http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 17  

PETITIONER: COMMISSIONER OF INCOME TAX, MADRASAND ANR.

       Vs.

RESPONDENT: M/S DALMIA CEMENT (BHARAT) LTD.

DATE OF JUDGMENT16/08/1995

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) SEN, S.C. (J) NANAVATI G.T. (J)

CITATION:  1995 AIR 2453            1995 SCC  (6) 256  JT 1995 (6)    60        1995 SCALE  (4)727

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T B.P. JEEVAN REDDY, J.      Cardozo, J.  had once  exclaimed: "The  precedents have turn upon  us and  they are  engulfing and  annihilating us, engulfing and annihilating the very devotees that worshipped at their shrine". We were inclined to repeat his observation after hearing this matter, a feeling which will be borne out as the judgment proceeds.      The matter arises under the Indian Income Tax Act, 1922 (hereinafter  referred   to  as  "1992  Act").  Of  the  six questions referred  by the  Tribunal for  the opinion of the Madras High  Court under  Section 66(1)  of  the  Act,  only Questions 2,  3 and  4 are  relevant for  our purpose.  They read:      "2. Whether,  on the  facts and  in  the      circumstances of  the case, the assessee      was entitled  to have the losses for the      assessment  years   1952-53  to  1954-55      quantified and set-off against its share      income  from  the  partnership  firm  of      Dalmia  Magnesite  Corporation  for  the      assessment years 1960-61 and 1961-62?      3. Whether  the Appellate  Tribunal  has      jurisdiction to  direct  the  Income-tax      Officer to  quantify the  losses for the      assessment years  1952-53 to 1954-55 and      allow  the  set-off  against  the  share      income from  the  partnership  firm  for      1960-61 and 1961-62?      4. Whether,  on the  facts  and  in  the      circumstances of  the case, the assessee      was entitled  to have  the losses of the      assessment years  1955-56 to 1959-60 set      off against its share income from Dalmia

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 17  

    Magnesite Corporation for the assessment      years  1960-61  and  1961-62  under  the      provisions of Section 24(2) (iii) of the      Indian Income-tax Act, 1922?      We shall  state the  facts insofar as they are relevant to the said questions alone.      The respondent-assessee  is a  public  limited  company carrying on the business of mining Manganese Ore and selling it as  such or  after calcining it. During the years 1945 to 1956, it  claimed to  have suffered losses in that business. On April 23, 1956 the respondent-assessee filed its returns, for the  first time,  for the  previous years relating inter alia to  assessment years 1952-53 to 1954-55. The Income Tax Officer issued  a notice under Section 23(2) and the matters were posted  for hearing on May 7, 1956 but later the Income Tax Officer  informed the assessee that no cognizance can be taken of  the said returns as they had been filed beyond the period stipulated  under Section 22(1) and Section 22(2A) of the Act.  In respect  of the assessment years 1955-56, 1956- 57, 1957-58,  1958-59  and  1959-60,  for  which  years  the returns were  filed in  time, the  Income Tax  Officer found that the  assessee had  suffered losses  and determined  the same for each of the said years.      For the assessment year 1960-61, the assessee filed, in the first  instance, a  return disclosing  a profit  of  Rs. 1,00,136.00, but later filed a revised return showing a loss of Rs.  60,351.00 after bringing forward and setting off the losses of  the earlier  assessment years commencing from the assessment year 1950-51. The Income Tax Officer rejected the assessee’s claim  that it  was entitled to bring forward and set-off the  losses of the earlier years against the profits for the  previous year relating to the assessment year 1960- 61 in  view of clause (ii) of sub-section (2) of Section 24. In other  words, he  was of the opinion that the business in which losses  arose in  the earlier  year was  not the  same business which  was carried  on  during  the  previous  year relevant  to   assessment  year   1960-61.  On  appeal,  the Appellate Assistant  Commissioner affirmed  the  Income  Tax Officer’s view that the income of the previous year relevant to assessment  year 1960-61  arose from a business which was different from  the business which was carried on during the earlier years.  On further  appeal,  however,  the  Tribunal agreed with  the assessee. It held that the business carried on during  the previous  year relevant  to 1960-61  and  the business carried  on during the earlier year was one and the same. The Tribunal also rejected the contention urged by the Revenue before  it that  in as  much as  the losses have not been quantified for the assessment years 1952-53 to 1954-55, the assessee was not entitled to carry forward the losses of those  years   for  being  set-off.  It  also  rejected  the Revenue’s contention  that during  the course  of assessment for the  assessment year 1960-61 or for that matter 1961-62, the Tribunal  cannot direct the quantification of the losses in respect of the said three earlier assessment years, viz., assessment years 1952-53 to 1954-55. Aggrieved with the said decision of  the Tribunal, the Revenue applied for referring the aforesaid  questions for  the opinion of the High Court, as stated above.      Of  the  three  questions  concerned  herein  (Question Nos.2, 3  and 4),  the High  Court took up Question No.3 for consideration first.  The contentions  urged by  the Revenue were to the following effect: under the Income Tax Act, each assessment year  is an unit by itself. While dealing with an appeal in  relation to  a particular  assessment  year,  the Tribunal cannot  travel outside  the scope of the appeal and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 17  

