Appeal No 494 of 1970
From the judgment and order dated the 24th January 1969 of the Delhi High Court in Income Tax Ref
No 51 of 1966
V C Desai J Ramamurthy and R N Sachthey for the appellant
K Sen and H K Puri for the respondent
The Judgment of the Court was delivered by SARKARIA J
This appeal is directed against the Judgment dated 24 1 1969 of the High Court of Delhi answering in the affirmative the following question referred to it under section 661 of the Indian Income tax Act 1922 for short the Act by the Commissioner of Income tax 
Whether on the facts and in the circumstances of the case the capital loss of Rs 28662 could be determined and carried forward in accordance with the provisions of Section 24 of the Indian Income tax Act 1922 when the provisions of section 12B of the Income tax Act 1922 itself were not applicable in the assessment year 1955 56
 The assessee respondent is a Private Limited Company
The assessment year under reference is 1955 56 and the relevant previous year is from 1 5 1953 to 30 4 1954
On 10 1 1952 the assessee pur 698 chased 1124 shares of Ms Intercontinent Travancore Pvt Ltd at a cost of Rs 112400 from Ms Escorts AM Ltd In the relevant accounting year ending on 30 4 195 3 the assessee received 562 bonus shares from the same company
It thus acquired a total number of 1686 shares
On 3 9 53 ie during the relevant previous year the assessee sold all these 1686 shares to Ms Escorts Agents Ltd for Rs 84300 and claimed a loss of Rs 84862 in the income tax return filed by it
The Income tax Officer disallowed the entire loss of Rs 84862 on the ground that it was a loss of a capital nature
The assessee carried an appeal to the Appellate Assistant Commissioner and contended that this loss of Rs 84862 was a revenue loss arising out of dealing in shares
The Appellate Assistant Commissioner found that the assessee s claim was exaggerated and that the actual lose was to the tune of Rs 28662 only
He further held that this loss of Rs 28662 was not a revenue loss but a capital loss  arising out of change of investments
Against the decision of the Appellate Assistant Commissioner the assessee preferred an appeal before the Tribunal challenging the findings of the Commissioner both in regard to the amount of loss and its nature
At the stage of arguments before the Tribunal the assessee s Counsel did not press these grounds of appeal but took up the plea that the amount of Rs 28662 which had been held to be a capital loss by the authorities below should be allowed to be carried forward and set off against profits and gains if any under the head capital gains earned in future as laid down in sub sections 2A  2B of section 24 of the Act
Despite objection from the Departmental Representative the Tribunal allowed this new ground to be raised with the observation that It was a pure question of law and did not require investigation of any fresh fact 
It further accepted the contention of the assessee and directed that the capital loss of Rs 28662 should be carried forward and set off against capital gains if any in future
At the instance of the Commissioner of Income tax the Tribunal referred the above question set out at the commencement of this judgment to the High Court under section 661 of the 1922 Act
It was contended before the High Court on behalf of the Revenue that the expression capital gains in sub section 2A of section 24 has reference only to section 12B so that the loss suffered in the year in which the profits under the head capital gains were not taxable could not fall within sub section 2A of section 24 section K Kapoor J speaking for the Division Bench rejected this contention in these terms  This argument overlooks the fact that the head of income chargeable to income tax are set out in section 6 Section 12 B deals only with the computation of capital gains and with their taxability if they arise during a particular period
As a matter of fact section 12B itself refers to section 6 inasmuch as it says that the tax shall be payable by an assessee under the bead capital gains
This obviously has reference to the VIth head in section 6
The effect of 699 sub section 2A and 2B of section 24 read with section 6 and 12B therefore is that if a capital loss is incurred in a year in which a capital gain did not attract tax under section 12B such loss would still be loss under the head capital gains and if in subsequent year the assessee has any profit under that head it can still be carried forward and set off against the taxable capital gain
The Tribunal was in my opinion right in coming to the conclusion that it did
 Hence this appeal by the Commissioner of Income tax Central Delhi
Capital Gains Tax for the first time was introduced by the Income tax and Excess Profit Tax Amendment Act 1947 No 22 of 1947 which inserted section 12B in the Act
This section made taxable capital gains which arose after March 31 1946 The same Act of 1947 added as the VIth head capital gains in section 6 of the Act
It also inserted sub sections 2A and 2B in section 24 of the Act
The Indian Finance Act 1949 virtually abolished the levy and restricted the operation of section 12B to capital gains arising before the  1st April 1948
But section 12B in its restricted form and the VIth head capital gains  in section 6 and sub sections 2A and 2B of section 24 were not deleted and continued to form part of the Act
The Finance No reintroduced the capital gains  tax with effect from the 31st March 1956
It substantially altered the old section 12B and brought it into its present form
