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Siddharth Shrinivas Jhaver Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1986)15ITD292(Ahd.)
AppellantSiddharth Shrinivas Jhaver
Respondentincome-tax Officer
Excerpt:
.....proper sense--in a sense which no commercial man would misunderstand'. . . ." (p. 15) therefore, applying the commercial test the assessee's loss could be said to be one which is reduced by the profits earned by him in the earlier years. therefore, in commercial sense the loss carried forward by the assessee would be the loss as reduced by the profits for two earlier years, viz., 1977-78 and 1978-79.9. in light of the above discussion, therefore, we see no reason to interfere with the decisions of the authorities below.
Judgment:
1. This set of two appeals which relate to the assessment years 1979-80 and 1980-81 are disposed of by this combined order for the sake of convenience. These appeals involve an interesting point regarding carry forward and set off of losses. For the assessment year 1976-77 the ITO determined the business loss of the assessee-individual, at Rs. 5,31,351. For the assessment year 1977-78 the assessee disclosed income of Rs. 79,384 and claimed under revised returns net loss of Rs. 4,51,967. No assessment was made by the ITO for the assessment year 1977-78. Similarly, for the assessment year 1978-79 the assessee disclosed a profit of Rs. 51,212 and after setting off of carry forward loss as aforesaid for the assessment year 1977-78 showed loss of Rs. 4,00,755. No assessment order was made by the ITO for this year also.

For the assessment year 1979-80 the assessee filed the original return disclosing a loss of Rs. 4,00,755 which was revised to loss of Rs. 5,31,351. For the assessment year 1980-81 the assessee disclosed a loss of Rs. 4,331 which was assessed at Rs. 81,571. The assessee's claim before the ITO was that he should be allowed carry forward of loss as determined for the assessment year 1976-77 of Rs. 5,31,351 which should be set off only against the income for the assessment year 1979-80 and the balance loss for against the income for the assessment year 1980-81. The ITO on the other hand did not accept this submission and reduced the loss for the assessment year 1976-77 as aforesaid by a sum of Rs. 79,384 being the profit for the assessment year 1977-78 and by further amount of Rs. 51,212 being the profit for the assessment year 1978-79. In other words, the assessee's claim was that the loss as dstermined for the assessment year 1976-77 should be carried forward as it was so determined and set off against the income for the assessment years 1979-80 and 1980-81 without reducing the same by the profits for the assessment years 1977-78 and 1978-79 as aforesaid. The assessee's claim was founded on the ground that as the assessment for the assessment years 1977-78 and 1978-79 have become barred by limitation the ITO had no jurisdiction to reduce the loss as determined for the assessment year 1976-77. The ITO rejected this claim and allowed the benefit of set off of loss of Rs. 4,00,755 as determined by him after reducing the loss for the assessment year 1976-77 by the amount of profits for the assessment years 1977-78 and 1978-79. He, thus, determined the loss to be carried forward for the assessment year 1976-77 at Rs. 3,19,184 by his order for the assessment year 1979-80.

Similarly, for the assessment year 1980-81 the ITO reduced the said carried forward loss by a sum of Rs. 75,594 being the income as determined for the assessment year 1980-81 and determined the loss to be carried forward for the assessment year 1976-77 at Rs. 2,43, 590.

2. Being aggrieved the assessee carried the matter in appeal before the Commissioner (Appeals) and relying on the decisions in the case of Deep Chand Jain v. ITO [1983] 15 Taxman 522 (Punj. & Har.) and the Karnataka High Court decision in the case of R. Gopal Ramnarayan v. Third ITO [1980] 126 ITR 369 contended that if the assessment had become barred by limitation taxes paid in advance or on self-assessment were required to be refunded. On parity of reasoning it was claimed that the losses for the assessment year 1976-77 could not be reduced by the profits earned by the assessee for the assessment years 1977-78 and 1978-79.

