SRINIVASAN J. - The question that have been referred to us are these :
'1. Whether there were materials for the Tribunal to hold that the loss of $ 1,64,958 and $ 1,96,132 by revaluation of the fixed and floating assets of the Kuala Lumpur and Johore business of the assessee arose as and when the various transactions took place from time to time during the enemy occupation period till 1945 and not on the 1st October, 1949, the date on which the Debtor and Creditor (Occupation Period) Ordinance came into force ?
2. If the answer to the above question is in the affirmative whether any part of the loss incurred by the assessee till the end of the enemy occupation in 1945 is available under section 24(2) as a set-off against the assessments of 1950-51, 1951-52, 1952-53, notwithstanding that they had not been determined in any proceedings for the relevant year ?
3. If the answer to question No. 2 above is in the affirmative, whether the aforesaid contributions of $ 2,21,301 and $ 49,433 by the Kuala Lumpur and Johore businesses constitute proper deductions from the computation of foreign profits of the assessee for the calendar year 1945 ?'
The assessee is a private limited company incorporated under the laws prevailing in the former Pudukottah State. It had its registered office in that State. It carried on a money-lending business and a business in properties as an adjunct to the money-lending business in the Federated Malay States.
On the merger of the State of Pudukottah with the Indian Union from the 1st September, 1949, and the extension of the Indian Income-tax Act to Pudukottah, assessments were made under the Indian Income-tax Act. The assessments in question in this reference are those relating to the assessment years 1950-51, 1951-52, 1952-53 and 1953-54, the relevant accounting years being the calendar years immediately preceding. The claim of the assessee was that, during the years prior to the first of the assessments years in questions, the assessee had incurred losses which it was entitled to carry forward and set off against the income, profits and gains brought to assessment in these assessments years. Though three different questions have been framed, the answer to these question will depend upon whether the assessee is entitled to the right set-off under section 24(2) of the Indian Income-tax Act. We may however set out a few facts from out of which the questions arise.
It is common ground that the entirety of the assessees business was confined to the Federated Malay States. It is nor clear whether any part of its income arose within the State of Pudukottah. But one thing is clearly admitted by the assessee that no income arose or accrued to it or could be deemed to have arisen or accrued to it in the taxable territories during any of the years of assessment or in any of the years earlier thereto. The Federated Malay States came under enemy occupation between 1942 and 1945. The transactions during that period were necessarily in Japanese currency. After the re-occupation of the territory in September, 1945, the Japanese currency ceased to be legal tender. The Malayan Government declared a moratorium keeping in abeyance the enforcement of all rights and claims arising or incurred during the enemy occupation. With effect from the 1st October, 1949, a law was enacted to bring the value of the claims in Japanese currency into conformity with the Malayan currency. A sliding scale for computation of the respective values of the two currencies was introduced. It is not necessary to enter into the details thereof, but, as a result of the devaluation of the Japanese currency in which the transactions had been carried on, the assessee wrote off in his books of account a sum of Rs. 6,15,508 as the loss that arose prior to 1947. Subsequently, a sum of Rs. 1,05,392 was collected, that is, after 1949, leaving a balance of the loss of Rs. 5,10,116.
In the first of the assessment years, the above loss was claimed as a deduction on the grounds that the loss became effective only on the 1st of October, 1949, that is, within the year of account relevant to the assessment year 1950-51. Alternatively, it was contended that even if the loss had arisen earlier, a set-off could be allowed under section 24(2) of the Act. This claim to set-off was reiterated in the subsequent assessments. The Income-tax officer took the view that, even on the assessees own showing, the loss had been incurred on or before 1947. With respect to the set-off, he observed :
'The assessee did not offer the income from Malayan business for assessment on the ground that if the losses sustained in the war years 1942 to 1946 were set off, there would be no income for assessment. There is no need for set-off of the loss, if any, against the income of the year of income. The operation of the Income-tax Act was extended to the merged territory only with effect from 1st April, 1949, and there can, therefore, be no question of making any assessment on the company for any year prior to 1949-50 nor of determining losses for carry forward and set-off against the profits assessable for 1949-50 or subsequent years. The loss of profits and gains of any year referred to in section 24(2) can only refer to losses to which the Indian Income-tax Act applied. It is not, therefore, permissible to set off any losses of prior years under section 24(2) of the Act.