As a result of Finance Act 3 of 1956 capital gains again became taxable in the assessment year 1957 58
The position that emerges is that capital gains arising between 1 4 1948 and 31 3 1956 were not taxable
The capital loss in question relates to this period
Mr V section Desai learned Counsel for the appellant contends that according to the scheme of the Act a capital loss occurring in a previous year could be allowed to be carried forward and set off against the capital gains of a subsequent year only if the income under that head was taxable in the relevant previous and subsequent years
Since during the period from 1 4 1948 to 31 3 1956 capital gains plus or capital gains minus did not enter into computation of the total income of the assessee chargeable to tax under section 3 read with section 12B of the Act the question of carrying forward inch loss did not arise much less could such a loss be set off against the profits of any subsequent year
As against this Shri Ashok Sen learned Counsel for the assessee maintains that a right to carry forward a loss under any of the heads enumerated in section 6 is not dependent upon the taxability of income under that head it is sufficient if at the relevant time capital gains is one of the heads of income recognized by the charging section 6 and the loss is adjustable against capital gains if any in future under section 24
The argument proceeds that section 6vi was not lying inert on the statute book but was operative throughout for the purpose of calculating the losses under that head
Shri Sen compared the non taxability of 700 capital gains during the period from 1 4 1948 to 31 3 1956 to a tax holiday for those years
Another illustration given by the learned Counsel is of a person whose total income falls entirely on the negative side on account of losses suffered by him under any of the heads of income given in section 6
Such a person notwithstanding the fact that he had no assessable income has a right to file a return and get his losses computed by the Income tax Officer merely for the purpose of carrying forward the loss
The Income tax Officer it is added cannot ignore the return filed by the assessee voluntarily showing losses even though such a return is filed beyond time
In this connection Shri Sen has referred to Commissioner of Income tax Punjab vs Kulu Valley Transport Co Ltd 1 Jaikishan Gopikishan and Sons vs Commissioner of Income tax MP 2 and Commissioner of Income tax Madhya Pradesh vs Khushat Chand Daga3
Before dealing with the contentions canvassed it will be appropriate to have a clear idea of the terms income  total income  computation of total income  carrying forward  of a loss and its purpose in the context of the scheme of the Act
Section 2 Cl
15 defines total income to mean total amount of income profits and gains referred to in sub section 1 of section 4 computed in the manner laid down in this Act
Section 3 captioned as Charge of Income tax emphasises that the income tax shall be charged in respect of the total income of the previous year of every assessee
Section 4 defines the ambit of that total income
Section 6 enumerates six heads of income profits and gains chargeable to income ax
They are   i Salaries
ii Interest on securities
iii Income from property
ivProfits and gains of business profession or vocation
v Income from other sources
vi Capital gains
 Sections7 8 9 10 12 and 12B relate to payability and computation of taxunder the various heads of income
The material part of section 12B at the relevant time was as follows 12B 1 The tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale exchange or transfer of a capital asset effected after the 31st day of March 1946 and before the 1st day of April 1948 and such profits and gains shall be deemed to be income of the previous year in which the sale exchange or transfer took place
 1 7 3 2 701 Section 221 requires a general notice to be published requiring every person whose total income during the previous year exceeds the maximum non taxable limit to Me a return
Sub section 2 of this section enables the Income tax Officer to issue notice to any such person requiring him to furnish a return
Sub section 2A which was inserted by the Income tax Amendment Act 25 of 1953 with effect from 1 4 1952 provides 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 assssment furnish within the time specified in the general notice given under sub section
1 all the particulars required under the prescribed form of return
 The material part of section 24 runs thus  241 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      Provided that in computing the profits and gains chargeable under the head Profits and Gains of business profession or vocation any loss sustained in speculative transaction which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains if any in any other business consisting of speculative transactions      2 Where any assessee sustains a loss of profits or gains in any year being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940 in any business profession or vocation and the loss cannot be wholly set off under sub section 1 so much of the loss as is not so set off or the whole loss where the assessee bad no other head of income shall be carried forward to the following year and i where the loss was sustained by him in a business consisting of speculative transactions it shall be set off only against the profits and gains if any of any business in speculative transaction carried on by him in that year ii where the loss was sustained by him in any other business profession or vocation it shall be set off against the profits and gains if any of any business profession or vocation carried on by him in that year pro 702 vided that the business profession or vocation in which the loss was originally sustained continued to be carried on by him in that year and iii if the loss in either case cannot be wholly so set off the amount of loss not so set off shall be carried forward to the following year and so on       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 failing under that head
