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PETITIONER: COMMISSIONER OF INCOME-TAX, KANPUR

       Vs.

RESPONDENT: BEHARI LAL RAM CHARAN LTD.

DATE OF JUDGMENT22/04/1987

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH PATHAK, R.S. (CJ)

CITATION:  1987 AIR 1380            1987 SCR  (2)1159  1987 SCC  (2) 452        JT 1987 (2)   261  1987 SCALE  (1)970

ACT:     Income-tax  Act,  1961:  ss. 74  and  80--Claim  of  set off--When  admissible-Assessee whether entitled  to  benefit conferred under s. 24 of 1922 Act.

HEADNOTE:     Sub-section  (3) of s. 24 of the Income-tax  Act,  1922, required that when it was established that a loss of profits or gains had taken place. Which the assessee was entitled to have  set off, the Income-tax Officer should notify  to  the assessee  by an order in writing the amount of loss as  com- puted  by  him. This benefit was continued in s. 74  of  the Income-tax Act, 1961 which provides for carrying forward  to the  following  years the net loss computed under  the  head ’capital  gains’ in respect of an assessment  year.  Section 80,  however, interdicts that no loss which has not been  so determined shall be carried forward and set off.     The assessee, a private limited company disclosed in its return for the assessment year 1965-66 capital gains of Rs.3 lacs  and odd but claimed set off of capital loss of a  like amount  sustained  during the assessment year  1957-58  over sale of shares. This claim was disallowed by the  Income-tax Officer  on  the footing that when in  the  assessment  year 1957-58 the loss was claimed it was excluded in the computa- tion of income as capital loss. A challenge to that order by the assessee was rejected by the Appellate Assistant Commis- sioner  who  took  the view that the  loss  was  essentially notional  in  nature, and that the claim for set off  to  be admissible,  had  to be notified by the  income-tax  Officer under  s. 24(3) of the 1922 Act to the assessee by an  order in  writing.  That having not been done the  claim  was  not admissible.     Allowing  the  assessee’s claim, the  Tribunal  however, came to the conclusion that the assessee was entitled to the benefit of set off of loss provided it satisfied that  capi- tal  loss  was  computed under the old Act, and  as  in  the instant case the Income-tax Officer had neither computed the loss nor passed an adverse order. the Income-tax Officer was not entitled to take advantage of his own failure and reject the assessee’s 1160

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claim  on  the ground that loss had not been  determined  as required under s. 24(3) of the Income-tax Act, 1922.     The High Court agreed with the conclusion of the  Tribu- nal and found against the Revenue. Dismissing the Appeal, the Court,     HELD: Reading the provisions of s. 74(1)(b) and s. 80 of the Income-tax Act, 1961 together makes it evident that  the benefit  conferred  under  s. 24 of the 1922  Act  has  been continued  to  be given effect to under the  1961  Act.  and notwithstanding  the words of s. 80 of the latter  Act,  the claim  of set off was admissible. The conclusion reached  by the High Court was. therefore. correct. [1166CD]     The Income-tax Officer in the instant case, did  compute the  amount by specifying it in his assessment  order.  When the  assessee had made the claim and the Income-tax  Officer took  Rote  of it, his failure to comply strictly  With  the requirement of sub-s. (3) of s. 24 of the 1922 Act could not be  permitted to be taken advantage of by the  Revenue.  nor could it be used to the prejudice of the assessee. [1164D]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 74 of 1975.     From  the  Judgment and Order dated 9.11.  1973  of  the Allahabad High.Court in L.T. Ref. No. 722 of 1971.     S.C.  Manchanda, Ms. A. Subhashini and M.N.  Tandon  for the Appellant.     J.P. Goyal, Rajesh, Malt Ram Bidwar. and D.P.  Mukherjee for the Respondent. The Judgment of the Court was delivered by     RANGANATH MISRA, J. This appeal is by special leave  and the  judgment  of the Allahabad High Court  on  a  reference under Section 256(1) of the Income Tax Act. 1961  (hereinaf- ter referred to as ’the Act’) is assailed by the Revenue.     The relevant assessment year is 1965-66 corresponding to the  previous year ending on 31.12. 1964. In its return  the assessee, a pri- 1161 vate limited company. disclosed capital gains of Rs.3.10,200 but claimed set off of capital loss of Rs.3.17,500 sustained by it during the assessment year 1957-58 over sale of shares to three associate concerns. It was maintained by the asses- see  that the loss was sustained in the previous year  rele- vant  to the assessment year 1957-58 and the same should  be set off against the capital gains in the assessment year  in question.  The Income-tax Officer disallowed the  claim  for set  off  on the footing that when in  the  assessment  year 1957-58 the loss was claimed it was excluded in the computa- tion  of income as capital loss and the Appellate  Assistant Commissioner  while disposing of the assessee’s  appeal  had stated  that it was a notional capital loss. As  no  further appeal was carried by the assessee, with the first appellate order the matter had become final.     The  assessee challenged the rejection of its  claim  of set  off before the Appellate Assistant Commissioner and  he dismissed  the appeal by holding that there was  no  genuine loss;  it  was essentially notional in nature and  that  the claim for set off to be admissible had to be notified by the Income-tax  Officer under Section 24(3) of the 1922  Act  to the  assessee by an order in writing. That having  not  been done,  the claim was not admissible. Thereupon the  assessee went before the Appellate Tribunal and reiterated its claim. The  Tribunal came to the .conclusion that the assessee  was