deal with  matters relating  to other  assessment years.  In respect of  the assessment years 1952-53 to 1954-55, no loss was determined by the Income Tax Officer for the reason that the returns  were filed beyond the period prescribed. On the basis of  such returns,  no loss  could have been determined and allowed  to be  carried forward in view of the provision contained in  sub-section (2A)  of Section 22. In any event, the  assessment   in  respect  of  the  said  three  earlier assessment years  - whether right or wrong- had become final and the  Tribunal had  no jurisdiction   while  dealing with appeal  relating   to  the   assessment  year   1960-61  (or assessment year  1961-62, as the case may be), to reopen the assessment relating  to the  said three  earlier  assessment years, determine  the loss for those years, carry it forward and set  it off  against the  profits made  during the  year relevant to  assessment year  1960-61 (or 1961-62). Reliance was placed  on Income  Tax Officer v. Muralidhar Bhagwan Das [(1964) 52  I.T.R. 335]  and Commissioner  of Income  Tax v. Manick Sons  [(1969) 74  I.T.R. 1]  in support  of the above propositions. The said contentions were rejected by the High Court in the following words:      "On the facts of this case, it cannot be      said that  the Tribunal has exceeded its      jurisdiction in directing the Income-tax      Officer  to   quantify  the   losses  in      relation to the assessment years 1952-53      to 1954-55  and to  allow a  set-off  of      the losses  for those  years in relation      to  the  assessment  years  1960-61  and      1961-62. The Tribunal while disposing of      the appeal  relating to  the  assessment      years  1960-61   and  1961-62   has   to      actually determine the taxable income of      the assessee  for these  years  and  for      this purpose  it has necessarily to find      out whether  the assessee is entitled to      carry forward  the losses  and set  them      off against  the profits of the years in      question. If,  in law,  the assessee  is      entitled to  carry forward  and set  off      the losses  of the previous years in the      assessment years  in question,  then the      Tribunal cannot  refuse to consider that      question on  the ground  that the losses      in respect of which the set off has been      claimed relate to some earlier years. As      a matter  of fact, an identical question      came to  be considered  by  the  Supreme      Court  in   Commissioner  of  Income-tax      Madhya Pradesh  v.  Khushal  Chand  Daga      [(1961) 42  I.T.R.  177].  The  question      there was  whether  the  Tribunal  could      direct the  quantification of the losses      for the earlier years while dealing with      an appeal  relating  to  the  subsequent      assessment year.  The Supreme Court held      that the  assessee is  entitled to  have      the   losses    re-determined   in   the      subsequent  year   if   the   income-tax      Officer  had   not  duly   followed  the      provisions of the statute in determining      the quantum  of losses  in  the  earlier      years. Though  that case  did not relate      to the jurisdiction of the Tribunal, the      principle of the said decision has to be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 17  

    applied to the facts of this case.           Admittedly, the  assessee, in  this      case, applied  for extension of time for      the submission  of the  returns for  the      assessment years  1952-53 to 1954-55 and      in fact  obtained the required extension      from the  Income-tax Officer himself. It      is also  seen that  after the submission      of the returns within the extended time,      the matters  were posted for enquiry and      the  assessee   was  asked   to  produce      materials  in   support  of   the   said      returns. But,  somehow,  the  Income-tax      Officer chose  to close  the proceedings      saying that  he will not take cognizance      of those  returns as  they had  not been      filed  within   the  time   provided  in      section 22(1)  or section 22(2A). But it      has been  held by  the Supreme  Court in      Commissioner of  Income-tax,  Punjab  v.      Kulu  Valley   Transport  Co.   P.  Ltd.      [(1970)   (77) ITR  518] that  though  a      return disclosing  the loss is not filed      in time  as fixed  in the general notice      under section  22(1) or  section 22(2A),      the provisions  of section 24(1) and (2)      of the  Act should be taken into account      for the  purpose of  granting relief  to      the  assessee,   in  relation   to   the      assessment for  the subsequent  year. It      has therefore, to be taken that the non-      consideration of  the  returns  and  the      non-determination  of   the  losses   in      relation to the years 1952-53 to 1954-55      by the Income-tax Officer cannot be said      to stand  in the  way  of  the  assessee      getting the  relief under  section 24(1)      or section  24(2)  in  relation  to  the      assessment years 1960-61 and 1961-62. We      have  to,   therefore,  hold   that  the      Tribunal, in  this case,  while  dealing      with the  assessment for the years 1960-      61 and 1961-62 is justified in directing      the Income-tax  Officer to determine the      losses in  relation  to  the  assessment      years 1952-53 to 1954-55 for the purpose      of granting relief to the assessee under      section  24(1)   and  section  24(2)  in      relation  to  the  assessment  years  in      question.   The   third   question   is,      therefore, answered  in the  affirmative      and against the revenue".      The High  Court then  took up  Questions 2  and 4 which related to  the merits  of  the  claim,  viz.,  whether  the business carried  on during  the previous  year relating  to assessment year  1960-61 (and  1961-62) is  the same  as the business carried  on during  the earlier years including the previous years  relevant to  the aforesaid  three assessment years. The  High Court  agreed with the Tribunal that it was the same  business. Accordingly, the questions were answered in favour  of the  assessee and  against  the  Revenue.  The correctness of  the opinion  expressed by  the High Court is questioned in these appeals.      The  appeals   had  come  up  earlier  before  a  Bench comprising  one   of   us   (B.P.Jeevan   Reddy,   J.)   and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 17  