The Commissioner (Appeals) rejected this contention on the ground that the fact that the assessment had become barred by limitation would not affect the resultant loss shown by the assessee for both the years in the returns for the respective years. The department of course had lost their right of examining the claim of the assessee on merit. All the same the claim of the assessee for carry forward the entire loss for the assessment year 1976-77 was not tenable. He, thus, rejected the claim of the assessee for both the years and upheld the view taken by the ITO.3. Being aggrieved the assessee is in appeal before us. Shri Kaji, the learned counsel for the assessee, submitted that the controversy fell in a narrow compass. The assessee's claim is that he was entitled to carry forward of the entire loss as determined for the assessment year 1976-77 ('gross loss'). The action of the ITO to reduce the said loss by the income returned for the assessment years 1977-78 and 1978-79 was not in order. Thus, the assessee was not entitled to carry forward the reduced loss as determined by him after setting off the income for the said years. Thus, the claim of Shri Kaji was that the income for the years under appeal should be reduced by the amount of gross loss as aforesaid and not by the reduced loss as determined by the ITO. In support of this contention Shri Kaji submitted that the assessments for the assessment years 1977-78 and 1978-79 had become barred by limitation. According to Section 72 of the Income-tax Act, 1961 ('the Act'), the loss which is determined for the assessment year 1976-77 is to be set off against the profits and gains 'assessable' for the succeeding year or years. The word 'assessable' according to Shri Kaji, would mean what is subjected to the process of assessment and cannot be considered de hors the assessment made by the ITO. Thus, unless the loss was set off in course of assessment for any year such loss cannot be reduced notionally by the ITO. The assessment having become barred by limitation there was no assessment at all and, therefore, the gross loss cannot be subject ed to reduction m the manner the ITO has done.

The income returned for the two years, viz., 1977-78 and 1978-79, which has not been subjected to assessment could not be subjected to assessment because of bar of limitation. The income shown in the respective returns must be ignored, as a consequence the gross loss should be allowed to be carried forward and set off against the income for the years under appeal. Shri Kaji further submitted that the assessee makes a claim in the return either for the loss or for relief due. Unless such claim is subjected to assessment proceedings such loss or claim for relief does not crystalise for purpose of adjustment qua the income returned by the assessee. Thus, the disclosure in the returns for the assessment years 1977-78 and 1978-79 of the profits earned by the assessee in the respective years were not assessable for the reasons as aforesaid in which case the gross loss cannot be subjected to reduction as done by the ITO. The expression 'assessable', therefore, has to be so construed as to mean liable for assessment in accordance with law. If the profits were not liable to assessment because of bar of limitation such profits were required to be ignored.

Shri Kaji, thus, submitted that the assessee was entitled to benefit of gross loss for purpose of set off as claimed by the assessee. Shri Kaji also submitted that this proposition can be examined from a slightly different angle. The power to make assessment which includes determination of loss is vested in the ITO. Unless the loss is computed or determined by the ITO under an effective assessment order the claim for loss as determined initially under Section 80 of the Act cannot be subjected to reduction merely by reason of the fact that the assessee had shown positive income for two succeeding years. In other words, unless the loss as determined for the assessment year 1976-77 was subjected to reduction by the ITO by an order made for assessment for the assessment years 1977-78 and 1978-79, respectively, such loss cannot be notionally or artificially reduced in the manner the ITO has done.

4. Shri Mehta, the learned departmental representative, on the other hand vehemently contended that the scheme of the Act in regard to the carry forward of loss postulates determination of the loss by the ITO on basis of the return filed by the assessee. Unless the loss is so determined it cannot be allowed to be carried forward in view of the provisions of Section 80. There is no dispute that for the assessment year 1976-77 the loss was determined by the ITO at Rs. 5,31,351.

5. The next such stage is the stage of carry forward as laid down in Section 72(1)(ii). The loss as determined for any year shall be carried forward to the following assessment year and in the first place it shall be set off against the profits and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year subject to the conditions laid down in the proviso (with which we are not concerned). Further, if the loss cannot be wholly so set off the amount of loss not so set off shall be carried forward to the following assessment year and so on. So that no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. The word assessable according to Shri Mehta clearly assumes considerable force. The word assessable has not been defined and, therefore, in ordinary sense it would mean liable to assessment. Now the profits and gains as returned by the assessee for the assessment years 1977-78 and 1978-79 were assessable or liable to assessment but were not actually assessed. Therefore, the said profits and gains cannot be ignored while determining the assessee's claim for carry forward. Shri Mehta submitted that the scheme relating to carry forward and set off of loss postulates a process by which the profits for the immediately succeeding years are required to be absorbed against the loss still such time there are adequate profits of absorb the entire loss. The ITO cannot omit any assessment year in carrying out this process nor can the assessee claim that the profits returned for any assessment year be ignored on whatsoever ground. In other words, whether the profits disclosed by the assessee in the return are subjected to assessment or not, if the same are found assessable then such profits and gains would tend to reduce the determined loss of the earlier year and it is the reduced loss which is required to be carried forward year after year till such time the losses are fully absorbed by the profits or the period of limitation of eight years runs out (subject to the other condition laid down in that section). He, therefore, submitted that the orders of the authorities below did not call for any interference.