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entitled  to  the  benefit of set off of  loss  provided  it satisfied  that its capital loss was computed under the  old Act. In its view as the assessee had filed its return  show- ing the loss and the Income-tax Officer neither computed the loss nor passed an adverse order, the Income-tax Officer was not entitled to take advantage of his own failure and reject the assessee’s claim of carry forward and set off of loss on the  ground  that loss had not been determined  as  required under section 24(3) of the Income-tax Act, 1922. The  Tribu- nal  further found that the Income-tax Officer  had  clearly disallowed  the assessee’s claim of revenue loss by  holding that  it  was a capital loss. It found  that  the  Appellate Assistant Commissioner had no justification to hold that the claim of loss was not genuine while disposing of the  appeal for  the assessment year 1957-58 and ultimately allowed  the assessee’s claim. At the instance of the Revenue four  ques- tions were referred for opinion of the High Court.               1.  Whether  on the facts and in  the  circum-               stances of the case, the Income-tax  Officer’s               order for the assessment year 1957-58 had  not               merged in the Appellate Assistant  Commission-               er’s  order in which the  Appellate  Assistant               Commissioner  had given a clear  finding  that               the loss was notional?               1162               2.  If the answer to the above question is  in               the  negative, whether any loss could be  said               to  have  been determined for  the  assessment               year  1957-58, which could be carried  forward               to subsequent years?               3.  Whether in view of the provisions of  Sec-               tion 80 of the Income-tax Act, 1961, the  loss               claimed for the assessment year 1957-58  could               be  set off against the income determined  for               the assessment year 1965-66?               4.  Whether the Tribunal was justified in  law               in  holding  that the  provisions  in  Section               24(3)  regarding intimation of  losses  deter-               mined by the Income-tax Officer do not.  apply               to the loss falling under the head ’capital’? The  High  Court found that the Income-tax  Officer  in  the assessment order for 1957-58 had mentioned:               "Net    loss   as   per   profit   and    loss               account--adjust Rs.3, 17,205.                          (i)  Loss  on  sale  of  investment               being                               capital : Rs.3, 17,500-00                          (ii) Income-tax   :Rs.    204-00                               Total        : Rs.3, 17,704-00                               Income      :Rs.    499-00"     It  is true that in appeal the Appellate Assistant  Com- missioner had held:-               "A perusal of the assessment records show that               the  appellant held 2,500 ordinary  shares               in  M/s. B.R. Ltd. These shares were  held  on               investment account and were not stock-in-trade               of the Company. M/s. B.R. Ltd. is an associat-               ed concern and the shares were sold to  allied               concerns and a loss of Rs.3, 17,500 was worked               out.  Firstly,  the  shares  were   investment               shares.  Secondly,  the price  for  which  the               shares were transferred to another  associated               concern  was a notional price. The  management               just transferred the shares held by one compa-               ny to another company

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             1163               under their control and management. Of course,               the  transfer was not a trading  activity.  In               these  circumstances, I hold that the  Income-               tax  Officer has rightly disallowed  the  loss               claimed,  the  same  being  notional   capital               loss." The  High  Court found that both the Income-tax  Officer  as also the Appellate Assistant Commissioner had found that the loss was a capital loss. The High Court fur:her found:-               "In  our opinion this Section (Section  80  of               the 1961 Act) cannot apply to a case where  in               law  a return could not have been filed  under               Section  139.  That is to say in  relation  to               assessment  years  prior to  the  coming  into               force  of  the Income-tax Act, 1961  a  return               could  not  possibly  have  been  filed  under               Section  139 because in these years this  Sec-               tion  was  not  on the Statute  Book.  But  if               Section 80 is construed to mean that a  return               filed  under the Income-tax Act 1922  is  also               within  its  purview then in our  opinion  the               requirement  of this Section was equally  ful-               filled  because the assessee has for  the  as-               sessment  year 1957-58 filed a return of  loss               which loss had been determined by the  Income-               tax Officer in the assessment order."     The  High  Court  took the view that in  the  order  for assessment year 1957-58. the Appellate Assistant Commission- er  has referred to the claims of loss as notional  when  he really  meant  that it was an estimate. It agreed  with  the conclusion of the Tribunal and found against the Revenue.     Section 24 of the 1922 Act which applied to the  assess- ment year 1957-58 as far as relevant provided:                         "(1)  Where any 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  .......  "               (2A)  Notwithstanding  anything  contained  in               sub-section (1), where the loss sustained is a               loss  falling under the head ’capital  gains’.               such loss shall not be set off except  against               any  profits  and  gains  falling  under  that               head."               1164               (2B) Where an assessee sustains a loss such as               is  referred  to in sub-section (2A)  and  the               loss  cannot be wholly set off  in  accordance               with  the provisions of that sub-section,  the               portion  not so set off shall be carried  for-               ward to the following year and set off against               capital gains for that year, and if it  cannot               be  so set off, the amount thereof not so  set               off shall be carried forward to the  following               year  and  so on. So. however,  that  no  loss               shall  be carried forward for more than  eight               years  .....................................               (3) "When, in the course of the assessment  of               the total income of any assessee. it is estab-               lished  that  a loss of profits or  gains  has               taken  place which he is entitled to have  set               off under the provisions of this section,  the               Income-tax Officer shall notify to the  asses-