S.P.Bharucha, J.  The learned  counsel  for  the  respondent assessee placed  strong reliance  upon the  decision of this Court in  Commissioner  of  Income-tax,  Madhya  Pradesh  v. Khushal Chand  Daga (42  I.T.R.177) -  which was also relied upon by  the High  Court. On  a careful  perusal of the said judgment, however,  the Bench  found  some  difficulty  with respect to  the precise ratio of the judgment. The Bench was of the  opinion that  the matter requires consideration by a larger Bench  for the  reasons mentioned  in  its  order  of reference. The  matter was accordingly directed to be placed before the  Hon’ble Chief  Justice of  India for  placing it before a  larger Bench.  The appeals have now come up before this three-Judge  Bench. We  have heard the counsel for both the sides at some length.      Relevant  Provisions   of  the   1922   Act   and   the Corresponding Provisions of the Present Act:      Sub-section (1)  of Section 22 of the 1922 Act provided that before  the 1st day of May in each year, the Income Tax Officer shall  give notice,  by publication in the press and by publication  in the  prescribed manner,  requiring  every person whose  total income during the previous year exceeded the taxable  limit to  furnish within sixty days a return in the prescribed  form, verified  in the prescribed manner and containing  the   requisite   particulars.   There   is   no corresponding provision  in the present Act. Sub-section (2) of Section  22 provided that in the case of any person whose total income  is, in  the opinion of the Income Tax Officer, such as  to render  such person  liable to  income tax,  the Income Tax Officer may serve a notice upon him requiring him to furnish within the prescribed period, not being less than thirty days,  a return in the prescribed form containing the requisite particulars.  The corresponding  provision in  the 1961 Act is sub-section (2) of Section 139. Both the old and the new  provisions empower the Income Tax Officer to extend the period  for filing  the return  on  proper  cause  being shown. Sub-section  (2A) of Section 22 provided that where a person claimed  to have  suffered losses  and to  carry them forward under sub-section (2) of Section 24, he must furnish his return  within the  time specified in the general notice issued under  Section 22(1)  or within  such further time as the Income  Tax Officer  may allow  in any case. It would be appropriate to set out the sub-section in its entirety:      "22(2A). If any person, who has not been      served with  a notice  under sub-section      (2) has  sustained a  loss of profits or      gains  in   any  year   under  the  head      ‘Profits   and    gains   of   business,      profession or  vocation’, and  such loss      or any  part  thereof  would  ordinarily      have been  carried  forward  under  sub-      section (2)  of section 24, he shall, if      he is  to be  entitled to the benefit of      the  carry   forward  of   loss  in  any      subsequent  assessment,  furnish  within      the time specified in the general notice      given under  sub-section (1)  or  within      such  further  time  as  the  Income-tax      Officer in  any case  may allow, all the      particulars    required     under    the      prescribed  form   of  return  of  total      income and  total world  income  in  the      same manner as he would have furnished a      return under  sub-section  (1)  had  his      income exceeded  the maximum  amount not      liable to  income-tax in  his case,  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 17  

    all the  provisions of  this  Act  shall      apply as  if it were a return under sub-      section (1)."      The corresponding  provisions in  the present  Act  are Section 139(3) and Section 80.      Sub-section (3) of Section 23 dealt with assessment. It provided that  on the  day specified  in the  notice  issued under section  23(2) or  on any  subsequent date, the Income Tax Officer  shall, after  hearing the  evidence produced by the assessee,  pass an  order in writing assessing the total income of the assessee and also determine the amount payable by  him  as  tax  on  the  basis  of  such  assessment.  The corresponding provision  in the  present Act  is sub-section (3)  of   Section  143.   Section  143(3),  however,  speaks specifically of  determining not  only  the  income  of  the assessee but also the loss-and as would be emphasised later, this  is   a  very  relevant  distinction  between  the  two provisions.      Section  24   of  the  1922  Act  contained  provisions relating to  set-off of  losses in  computing the  aggregate income. The  main limb  of  sub-section  (1)  provided  that "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".  The corresponding  provision in the present Act is Section 71.      Clause (ii)  of sub-section (2) of Section 24 contained a limitation upon the right of the assessee to carry forward the losses.  The limitation  was that  the losses  could  be carried forward  and set-off  only if  the same business was continued in  the subsequent year as well. The corresponding provision in  the present  Act is  clause (i) of sub-section (1) of Section 72.      Sub-section (3)  of Section  24 provided  that "when in the course  of the  assessment of  the total  income of  any assessee, it  is established 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 assessee by order in writing the amount of the loss as  computed by  him for the purposes of this section". (emphasis added).  This provision is of crucial relevance to the question at issue herein. The corresponding provision in the present Act is Section 157.      [When we  referred to  the "corresponding provision" in the present Act, we meant only a broad correspondence.]      Contentions of the Parties:      The submission  of the learned counsel for the assessee in the appeals before us is that inasmuch as the requirement of Section  24(3) has  not been  complied with in respect of the aforesaid  three earlier  assessment years  (1952-53  to 1954-55),  the   assessee  is   entitled  to  claim  in  the assessment proceedings relating to the assessment year 1960- 61 (and  1961-62) that the loss sustained during those three earlier assessment  years  be  determined  now,  be  carried forward and  set-off against  the profits arising during the previous year relating to assessment year 1960-61 (and 1961- 62). It  is further  submitted that  the intimation given by the Income  Tax Officer  that no  cognizance can be taken of the returns of the said three assessment years on the ground that they  were filed  beyond the  period  stipulated  under Section 22(1)  and Section  22(2A) is  neither an  order  of assessment nor an order within the meaning of Section 24(3). For this  reason also,  the assessee is entitled to have the losses for  the said  three assessment  years determined and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 17  

carried forward  to be  set-off against  the profits  of the subsequent assessment  years 1960-61  (and 1961-62).  Strong reliance in  support of the above proposition is placed upon the  decisions   of  this   Court  in  Khushal  Chand  Daga, Commissioner of Income-tax, Punjab v. Kullu Valley Transport Company  Private   Limited  [1970   (77)  I.T.R.   518]  and Commissioner of  Income Tax,  Uttar Pradesh  v. Manmohan Das (59 I.T.R. 699).      On the  other  hand,  the  contention  of  the  learned counsel for the Revenue is that the intimation of the Income Tax Officer  that no  cognizance can be taken of the returns filed by the assessee with respect to the said three earlier assessment years was an order which could have been appealed against by  the assessee,  if  he  so  choose.  (In  such  a situation, the  question of intimation of the amount of loss determined under  Section 24(3)  could not have arisen, says the counsel.)  Since the assessee failed to prefer an appeal against the  said intimation,  his right  to have the losses determined for  those years stood negatived. In such a case, he cannot  re-agitate or  seek  to  re-open  the  very  same question  in   the  assessment   proceedings   relating   to subsequent assessment  year(s) inasmuch  as each  assessment year is  a separate  unit under the Income Tax Act. Reliance is placed upon certain decisions of this Court in support of the  said  proposition  to  which  we  shall  refer  at  the appropriate stage.      A few clarification by way of clearing the ground:      The first  feature to be noted in this case is that the assessee did  not choose  to  file  an  appeal  against  the intimation given by the Income Tax Officer that he would not take cognizance  of the  returns filed  for  the  assessment years 1952-53  to 1954-55 on the ground that they were filed beyond the  period  prescribed  by  law.  Had  the  assessee preferred appeal(s)  against that  intimation, the  majority decision of  this Court  in Kulu  Valley  Transport  Company Private Limited  could probably  have come  to  its  rescue. Indeed, the  facts of  that case are more or less similar to the facts  of this case, with the crucial difference that in that case  the assessee  preferred appeals against a similar intimation and  it is  in those proceedings that it was held by this  Court ultimately,  by a  majority, that  under  the provisions of  the 1922  Act, a  return of loss filed before making the  assessment is a valid return and that Income Tax Officer is  obliged to  determine the  loss on  the basis of such return.      Strong reliance  is placed  by the  learned counsel for the assessee  upon the  decision of  this Court  in Manmohan Das. In  our opinion,  however, the  principle of  the  said decision is  of no  relevance to the facts and circumstances of this  case. The  main question  considered  in  the  said decision was  whether income  received by the assessee under the agreement  dated January  2,  1931  (whereunder  he  was appointed as  the  Treasurer  of  the  Allahabad  Bank)  was business income assessable under Section 10 or salary income under Section 7 or income from sources under Section 12. The Income Tax  Officer and the Appellate Assistant Commissioner held that it was not business income while the Tribunal held that it  was business  income. The other question concerning Section 24  arose in  the following  circumstances: for  the assessment year  1950-51, though the assessee suffered a net loss of  Rs.38,027.00, the  Income Tax Officer declared that "the loss computed in that year could not be carried forward to the  next year  under Section 24(2) of the Income Tax Act as it  was not  a business  loss". (This was consistent with his holding  that the  income of the assessee accruing under

