1. The following question has been referred to this court for its opinion by the Income-tax Appellate Tribunal at the instance of the Revenue :
'Whether, on the facts and in the circumstances of the case and having regard to the provisions of the rule 1(i) of the First Schedule to the Companies (Profits) Surtax Act, 1964, for arriving at the chargeable profits for the purpose of levy of surtax, the Income-tax Officer was justified in adding the short-term capital loss of Rs. 18,923 ?'
2. The assessee is a limited company manufacturing ink. For the assessment year 1974-75, while computing the chargeable profits for the purpose of surtax, the ITO arrived at the total income, after excluding short-term capital loss of Rs. 18,923 and rejecting the assessee's claim that the loss should not be so excluded. On appeal, the AAC confirmed the ITO's order. On further appeal before the Income-tax Appellate Tribunal, the assessee contended that the capital gains for the purpose of s. 45 could only mean a positive figure of income obtained on the transfer of a capital asset as defined in the I.T. Act and that as such the figure of loss cannot be added for arriving at the chargeable profits. The Revenue, on the other hand, contended that capital gains included capital loss also. The Tribunal, after considering the rival contentions, held that for the purpose of computation of chargeable profits for purpose of surtax, the ITO was not justified in adding back to the income the capital loss suffered. The correctness of the said view of the Tribunal has been challenged in this reference.
3. The contentions of the assessee urged before the Tribunal and accepted by it are these : Rule 1(i) of the First Schedule to the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the 'Surtax Act'), requires exclusion of any income chargeable under the I.T. Act under the head 'Capital gains' only and not capital losses, that on a correct reading of the provisions of ss. 70 and 71 of the I.T. Act, the significance of the absence of the expression 'loss' in rule 1(i) cannot be lost sight of and that as such the course of action taken by the Income-tax Officer in adding back the short-term capital loss was not justified.
4. The contentions of the Revenue, on the other hand, urged before the Tribunal but not accepted by it are these : In computing chargeable profits, rule 1(i) of the First Schedule requires the exclusion of 'any income chargeable under the head 'Capital gains'' and such income which is to be excluded may either be a positive figure or a negative figure as income chargeable under the I.T. Act has always been understood as including loss as well.
5. Thus, the only point for our consideration is whether the expression 'any income chargeable under the Income-tax Act' under the head 'Capital gains' will cover and include short-term capital loss as well.
6. Sections 48 to 55 deal with capital gains and the mode of computation thereof. Section 70(2)(i) of the I.T. Act says that where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. From the above, it would be seen that any short-term capital loss could be adjusted only against income arrived at under a similar computation made for the assessment year in respect of any other capital asset, the implication being that whether it is a loss or gain, both shall be considered under the head 'Capital gains'. The reference to 'capital gains' in rule 1(i) of the Surtax Act would not preclude but would also include capital loss. Such in interpretation of the expression 'capital gains' will be quite in accord with the well-known concept that the expression 'profit or gain' would include 'losses' as well for purposes of income-tax. This has been so held by the Bombay High Court in Harakchand Makanji & Co. v. CIT : 22ITR33(Bom) . In Dayalbhai Madhavji Vadera v. CIT : 60ITR551(Guj) , the Gujarat High Court has held that though the term 'income' has not been defined in s. 16(3) of the 1922 Act, it may, in certain cases, include negative income, namely, loss, but such a construction cannot be adopted while interpreting s. 16(3) as that section created an artificial liability and, therefore, having regard to the concept of adding rather than substracting, deducting or setting off the income referred to therein, should be understood as referring to a positive figure. Though the learned counsel for the assessee relies on the said decision of the Gujarat High Court in support of his contention that in the interpretation of rule 1(i), the income by way of capital gains should normally be taken to comprehend only a positive income and not a negative income, that is loss, we are not inclined to agree with the said contention. The learned counsel for the assessee himself concedes that the expression 'income' occurring in the I.T. Act has been normally understood as including a negative income, that is loss, for purposes of computation of the total income under the Act. However, he contends that having regard to the object of rule 1(i) of the First Schedule to the Surtax Act, it should be understood as only referring to a positive income and not a negative income, namely, loss. The learned counsel for the assessee contends that chargeable profits has been defined in s. 2(5) of the Surtax Act, and the adjustments contemplated in that section have been specified in rules 1(i) and 1(ii) and the adjustments provided for in rule 1(i) can only relate to the exclusion of a positive income under the head 'Capital gains'. We are not able to appreciate the above submission of the learned counsel for the assessee. Section 2(5) of the Surtax Act defines 'chargeable profits' as under :
''chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (XLIII of 1961) for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.'