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             see by order in writing the amount of the loss               as  computed by him for the purposes  of  this               section."     The High Court has found that the Income-tax Officer did compute the amount by specifying it in his assessment order. When the assessee had made the claim and he took note of it. his failure to comply strictly with the requirement of  sub- section  (3)  of section 24 should not be  permitted  to  be taken advantage of by the Revenue, nor should it be used  to the prejudice of the assessee.     Since  set off has been claimed in the  assessment  year 1965-66 to which the Act of 1961 applied, it is necessary to turn  attention to the relevant provisions thereof and  they are in sections 74 and 80. For convenience they are extract- ed:               "Section  74: (1)(a) Where in respect  of  any               assessment year. the net result of the  compu-               tation  under  the head "capital gains"  is  a               loss  such  loss shall. subject to  the  other               provisions  of this Chapter. be dealt with  as               follows:               "(i) such portion of the net loss (relating to               short-term  capital/assets as cannot be or  is               not  wholly set off against income  under  any               head  in  accordance with  the  provisions  of               section  71  shall be carried forward  to  the               following assessment year and set off  against               the capital gains, if any, relating to  short-               term  capital assets assessable for  that  as-               sessment  year.  and, if it cannot be  so  set               off,  the amount thereof not so set off  shall               be carried forward to the following assessment               year and so on."               1165               "(ii) such portion of the net loss as  relates               to capital assets other than short-term  capi-               tal  assets  shall be carried forward  to  the               following assessment year and set off  against               the capital gains. if any. relating to capital               assets  other than short-term  capital  assets               assessable for that assessment year and. if it               cannot  be so set off. the amount thereof  not               so  set  off shall be carried forward  to  the               following assessment year and so on:                   Provided  that where. in the case  of  any               assessee  not  being a company. the  net  loss               computed in respect of such capital assets for               any  assessment  year  does  not  exceed  five               thousand  rupees.  it  shall  not  be  carried               forward under this section."                "(b)   Notwithstanding anything contained  in               the Indian Income-tax Act. 1922 (11) of 1922),               any  loss  computed under  the  head  ’capital               gains’   in   respect   of   the    assessment               year.commencing on the 1st day of April. 1961.               or  any earlier assessment year which is  car-               ried forward in accordance with the provisions               of sub-section (2B) of section 24 of that Act.               shall  be  dealt with in the  assessment  year               commencing  on the 1st day of April. 1962.  or               any subsequent assessment year as follows:                   (i) in so far as it relates to  short-term               capital  assets, it shall be  carried  forward               and set off in accordance with the  provisions               of  sub-clause (i) of clause (a) and  sub-sec-

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             tion (2): and                   (ii)  in so far as it relates  to  capital               assets  other than short-term capital  assets.               it  shall  be carried forward and set  off  in               accordance  with the provisions of  sub-clause               (ii) of clause (a) and sub-section (2)."               "(2)(a) No loss referred to in sub-section (i)               of clause (a) of sub-section (1) or sub-clause               (i)  or sub-clause (ii) of clause (b) of  that               sub-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               under  the  Act  or as the case  may  be.  the               Indian Income-tax Act. 1922 ( 11 of 1922).               1166                        "(b)  No  loss referred  to  in  sub-               clause  (ii)of clause (a) of  sub-section  (1)               shall  be carried forward under  this  section               for more than four assessment years immediate-               ly  succeeding the assessment year  for  which               the loss was first computed under the Act," "Section  80:  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  for- ward  and  set off under sub-section (1) of  Section  72  or sub-section (2) of Section 73 or sub-section (1) of  Section 74 or sub-section (3) of Section 74A."     Reading  the provisions of Section 74(1)(b} and  Section 80 together. we agree with the submission advanced on Behalf of the assessee that the benefit conferred under Section  24 of  1922 Act continued to be given effect to under the  1961 Act  and notwithstanding the wordings of section 80  of  the latter  Act,  the High Court was Fight in holding  that  the claim  of  set off was admissible in our view’.  on  a  bare analysis  of  these  provisions, and  without  reference  to anything more, this appeal can be disposed of. We find  that the  High Court reached the correct conclusion and there  is no  merit in the appeal. Accordingly. it is  dismissed  with costs. P.S.S.                                                Appeal dismissed. 1167