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 17  

the said  agreement, whereunder  the loss  was incurred, was not business  income). The  Tribunal, however, held that the income accruing  under the  said agreement  (whereunder  the said loss  was incurred) was business income and accordingly allowed the  loss to  be carried forward and set-off against the income of the succeeding year. The matter was carried to this Court  mainly on  the question  as to the nature of the income. The  entire discussion  in the decision pertained to the said  question. Before taking up the said main question, however, Shah,  J., (who delivered the opinion of the Court) took up  the other  question (concerning Section 24) more by way of  clearing the  ground  for  the  main  question.  The learned Judge observed:      "Whether the loss of profits or gains in      any year  may be  carried forward to the      following year  and set  off against the      profits and  gains of the same business,      profession  or  vocation  under  Section      24(2) has to be determined by the Income      tax   Officer   who   deals   with   the      assessment of the subsequent year. It is      for the  Income-Tax Officer dealing with      the assessment in the subsequent year to      determine  whether   the  loss   of  the      previous year may be set off against the      profits  of   that  year.   A   decision      recorded by  the Income-tax  Officer who      computes the  loss in  the previous year      under section 24(3) that the loss cannot      be set  off against  the income  of  the      subsequent year  is not  binding on  the      assessee."      The decision  thus  lays  down  that  it  was  not  the function  of   the  Income  Tax  Officer  while  making  the assessment to  decide or declare whether the loss determined by him  for that  assessment year can be carried forward and set off  against the  income of  the  future  year(s)  under Section 24(2)  of the  Act or  not. The question whether the loss determined for a previous year is to be carried forward and set off against the income of the succeeding year, it is held, is  a matter  to be  decided by the Income Tax Officer dealing with  the assessment relating to the subsequent year in which  year the  loss is sought to be set off by carrying it forward from the previous year. On that basis, it is held that the  declaration made  by the Income Tax Officer in the assessment order  relating to  the assessment  year  1950-51 that the  loss incurred  in  that  year  cannot  be  carried forward was  beyond his jurisdiction. Since this Court, held agreeing with  the Tribunal  and High Court, that the income arising under  the agreement  aforesaid was business income, it held  that the loss determined in the previous assessment year can  be carried forward and set off against the profits of the  succeeding/subsequent assessment  year under section 24(2) of  the Act.  It is  for this  reason, we say that the ratio or  the principle  of this decision has no application to the fact of this case.      MAIN ISSUE:      Now coming  to the  main contention  of  the  assessee, which is  based upon  the language  of Section 24(3) and the decision of  this Court  in Khushal  Chand Daga, it would be appropriate  to  first  ascertain  the  facts  of  the  said decision. The  decision of  this Court records that "learned counsel for the commissioner (commissioner was the appellant before this  court) stated  that the Department was not very anxious for  the decision,  because this particular assessee

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 17  

has had  only losses  in the  years following,  and no  loss would be  occasioned to  the Revenue,  if the losses brought forward be  re-determined". Though  this Court observed that it was  not really  concerned with  the said  aspect, yet it appears that  the lack  of  interest  on  the  part  of  the appellant led  to certain  errors in  stating  the  relevant facts.  With   a  view  to  ascertain  the  correct  factual position, we  turned to  the  decision  of  the  High  Court reported in  Seth Khushal  Chand  Daga  v.  Commissioner  of Income-tax, Madhya  Pradesh (31.  I.T.R. 417), a decision of the Nagpur  High Court. The report contains the statement of the case submitted by the Tribunal as well. The statement of the case shows that the questions referred to the High Court therein related  to two  different sets of assessment years. The first  set of  assessment years  is 1941-42 and 1942-43. The question  referred for  these assessment  years, at  the instance of the assessee, was to the following effect:      "Whether the  assessee was  competent in      law to  raise a  question with regard to      the  determination   of  loss   for  the      assessment  year   1941-42,  as  finally      determined in  appeal, in  the course of      proceedings  for   the  assessment  year      1942-43 when  the loss  brought  forward      from 1941-42 was being set off?"      The other set of assessment years concerned in the said case is  1948-49 and 1949-50. In respect of these assessment years, the  following two  questions were  referred  at  the instance of the assessee, viz., "(1) Whether Section 12-B of the Indian  Income-tax Act of 1922 is ultra vires the Indian Legislature; and  (2)  whether  on  the  facts  and  in  the circumstances of  the case  the profit  of Rs.16,400  on the sale of  the three  houses can  be said to be covered by the second proviso  to Section  12B(1) of  the Act."  For  these assessment  years,   (1948-49  and   1949-50),  yet  another question was referred at the instance of the Revenue, viz.,      "Whether  on   the  facts   and  in  the      circumstances of  the case, the Tribunal      was  right  in  holding  that  the  loss      suffered  by   the  assessee   from  his      personal business  (including his  share      of loss from another firm) cannot be set      off  under  Section  24(1)  against  his      taxed share  income from an unregistered      firm?". (The wording of the question suggests that it must have been referred at the instance of the assessee. Be that as it may, we go  by the  statement of  the case)  Thus, there were two questions involving  Section 24,  viz., one  relating to the first set of assessment years (1941-42 and 1942-43) referred at the instance of the assessee and the other concerning the second  set   of  assessment  years  (1948-49  and  1949-50) referred at  the instance  of Revenue.  The report  in  Seth Khushalchand Daga  (31 I.T.R.  417)  does  not  contain  the reasons for  which the question, referred at the instance of the Revenue,  relating to assessment years 1948-49 and 1949- 50 was  answered against  the Revenue. Para 10 of the report merely  says:   "As   regards   the   question   raised   in Miscellaneous Civil  Case No.98 of 1954 decided by us today, for the reasons stated therein we answer the question in the affirmative."   The report (decision), however, contains the reasons for  which  the  other  questions  referred  at  the instance of  the assessee  (one relating  to assessment year 1942-43 and  the other  two questions relating to assessment years 1948-49) were answered for or against the assessee, as