7. Therefore, chargeable profits for the purpose of the Surtax Act should be taken as the total income of the assessee computed under the I.T. Act for any previous year and adjusted in accordance with the provisions of the First Schedule. Section 2(8) defines 'statutory deduction' as meaning an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater. Section 4 imposes the charge of surtax. It says that a tax called 'surtax' shall be charged on every company for every assessment year commencing from the first day of April, 1964, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. Schedule I sets out the rules for computing chargeable profits. Schedule II sets out the rules for computing the capital of the company for the purpose of surtax. Rule 1 of the First Schedule excludes certain items of income from the total income computed under I.T. Act for purposes of computation of chargeable profits. This is obviously for the reason that the Surtax Act levies a tax only on the business profits earned by the company and not in respect of its other heads of income. Rule 1(i) excludes from the total income any income chargeable under the I.T. Act under the head 'Capital gains'. Having regard to the object of rule 1 and also the language used therein, the expression 'any income chargeable under the head 'Capital gains'' should be taken to refer to the source of income under the head 'Capital gains' and that has to be excluded from the total income. Rule 2 states that the balance of the total income arrived at after making the exclusions mentioned in rule 1 should be reduced by the amount of income-tax, if any, payable by the company in respect of any income referred to in clauses (i) to (iii) or clause (viii) of rule 1 included in the total income. Thus, the First Schedule excludes income from some sources from the total income and thereafter a reduction is made towards the income-tax payable in respect of income from some of the sources excluded in clause (i). Thus having regard to the method of computation of chargeable profits contemplated by the First Schedule, the income from the head 'Capital gains' has to be excluded. According to the Revenue, income from capital gains has been shown as one of the heads of income under s. 14E of the I.T. Act, and, since, in the computation of total income, the income from capital gains forms part, rule 1(i) of the First Schedule to the Surtax Act excludes that head of income from the total income for purpose of computing the chargeable profits as defined in s. 2(5) of that Act. Having regard to the classification of the heads of income in s. 14, the expression 'income from capital gains' will have to take in capital loss as well. The learned counsel for the Revenue refers to ss. 70 to 78 of the I.T. Act to substantiate his contention that the losses arising under each head of income could be adjusted against income from another under the same head of income or against income from another head. Particular reference is made to s. 74(a)(ii) which contemplates loss arising under the head 'Capital gains' and also sub-s. (3) of s. 71 which contemplates the net result of the computation of capital gains under ss. 48 to 55 being a loss and the same being allowed as set off against income under any other head. According to the learned counsel, the Tribunal is, therefore, not right in holding that rule 1(i) of Schedule I will take in only when the capital gain is a positive figure and not when it is a loss. Reference also is made to s. 115 which relates to taxation on capital gains in the case of companies, as throwing light on the question as to whether the income from capital gain should always be a positive figure as has been found by the Tribunal.
8. There is considerable force in the submission of the learned counsel for the Revenue. What is excluded in rule 1(i) of Schedule I is the source or head of income and, therefore, the exclusion cannot be restricted to a case of positive income and not for negative income such as loss. The learned counsel for the assessee, however, contends that the word 'exclusion' used in rule 1(i) of Schedule I can only refer to a positive figure and, therefore, rule 1 contemplates only a downward increase and it does not contemplate an upward increase as and by way of an addition to the total income determined under the I.T. Act. According to the learned counsel for the assessee, the scheme of the Surtax Act contemplates only exclusion and not inclusion and having regard to the object of rule 1(i) of Schedule I, the income by way of capital gains referred to in rule 1(i) should be understood as relating to a positive income and not to negative income, that is, loss. The learned counsel refers to the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. CIT : 60ITR551(Guj) , wherein the term 'income' occurring in s. 16(3) of the Indian I.T. Act, 1922, was construed as not including negative income, namely, loss, and held that that section carries the concept of adding rather than substracting, deducting or setting off. We don not see how the said decision will come to the aid of the assessee in this case. There, s. 16(3) of the 1922 Act was considered and having regard to the object of that section, it was held that unless there is positive income in the hands of the minor, there is no question of its addition to the income of the parent. Further, s. 16(3) contemplates income accruing from the assets transferred directly or indirectly by the parent to the minor child otherwise than for adequate consideration and, therefore, the addition contemplated in that section can only be of income from the property transferred which can only be a positive figure. Therefore, the principle of that decision cannot apply while determining the scope of rule 1(i) of Schedule I to the Surtax Act.
9. In CIT v. Harprasad & Co. P. Ltd. : 99ITR118(SC) , the Supreme Court had occasion to consider the scope of the words 'income' and 'total income' occurring in the Indian I.T. Act of 1922. After referring to the various provisions of that Act, the Supreme Court observed thus (p. 124) :
'From the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains' should be understood as including losses also, so that, in one sense, 'profits and gains' represent 'plus income' whereas losses represent 'minus income'. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee.'
10. The learned judges of the Supreme Court have further observed that capital gains would be covered by the definition of 'income' in sub-s. (6C) of s. 2 only if they were chargeable under s. 12B, and during the relevant period capital gains, whether on the positive or the negative side, could not be computed and charged under s. 12B or under any other provisions of the Act which did not form part of the total income and, therefore, the income from capital gains need not be computed under the Act during the relevant period. This decision of the Supreme Court proceeds on the basis that income under the head 'Capital gains' may be a 'plus income' or a 'minus income' and that both will go into the computation of capital gains. Before the Supreme Court, on behalf of the assessee, in that case, it was contended that the income from capital gains will not contemplate a capital loss or minus income. The Supreme Court rejected the said contention and pointed out that the concept of carry forward of loss contemplated by ss. 70 to 78 does not stand in vacuo and it involves the notion of set-off, that its sole purpose is to set off the loss against the profits of a subsequent year, that the set-off implies that the assessee wants to adjust the loss against profit to reduce the tax demand and that 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 loss to be carried forward. Thus, the Supreme Court has held that having regard to the provisions for carry forward and set off of capital loss as against the income by way of capital gains, the income by way of capital gains should naturally include capital loss as well.
11. In this view of the matter, we have to answer the question in the affirmative and against the assessee. The Revenue will get costs from the assessee. Counsel's fee Rs. 500.