The disallowance was concerned in by the Appellate Assistant Commissioner. The Tribunal, in the appeal before it, remanded the case for determination of certain details. After receipt of the remand report, the Tribunal classified the claims under the two heads : loss on account of revaluation of the assets of the assessee and loss on account of depreciation of Japanese currency. With regard to the first, it held, that the loss by revaluation is actually no such loss at all and that it is only the cumulative result of re-writing the books on the basis of the scaled down values laid down in the Schedule to the Ordinance depreciating the Japanese currency progressively. On the second, the Tribunal took the view that the entire Japanese currency lost its value completely even by the date of re-occupation in 1945. It observed :
'By the Debtor and Creditor Ordinance, certain debts already wiped off by recovery in Japanese currency were received after 1st October, 1949, as also perhaps some liabilities against the assessee. Except to the extent of liabilities so created, of which there is no evidence, the aforesaid Ordinance was not instrumental in bringing any loss further to what the assessee had already lost in 1945. What it had lost, it had lost during the war period before the date of resumption of normalcy and not thereafter. By the Ordinance in question, the assessee was only empowered to collect some more money that what was due in its books. In these circumstance, it cannot be said that the assessees loss of the war period was capable of determination only on or after 1st October, 1949, as argued.'
Dealing with the claim to set-off, the Tribunal observed :
'The Indian Income-tax Act did not extend to Pudukottah till the financial integration and in the assessees case till the assessment year 1950-51. It is not, therefore, liable to be assessed till then and it follows that there was no obligation on the part of the income-tax authorities to determine its losses for any period....'
Question No. 3 relates to certain contributions made by the assessee company to the Indian Independence League. The claim of the company was that it had necessarily to incur this expenditure if it was to protect its assets and to be enable to carry on its business. It accordingly claimed this item to constitute admissible business expenditure. The department and the Tribunal rejected this contention apparently for the reason that this was a voluntary payment which had not been shown to be necessary for the purpose of carrying on the business.
As we have indicated, the principle question that calls for determination is whether, in the circumstances in which the assessee was doing business, it is entitled to the set-off contemplated in section 24(2) of the Act. After giving careful consideration to this question we are of opinion that the assessee is not entitled to this claim.
It is true that in a decision of a Full Bench of this court in Udaya Ltd. v. Commissioner of Income it has been held overruling the decision in Ahamed Sahib v. Commissioner of Income-tax that, where an assessee claims a set-off, it is necessary that the loss required to be set off should have been computed at an anterior point of time. In that case the assessee was doing business in the taxable territories. In the years 1948-49 and 1949-50, its losses in business far exceeded its income from other sources, that is, securities and dividends. In 1950-51, the company derived a net aggregate income of Rs. 13,611. In March, 1951, the company filed its return for all the three years and in November, 1951, it submitted the return for 1951-52. The Income-tax Officer accepted the two later returns for the years 1950-51 and 1951-52, disallowing the claim of the assessee to have the losses of the earlier two years ascertained and carried forward and set off against the income of the subsequent years. A Full Bench of this court held that section 24(2) of the Income-tax Act before it amendment in 1953 entitled an assessee to carry forward his losses for a period of six years and the only limitation on that right was that the assessee should have more heads of income that one. There was no further condition that the ascertainment of the losses should have been made anterior to the time when the claim to carry forward was made. What all this decision tends to lay down is that, if the assessee has a right to have his losses in one year adjusted against the income, profits or gains of the later year by way of set-off under section 24(2), it is not necessary that he should make the claim in the assessment for the year in which the loss arose, but that such a loss could be ascertained in the assessment proceedings of a subsequent year so long as the losses to be computed were within the period specified in section 24(2). It will be noticed that, in that case, the assessee not only had more than one head of income but that his income arose within the taxable territories and, whether or not an assessment was actually made upon him during the years when the losses arose, he was liable to be assessed in those years in the sense that the Income-tax Act applied to him. The present case is, however, different. We have already stated that not only was the assessee company a resident of Pudukottah, which was outside the taxable territories, but its income arose in territories outside India altogether. We have also stated that there is no material to show that, during any of the relevant years; the assessee company had any income which arose within the taxable territories. It is in the light of these peculiar circumstances that we have no consider to what extent the right to set-off is available.