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 17  

the case  may be.  We must  refer to the same. So far as the question  relating  to  the  validity  of  Section  12B  was concerned, the  High Court  answered it against the assessee relying upon  the decision  of this  Court in  Naveenchandra Mafatlal v.  Commissioner of  Income-tax,  Bombay  City  (26 I.T.R.758). The  other question  regarding the applicability of the  second proviso  to Section 12-B(1) was also answered against the assessee in view of the finding of fact recorded by  the  Tribunal.  So  far  as  the  question  relating  to assessment  year   1942-43  is  concerned,  the  High  Court answered it  in favour  of  the  assessee  and  against  the Revenue.  (In  reality,  the  said  question  arose  in  the assessment proceedings  relating to assessment year 1942-43, though it involved consideration of the question relating to carrying forward  of  the  loss  incurred  in  the  previous assessment  year   1941-42).  The  facts  relevant  to  this question, as  stated  in  the  order  of  the  Tribunal  (as extracted in  the Statement  of the Case) are the following: "The assessee  was a  partner of an unregistered firm in the year of  account relevant  for the  assessment year 1941-42. His share  of profits  in that unregistered firm amounted to Rs1,75,256 according  to the assessment order. The assessee, it appears, had suffered a loss of more than Rs.2 1/2 lakhs. The Income-tax  Officer set  off  the  assessee’s  share  of profit in the unregistered firm against the loss of Rs.2 1/2 lakhs. Thus,  according to  the Income-tax Officer there was only a  loss of  Rs.53,840 to be carried forward to the next year." In  the assessment proceedings relating to assessment year 1942-43,  the assessee  raised a  contention  that  the figure of  loss  determined  in  the  previous  year  (viz., Rs.53,840.00) is  incorrect and that it should be much more. This contention  was rejected  by the Income Tax Officer and Appellate Assistant  Commissioner. The Tribunal too rejected it observing  that such  a contention  could only  have been raised in  the appeal  against the  assessment order for the assessment year  1941-42 and  that it could not be raised in the appeal  preferred against  the assessment order relating to the  subsequent assessment  year,  i.e.,  1942-43.  As  a matter of  fact, the  Tribunal found from the records before it that  the assessee  had preferred  an appeal  against the assessment order relating to the assessment year 1941-42 but he did  not take  up this  contention in  that  appeal.  The Tribunal accordingly refused to permit the assessee to raise the said  contention in  the assessment proceedings relating to the  subsequent year. The High Court, however, upheld the contention of  the assessee on a reasoning, which may be set out in full in its own words:      "The  first   question  raised   by  the      assessee is  whether he  is entitled  to      raise a  question  with  regard  to  the      determination of loss for the assessment      year   1941-42    in   the   course   of      proceedings  for   the  assessment  year      1942-43 when  the loss  brought  forward      from  1941-42   was  being  set  off.  A      similar  question  arose  in  All  India      Groundnut Syndicate Ltd. v. Commissioner      of Income-tax [1954 (25) ITR 90] and was      answered as below:           "It is  then urged that inasmuch as           the loss  was not  computed in  the           relevant year  of assessment, there           is no right left to the assessee in           the assessment  year 1948-49.  That           contention, again,  is based upon a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 17  

         misapprehension. The right to claim           a  relief  which  the  assessee  is           claiming only arose to the assessee           in the assessment year 1948-49 when           the assessee  had made  profits and           sought  to   set  off   the  losses           incurred during  the previous years           against the  profits. The fact that           the  Income-tax   Officer  has  not           computed the  loss of  the  earlier           years can  have no bearing upon the           right of  the assessee which arises           in  the   year  1948-49.  There  is           nothing to  prevent the  Income-tax           Officer from computing those losses           which   the   assessee   may   have           incurred earlier  and which  he has           failed to do.’           In that case the question was as to      the effect of the failure of the Income-      tax Officer  to notify  the loss  of the      previous years  as required  by  section      24(3) of the Act, but that does not make      any   difference    to   the   principle      enunciated above.  No question  arose in      the assessment year 1941-42 in this case      of computing  the amount  of  the  loss.      That question  arose in  the  assessment      year 1942-43.  Therefore, what  was done      in the  preceding year  does not  affect      the right  of the  assessee to  get  the      amount of  the loss  which was liable to      be carried  forward duly  determined  in      the    subsequent     proceedings.    We      accordingly answer  the question  in the      affirmative."  (Emphasis   supplied   to      indicate the  error in the reasoning. As      a matter of fact, loss was determined at      Rs.53,840/-    in     the     assessment      proceedings relating  to assessment year      1941-42.)      A  reading  of  the  above  paragraph  shows  that  the decision of  the High  Court was  mainly influenced  by  the decision of  the Bombay  High Court  in All  India Groundnut Syndicate Limited.  It  is  perhaps  on  the  basis  of  the observations in  the said  decision that the High Court held that "no  question arose  in the  assessment year 1941-42 in this case  of computing  the amount of loss (and that ) that question arose  in the assessment year 1942-43", though as a matter of fact there is a substantial difference between the material facts  of both  the cases. (The facts in the Bombay decision are referred to at a later stage of this judgment.) It is  on the  same basis, it appears, the Nagpur High Court made the  following further  observation: "what  was done in the preceding year does not affect the right of the assessee to get the amount of the loss which was liable to be carried forward duly  determined in the subsequent proceedings". The High Court  also took  note of  the fact that the Income Tax Officer had  failed to notify the loss for the previous year (assessment year  1941-42) as  required by  Section 24(3) of the Act  but it  observed at the same time that such failure does not  make any difference to the principle enunciated in All India Groundnut Syndicate Limited. We find the reasoning of the  High Court  rather involved  and difficult to follow but that need not detain us since we are concerned only with