6. We have considered the rival submissions. The controversy at issue is not covered in our opinion by any precedents and, therefore, has to be resolved on first principles. For this purpose we refer to the relevant provisions of Section 72 as well as Section 80: (1) 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, . . . and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of Section 71, so much of the loss as has not been so set off or, ... or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and-- (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 (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on: (3) No loss 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.

Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed under Section 139, shall be carried forward and set off under Sub-section (1) of Section 72 or . . .

Under Section 72(1) ; read with Section 80, loss of the previous year under the head 'income from profits and gains from business, profession or vocation' may be carried forward to the next succeeding years only if it has been determined in pursuance of a return filed under Section 139 of the Act. If it is not so determined in the assessment of the subsequent year the loss cannot be carried forward and set off against the profits of the subsequent year or years. These observations are found in the decision of the Supreme Court in Jaipur Udyog Ltd. v. CIT [1969] 71 ITR 799 at p. 803. Again their Lordships of the Supreme Court had occasion to consider the concept of 'carry forward' of a loss in the case of CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118: It may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off. Its sole purpose is to set off 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. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It follows that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be ' carried forward'. Conversely, 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." (p. 126) In light of the above principles laid down by the Supreme Court if we consider the controversy it would be clear that the word 'assessable' is not defined in the Act and given an ordinary meaning would mean 'liable to assessment'. This expression has to be understood in contradistinction with the expression 'assessed'. The income assessable for any year has to be shown or disclosed in the return by the assessee. The liability in this regard is fastened on an assessee. This proposition will be clear if we look to the definition of the expression 'assessee' under Section 2(7) of the Act. The said expression 'assessee' includes a person who is assessable in respect of the income of any other person. Similarly, Section 139(1) enjoins upon every person, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax to furnish a return of his income or the income of such other person, etc. Therefore, the expression 'assessable' connotes liability to assessment under the Act.

In this context if we consider the provisions of Section 72(1) the set off of the carry forward loss is to be made against the profits and gains if any of any business or profession carried on by the assessee and assessable for that assessment year. In other words, if the profits and gains are found to be assessable for any assessment year though not actually assessed against such profits and gains the loss which is carried forward is required to be set off and the unabsorbed loss after such adjustment is required to be carried forward in the following assessment year and so on. Thus, the concept of carry forward and set off postulates a continuous process without interruption and without ignoring the assessment years in respect of which the profits and gains are returned by an assessee. It is immaterial whether such profits and gains are actually assessed or not.

7. We can also look at the controversy from a slightly different angle.

The assessee had submitted valid returns or revised returns in course of the assessment for the assessment years 1977-78 and 1978-79 and on basis of those returns the assessee was assessable. However, due to the period of limitation prescribed under Section 153 of the Act the assessment(s) could not be made and, therefore, the assessable profits were not subjected to assessment. Therefore, no tax liability could be fastened on the assessee qua those profits but the fact of assessability is not obliterated. The profits and gains, therefore, as disclosed in the returns continue to remain as assessable profits though no tax can be levied thereon. Again in the instant case there could not have been any effective tax liability because of the fact that the carry forward loss for the assessment year 1976-77 was far in excess of the profits returned for the said two years. Therefore, the profits and gains as returned by the assessee for the said two years would enter the computation for the purpose of determination of loss which is required to be carried forward. Unless the loss is so determined even notionally the assessee would lose the right to carry forward the loss as observed in Jaipur Udyog Ltd.'s case (supra). If the assessee's contention is stretched to an extreme and it would mean denial of carry forward of the entire loss which was not determined by the ITO as the assessment(s) had become barred by limitation but we are not taking such an extreme view because the ITO has in effect determined the loss for those two years while computing the loss available for set off for years under appeal. Therefore, looked at from this angle also the action of the ITO must be upheld.8. We can still consider the controversy from yet another angle. The expression profits and gains is not defined in the Act. Therefore, according to well settled legal principles the said expression has to be understood in general commercial sense. In case of Badridas Daga v.CIT [1958] 34 1TR 10 (SC) it is observed as follows: It is likewise well settled that profits and gains which are liable to be taxed under Section 10(7) are what are understood to be such according to ordinary commercial principles. 'The word "profits". .

. is to be understood', observed Lord Halsbury in Gresham Life Assurance Society v. Styles [1892J AC 309, 315, 'in its natural and proper sense--in a sense which no commercial man would misunderstand'. . . ." (p. 15) Therefore, applying the commercial test the assessee's loss could be said to be one which is reduced by the profits earned by him in the earlier years. Therefore, in commercial sense the loss carried forward by the assessee would be the loss as reduced by the profits for two earlier years, viz., 1977-78 and 1978-79.

9. In light of the above discussion, therefore, we see no reason to interfere with the decisions of the authorities below.


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