On behalf of the of the assessee, reliance has been placed upon Helen Rubber Industries Ltd. v. Commissioner of Income-tax. This was a case where the assessee had its business in the Travancore State. Under the income-tax laws of the Travancore State, the loss incurred in Travancore could be carried forward for two years. After the extension of the Indian Income-tax Act to the erstwhile State of Travancore and the consequent repeal of the local Income-tax Act, the question that arose was whether the assessee was entitled to carry forward the losses for a period of six years as under the Indian Income-tax Act of whether his right was limited only to the period of two years laid down in the Travancore Act. This called for an interpretation of section 3 of the Taxation Laws (Part B States) (Removal of Difficulties) Order and the learned judges of the Travancore High Court held that, since the State law had been superseded by the Indian Income-tax Act, the larger right contained in the Indian Income-tax Act would be available to the assessee newly brought under that Act. This decision however is not of much help in relation to the facts of the present case. In the case cited, there was a local law in force which gave the right to the assessee to have his loss taken into account in making assessment of his income and gave a right to carry forward such loss for a period of two years. Though it is not quite clear, it appears to be inherent in the decision that the quantum of the loss which the assessee was so entitled to carry forward must be the loss that is computed and arrived at on the application of the law then in force during the year in which the loss occurred. It could not have been contemplated that the loss that occurred in a year prior to the introduction of the Indian Income-tax Act to the Travancore State was to be computed according to the law that was subsequently introduced. That was therefore a case where there was a loss which was recognised to exist by the law then prevailing, namely, the Travancore Act, and that loss itself was allowed to be carried forward and set off. That loss itself was not intended to be recomputed in accordance with the principles of the Indian Income-tax Act.
This view finds supports in a decision of the Bombay High Court in Indore Malwa United Mills Ltd. v. Commissioner of Income-tax. The assessee company in that case mainly carried on its business in the native State of Indore and incurred a loss of Rs. 5,19,590 in the year 1948-49. Under the tax laws prevailing in Indore, this loss could not be carried forward. The assessee was also assessed under the Indian Income-tax Act as a non-resident for that year. But this loss having been incurred in a native State could be brought forward and set off only against income of the assessee accruing in that State. For the years 1948-49 and 1949-50, the company was also allowed under the Indore law depreciation in certain amounts. But these amounts could not be absorbed in those years as the company had incurred loss. On the repeal of the local law and the extension of the Indian Income-tax Act to the State of Indore, the assessee claimed in the assessment years 1950-51 and 1951-52, that it was entitled to carry forward the loss incurred in 1948-49 as well as the unabsorbed depreciation under the Income-tax Act. It was held that the loss incurred by the assessee in 1948-49 did not come within the scope of section 24(1) of the Act and could not therefore be carried forward under section 24(2). But in so far as the depreciation was concerned, since the State law allowed such depreciation to be carried forward, the assessee was entitled to the benefit of the carry forward even under the Indian Income-tax Act. The learned judges in dealing with this question observed :
'Under the law as it stood in 1948-49, profits made in an Indian State were not subject to tax except when they were brought into what was then known as British India. Thereafter, when an assessee was assessed in British Indian, he was not liable to pay tax on the profits he might have made by carrying on a business in an Indian State. If he brought those profits into British India, then he had to pay tax. But if he kept the profit in the Indian State, then they were exempt from tax; those profits were considered to be exempted from tax or profits which were not liable to tax. Now, having exempted those profits from tax, it stood to reason that when losses were made, the assessee could not take the benefit of the set-off with regard to those losses. Therefore, the proviso to section 24(1) laid down that an assessee could only claim to set off his losses incurred in an Indian State against the profits also earned in the Indian State.'
Further on, in dealing with the argument that under section 24(1) there is a mandatory provision that these losses shall be carried forward, the learned judges say :
'But the fallacy in the arguments is this : that before your come to section 24(2), before you can claim to carry forward losses, the losses must be such as could have been set off initially under section 24(1), because section 24(2) says and the loss cannot be wholly set off under sub-section (1), the portion not so set off shall be carried forward.'