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 17  

the ratio and the principle of the decision of this Court in appeal. We now turn to the decision of this Court.      The facts  as stated  in the first two paragraphs shows that this  Court was  led to assume that the question raised in the  assessment proceedings  relating to  assessment year 1942-43 was  again  raised  in  the  assessment  proceedings relating to  assessment years  1948-49 and  1949-50 which is not the  correct factual  position as  would be evident from the Statement  of the  Case contained  in Seth  Khushalchand Daga (31  I.T.R. 417).  The question  involving  Section  24 regarding the assessment years 1948-49 and 1949-50 was based upon altogether  different facts.  Be that  as it  may,  the relevant question  (relating to  1942-43 and involving 1941- 42) was dealt with and answered in the following words:      "As regards the first question, the only      contention  raised  was  that  the  loss      which had been determined and ordered to      be carried  forward must  be  deemed  to      have become final, because no appeal was      filed against that determination. But it      appears that  the procedure laid down by      Section 24(3) under which the Income-tax      officer has to notify to the assessee by      order in  writing the amount of the loss      as computed  by him  for the purposes of      that section was not followed. No doubt,      under section  30 an appeal lies, if the      assessee objects  to the  amount of loss      computed and  notified under section 24;      but inasmuch  as the  Income-tax Officer      had not  notified the  loss computed  by      him by order in writing, an appeal could      not be  taken  on  that  point.  In  our      opinion, the  assessee  was,  therefore,      entitled to  have the loss re-determined      in a  subsequent year.  Learned  counsel      for the  Commissioner  stated  that  the      Department was  not very anxious for the      decision,   because    this   particular      assessee had  had  only  losses  in  the      years following,  and no  loss would  be      occasioned to the revenue, if the losses      brought forward  be  re-determined.  But      that is  a matter, with which we are not      concerned. In  our opinon,  the judgment      of the High Court impugned before us was      correct  in  the  circumstances  of  the      case."                           (Emphasis supplied)      A reading  of the  above paragraph  shows that the only ground upon  which this  Court held  that the  assessee  was entitled to  claim in the assessment proceedings relating to the assessment  year 1942-43  that the  loss computed in the previous year be re-opened and re-determined for the purpose of being  carried forward and set-off against the profits of the assessment year 1942-43 is the failure of the Income Tax Officer to  notify by an order in writing the amount of loss computed by  him in the previous assessment year as required by Section  24(3) of  the Act. This Court also observed that because of  the failure  of the Income Tax Officer to notify the loss by an order in writing, an appeal could not also be taken on  that point.  (As a  matter  of  fact,  it  may  be reiterated, under the order of assessment made in respect of the assessment  year 1941-42,  the Income  Tax  Officer  had determined the  loss at  Rs.53,840.00 and  that the assessee

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 17  

had preferred an appeal against the said order of assessment though he  did not  choose to  urge therein  any ground with respect to  the correctness of the amount of loss determined by the Income Tax Officer.) In our opinion, the ratio of the said decision  must be  understood in the light of the legal position obtaining  under the 1922 Act. As pointed out by us hereinbefore, under  Section 23(3) of the Act the Income Tax Officer was  required to  "assess the  total income  of  the assessee and  determine the  sum payable by him on the basis of such assessment". The sub-section did not expressly speak of determining  the loss  as well as the amount of refund as is provided  by section  143(3) of the present Act; that was left  to   be  provided   by  Section  24(3).  It  would  be appropriate to set out sub-section (3) of Section 23 of 1992 Act and sub-section (3) of Section 143 of the present Act to bring out the contrast.      "Section 23(3).  On the day specified in      the notice issued under sub-section (2),      or as  soon afterwards  as may  be,  the      Income-tax Officer,  after hearing  such      evidence as  such person may produce and      such other  evidence as  the  Income-tax      Officer  may   require,   on   specified      points, shall,  by an  order in writing,      assess the total income of the assessee,      and determine  the sum payable by him on      the basis of such assessment."      "Section 143(3). On the day specified in      the notice issued under sub-section (2),      or as  soon afterwards  as may  be,  the      Income-tax Officer,  after hearing  such      evidence as the assessee may produce and      such other  evidence as  the  Income-tax      Officer may require on specified points,      and  after   taking  into   account  all      relevant material  which the  Income-tax      Officer has gathered, shall, by an order      in writing,  assess the  total income or      loss of  the assessee, and determine the      sum payable  by him or refundable to him      on the basis of such assessment."      It is  true that  an order of assessment would not only determine the  income but  also the  loss, even  so  Section 23(3) has  to be  read along  with Section 24(3) of the 1922 Act. So  read, it  would mean  that in  case of loss, it was mandatory upon  the Income-tax  Officer to  "notify  to  the assessee by  order in  writing the  amount of  the  loss  as computed by  him for  the purposes  of this  Section".  Sub- section (3)  of Section 24 must be construed to be mandatory in view of absence of words in sub-section (3) of Section 23 regarding the determination and intimation of loss. Inasmuch as in  Khushal Chand  Daga the  Income Tax Officer failed to notify to  the assessee  the loss  computed by  him (for the assessment year  1941-42), this Court said that the assessee could not  question the  amount of loss so determined by way of an  appeal. [Section  30 provided  an appeal  inter  alia against an  order computing the loss under Section 24, which means and  refers to  the order  in writing  contemplated by Section 24(3)].  It is  for this reason that this Court held in Khushal  Chand Daga  that the  computation of loss by the Income Tax Officer in the assessment proceedings relating to assessment year 1941-42 was not final and could be re-opened and  re-agitated   by  the   assessee  in   the   assessment proceedings relating  to  assessment  year  1942-43.  It  is obvious that  such a  plea would  not be available under the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 17  

present Act  inasmuch as  sub-section  (3)  of  Section  143 expressly provides  the determination  of not only the total income but  also the  loss. Because  of the language of sub- section (3) of Section 143 of the present Act, the provision contained in  Section 157  of the present Act (correspondent to Section  24(3) of  the 1922  Act) cannot  be deemed to be mandatory but  only directory.  In other words, the position under the  present Act  is that  even if  the intimation  in writing contemplated  by Section  157 is  not given  by  the assessee, Yet  the assessee  will not be entitled to raise a question similar  to the  one  raised  by  the  assessee  in Khushal Chand Daga because under the present Act he can, and should, raise  that question in the appeal preferred against the order  of assessment  since an order of assessment under the present  Act determines  not only the assessee’s income, if there is one, but also the loss, if there is one.      The question  then arises,  how far  does the  ratio of Khushal Chand  Daga help  the assessee  before us.  In  this case, the  Income Tax  Officer intimated  the assessee  that since the  loss returns filed for the assessment years 1952- 53 to  1954-55 were  filed beyond  the period  prescribed by law, he  would not  take cognizance  of the said returns. In other words,  he refused  to make  an assessment. True it is that this  stand of  Income Tax  Officer was wrong in law as held in  Kulu Valley  Transport; but that only means that he failed to do his duty by law, viz., refused to make an order of assessment  on the basis of such returns and to determine the loss.  Had he made an assessment and determined the loss then, he would have been obliged to intimate the assessee of the same  under and as required by Section 24(3). As against this, in Khushal Chand Daga, an assessment was duly made for the  previous   assessment  year  (1941-42)  and  loss  also computed but  the failure  of the  Income Tax Officer lay in not sending  an intimation  specifying the  amount  of  loss determined as  contemplated by  Section 24(3).  It was  held that such  failure to  intimate under Section 24(3) disabled the assessee from questioning the quantum of loss determined by way of an appeal. To put it in different words, while the failure in  Khushal Chand  Daga related  to the second stage (failure to  intimate the  amount of  loss determined),  the failure in  the case before us relates to the anterior stage (failure to  make an  assessment and determine the loss). In this context,  it is  essential  to  keep  the  language  of Section 24(3)  and Section  30(1)  in  mind.  Section  24(3) provided that  "when in  the course of the assessment of the total income  of any assessee, it is established 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 assessee by order in writing the  amount of  the loss  computed by  him  for  the purposes of this Section". Section 30(1), which provided for appeal against  the Income  Tax Officer’s  order  read  thus (insofar as  is relevant):  "any assessee  objecting to  the amount of  income assessed under section 23 or section 27 or the amount  of loss  computed under Section 24....may appeal to  the   Appellate  Assistant   Commissioner  against   the assessment or  against such refusal or order". Khushal Chand Daga seems  to say  that where such intimation is not given, the assessee  cannot question the quantum of loss determined by way of appeal and that such a plea cannot be urged in the appeal preferred  against  the  order  of  assessment.  This holding rendered  in the  light of  the language  of Section 24(3) and  Section 30(1) is diferrent from a refusal to make the assessment altogether as has happened in the case before us. To  repeat, the  failure in  this case  pertained to the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 17  

anterior stage  and could  have been  appealed against  as a "refusal" to make an assessment order under Section 30(1) as was done  in Kulu Valley Transport, whereas in Khushal Chand Daga, no  appeal could be preferred according to the holding in that  case  disputing  the  quantum  (‘amount’)  of  loss determined in  assessment proceedings  in the  absence of an intimation under  Section 24(3).  This  is  the  qualitative difference between  both cases  and hence  the principle  of Khushal Chand Daga has no application herein.      The learned  counsel for  the assessee  relied strongly upon the  decision of  the Bombay  High Court  in All  India Groundnut Syndicate  Limited referred  to and relied upon in Seth Khushalchand  Daga (31  I.T.R.417). In  this case,  the assessee filed  a return  of loss of three assessment years, but the  Income  Tax  Officer  treated  the  income  of  the assessee as  nil. Because  he took the income as nil and did not determine  any loss, obviously there was no occasion for notifying the loss to the assessee under and as contemplated by Section  24(3). In the next assessment year, the assessee made profits and claimed to set off the loss incurred during the earlier  three assessment  years against the profit made in the  subsequent assessment  year. The  Income Tax Officer disallowed the  claim on  the ground  that the  loss was not notified under  Section 24(3)  of  the  Act  for  the  three earlier assessment  years. When  the matter came to the High Court, it  was held that the Income Tax Officer was at fault in not determining the loss on the basis of the loss-returns filed by the assessee for the three previous years. The High Court observed:      "In this  case the assessee has actually      submitted his  return, that  return  has      not been  challenged or  disputed by the      Income-tax  Officer,   he  comes  to  no      conclusion on  that, he  does not give a      finding, he  does not  compute the loss.      All he  says  is  "income  nil".  It  is      difficult to  understand how,  when  the      Income-tax  Officer   does  not  give  a      finding and  does not  compute the  loss      made by the assessee, the computation of      the loss  by  the  assessee  has  become      appealable under  Section 30  of the Act      and no appeal having been preferred, the      computation  becomes  final.  Before  we      reach  this   stage,  there  must  be  a      computation. But  in this  case there is      no computation and no question therefore      of either  its finality or appealability      arises." Accordingly, it  was held  that the assessee was entitled to have the  losses in  the  three  previous  assessment  years determined, carried  forward and set off against the profits of the  later assessment  year in the assessment proceedings relating to  the later  assessment year. The learned counsel for the  Revenue disputes  the correctness of the view taken in this  decision. He says that the intimation of assessment of income  as ‘nil’  was an  appealable order  and that non- filing of  appeal against  it disentitled  the assessee from seeking to  reopen and  re-agitate the  said  issue  in  the course  of   assessment  proceedings   for  the   subsequent assessment  year.   He  points   out  that  in  Kulu  Valley Transport,  precisely   such  an   intimation  was  appealed against. Counsel  also relies  upon two  decisions  of  High Courts in  this behalf,  to which  a reference  would be  in order. The  first one  is the decision of the Madhya Pradesh