Therefore, not only have they not been set off, in fact they could not have been set off under section 24(1). Admittedly, this loss could not have been set off under section 24(1), because of the proviso in 1948-49. If they could not have been set off, no right to carry forward under section 24(2) can arise. In our opinion, the condition precedent to the application of section 24(1) is that the losses in respect of which a special right is given to carry forward for six years must be losses to which initially section 24(1) must apply. If they are losses to which section 24(1) does not apply and they are not losses which could have been set off against any other head, no question of carrying forward under section 24(2) can arise and that is exactly the position here. It is obvious that the right to set off and to carry forward contemplated in section 24 of the Act is a relief that is given to the assessee whose income is brought to tax. It should therefore be axiomatic that, where that income was subject to no tax law, there cannot be any question of a corresponding relief. Assuming that the income of the assessee company accrued in Pudukottah, where it had its place of residence, at no time prior to the introduction of the Indian Income-tax Act, was its income subject to any tax, there being no local tax law at all. On what basis then is the claim of the assessee company that its losses occurred during the period prior to the introduction of the Indian Income-tax Act to be considered In the Bombay case it would be noticed that the loss had been computed under the local law. There was therefore a loss recognised by the tax Act then in force and it was that amount only which could have been carried forward. It seems to be implicit in the assessees contention that, in a case where there was no tax law, the loss which he is entitled to carry forward should be computed on the basis of the provisions of the Indian Income-tax Act, even though this Act was not in force during the year when the loss was incurred. We can find no satisfactory basis for accepting this contention. It seems to us that, in the peculiar set of circumstances prevailing in this case, there was no loss which could be recognised under the Indian Income-tax Act which could be said to have arisen, at any time prior to the introduction of the Indian Income-tax Act. The loss, if any, must be loss which could be computed under the law that existed and if there was no law relevant to the computation of such loss it should necessarily follow that no loss was available for being carried forward, even if the right to carry forward becomes available under the Income-tax Act.
In Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax a somewhat similar question arose. There the assessee company, which was incorporated in the United Kingdom, had a spinning and weaving mills in Pondicherry. In the year material to the assessment, it did not business in British India and accordingly submitted to return to the Income-tax authorities. On a notice issued by the Income-tax Officer, the assessee claimed that, all times material to the assessment year, no business was done in British India and consequently no profits arose or accrued or were received in British India and therefore the assessee was not liable to comply with the provisions of the Indian Income-tax Act. Proceedings under section 34 were taken and, in response to the notice, the assessee submitted a 'nil' return and filed a statement showing a loss on its total world income. The Income-tax Officer accepted the 'nil' return and made no assessment. He observed that the loss need not be carried forward under section 24(2). Against that order appeals were taken and finally the matter came to the Supreme Court. Their Lordship observed :
'There is no provisions in the Act which entitles the assessee to have a loss recorded or computed, unless something is to be done with the loss. Thus, under section 24(1) a loss can be set off against an income, profits or gain and under sub-section (2) the balance of a loss can be carried forward to a following year on the conditions set out there. Except for this there is nothing else that can be called in aid. But under sub-section (2) the loss can be carried forward when the loss cannot be wholly set off under sub-section (1) and in what event only the portion not so set off can be carried forward. We are therefore thrown back on sub-section (1).
Sub-section (1) provides that where an assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6 he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. Therefore, any question of set-off can arise, there must be (1) a loss under one or more of the heads mentioned in section 6, and (2) an income, profits or gains under some other head. It follows that when there is no income under any other head at all, there is nothing against which the loss can be set off in that year and unless that can be done sub-section (2) does not come into play.'
It seems to us that on the principle laid down in this decision, in so far as the assessee is concerned, there was no income which could come within the ambit of any tax law in any of the previous years in question. There could accordingly be nothing against which any adjustment or set off could be made in any of those years. As has been pointed out, unless the loss could be computed under section 24(1) of the Act, there could be question of any carrying forward under section 24(2). In our opinion, at not time prior to the introduction of the Indian Income-tax Act was the assessee in receipt of any income which could be brought within the scope of section 24 of the Act. It follows that there could be no computation of a loss under such circumstances or its carry forward under section 24(2).
We answer the questions against the assessee. The assessee will pay the costs of the department. Counsels fee Rs. 250.