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 17  

High Court  in Jaikishan Gopikishan and Sons v. Commissioner of Income-tax  Madhya Pradesh (84 I.T.R. 645). In this case, the  assessee  filed  a  return  of  loss  beyond  the  time prescribed under the notification issued under Section 22(1) of the  1922 Act.  The Income Tax Officer simply ‘filed’ the return on  the ground that it was filed beyond the time. The High Court  held, following  the decision  of this  Court in Kulu Valley  Transport,  that  in  such  a  case  the  order ‘filing’ the  return should  be treated as an order by which the Officer  has determined  the loss  as nil  and therefore appealable under  Section 30  of the Act. The other decision is that of Patna High Court in Bihar State Electricity Board v. Commissioner  of Income-tax,  Bihar (101 I.T.R.740). This was also  a case  where the  returns were  filed beyond  the period prescribed  by the  1922 Act as well as the 1961 Act. The Income Tax Officer intimated the assessee that since the returns were  filed beyond  the prescribed period, no action was being  taken by  him thereon and that the loss for those years would not be carried forward for being set off against the income  of the  subsequent years. Following the decision of this  Court in Kulu Valley Transport, the High Court held that the  intimation of  the Income Tax Officer must be held to be  an order  computing the  loss as  nil and,  therefore appealable.      It is  enough for  us to  say that we do not accept the reasoning of  the  Bombay  High  Court  in  full.  The  true position has already been indicated by us hereinbefore while indicating the  distinction between  the facts  and ratio of Khushal Chand  Daga and  the case before us. The intimations of the  nature concerned  in the said three decisions of the High Courts,  as also  the intimation  concerned in the case before us,  should be  understood and construed as a refusal to make  an assessment  and to  compute the  loss, which  is appealable under  Section 30 of the 1922 Act as rightly held by  the   Madhya  Pradesh   and  Patna  High  Courts,  which necessarily  means   that  if  not  appealed  against,  that question cannot be re-agitated in the assessment proceedings relating to  a  subsequent  assessment  year.  Moreover,  as eludicated hereinabove,  refusal to  make an  assessment  is wholly different  and distinct  from the failure to intimate the ‘amount’  of loss  determined  as  required  by  Section 24(3). They  are two  different  things  and  two  different stages. The  stage of  intimation of  quantum of  loss under Section 24(3)  arises only  after making an assessment under Section 23(3)  and after  detemining the loss. Now, a return showing loss  need not  be accepted implicity. On making the assessment, the Income Tax Officer may find that it is not a case of  loss but  one of profits or he may agree that there is loss.  The amount of loss is also a matter of assessment. In other  words, an  assessment is necessary for determining the  loss.   Only  after   such  determination,   could  the intimation contemplated by Section 24(3) be given specifying the amount of loss. Without an assessment being made, no one can assume  that the  return showing  loss is  correct  one. Where the  Income Tax  Officer refused to make an assessment and determine the loss on the ground that returns were filed beyond the  prescribed  period,  the  assessee  must  appeal against such  intimation and  have the  Income  Tax  Officer compelled to make an assessment.      We must  reiterate that  the controversy  of the  above nature cannot arise under the present Act. Under the present Act,  Section  143(3)  requires  the  Assessing  Officer  to determine not  only the  profits/income taxable  but also to determine the  loss, if  there is  one. In  this view of the matter, Section  157 of  the present  Act [corresponding  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 17  

Section 24(3)] loses its significance. It must be understood as merely  directory. Under the present Act, the assessee is entitled to  and  ought  to  question  the  amount  of  loss determined in  the appeal  preferred against  the assessment order  itself.  He  need  not  wait  till  he  receives  the intimation  under  Section  157.  Nor  does  he  suffer  any disability  on   account  of   not  appealing  against  such intimation, if  he has  already preferred  an appeal against the order of assessment. In this connection, the language of clause (a) of sub-section (1) of Section 246 of the 1961 Act is worth noting. It provides an appeal against "any order of assessment under  sub-section (3)  of Section 143 or Section 144 where  the assessee  objects to  the  amount  of  income assessed, or  to the  amount of  tax determined,  or to  the amount of  loss computed...".  Section 246  does not provide for an  appeal against  the intimation  under Section 157 of the Act.  For that  matter, none  of the  provisions in  the present Act corresponding to the provisions in Section 24 of the 1922  Act find  a mention in Section 246. It can even be said that  an intimation  by the Income Tax Officer refusing to take  cognizance of  return -  or a  similar intimation - implying his refusal to make an assessment and determine the loss is  "an order  against the assessee" within the meaning of clause  (1) of  sub-section (1)  of Section  246  of  the present Act and is appealable as such.      For the  reasons recorded  hereinabove, the appeals are alowed, the  judgment of  the High  Court is  set aside  and Question  No.2  of  the  three  questions  set  out  at  the inception of  the judgment  is answered  in  favour  of  the Revenue and  against the assessee. So far as Questions 3 and 4 are  concerned, the  opinion expressed  by the  High Court therein has not been questioned before us and is accordingly affirmed. We  hold that the assessee having failed to appeal against the intimation of the Income Tax Officer refusing to take cognizance  of loss  returns filed  by the assessee for the assessment years 1952-53 to 1954-55, cannot claim in the assessment proceedings relating to subsequent years that the loss in  the said earlier assessment years (1952-53 to 1954- 55) be  determined, carried  forward and set off against the profits of the subsequent year or years, as the case may be.