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 forward 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 such loss shall be so carried forward for more than six years  Provided that where the loss sustained in any previous year does not exceed fifteen thousand rupees it shall not be carried forward
3 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
 Section 26C provides that income  includes among other things vi any capital gain chargeable under Section 128
 From the charging provisions of the Act it is discernible that the words income  or Profits and gains  should be understood as including losses also so that in one sense profits and gains  represent plus income  whereas losses represent minus income 1
In other words loss is negative profit
Both positive and negative profits are of a revenue character
Both must enter into computation wherever it becomes material in the game mode of the taxable income of the assessee
Although section 6 classifies income under six heads the main charging provision is section 3 which levies income tax as only one tax on the total income  of the assessee as defined in section 215
An income in order to come within the purview of that definition must satisfy two conditions
Firstly it must comprise the total amount of income 1 CIT vs Karamchand Prem Chand  CIT V Elphinston Spinning  Weaving Mills 703 profits and gains referred to in s 41
 Secondly it must be computed in the manner laid down in die Act
If either of these conditions fails the income will not be a part of the total income that can be brought to charge
Now capital gains would be covered by the definition of income  in sub section 6C of section 2 only if they were chargeable under section 12B
As noticed already s12B as modified by the Finance Act 1949 did not charge any capital gains  arising between 1 4 1948 to 14 1957
Indeed section 12B was not operative in these years 1948 57
During this period capital gains whether on the positive or the negative side could not be computed and charged under section 12B or any other provisions of the Act
In the instant case the second condition namely the manner of computation laid down in the Act which to use the words of Stone CJ1 f an integral part of the definition of total income  was not satisfied
Thus in the relevant previous year and the assessment year or even in the subsequent year capital gains or capital losses did not form part of the total income of the assessee which could be brought to charge and were therefore not required to be computed under the Act
Before the insertion of sub section 2A in section 22 by the amendment of 1 4 1952 an assessee was entitled to carry forward a loss even if he had submitted no return for the year in which the loss was sustained
After the enactment of sub section 2A it is a condition precent to the carry forward and set off of the loss that the assessee must file a return either in response to a general notice under sub section 1 of section 22 or voluntarily without any individual notice under sub section 2 of that section
If he does not Me the return for the year in which the loss was incurred and get the loss computed by the Income tax Officer the right to carry forward the loss will also be lost
But if the loss is from a source or head of income not liable to tax or congenitally exempt from income tax neither the assessee is required to show the same in the return nor is the Income tax Officer under any obligation to compute or assess it much less for the purpose of carry forward
It is noteworthy that in the instant ease the assessee in his return had not shown any capital losses
He had claimed this loss as a revenue loss
The Income tax Officer could therefore reject the assessee s claim to carry forward the loss merely on the ground that it was not a revenue loss
His further finding that it wag a capital loss was only incidental and in fact was not necessary
From what has been said above it follows as a necessary corollary that during the period section 12B did not make income under the he ad capital gains  chargeable an assessee was neither required to show income under that head in his return nor entitled to file a return showing capital losses merely for the purpose of getting the same computed and carried forward
Sub section 2A of section 22 would not give him such a right because the operation of that sub section is in terms confined to i a loss which is sustained under the head profits and gains of business profession or vocation and would ordinarily 1 In re Kamdar  21
704 have been carried forward under sub section 2 of section 24 and ii to income which falls within the definition of total income 
Both these conditions necessary for the application of the sub section are lacking in the present case
Nor do we find any substance in the contention that under sub section 2 read with subsection 1 of section 24 the assessee had an independent right to carry forward his capital loss even if it could not be set off owing to the non taxibility of capital gains against future profits it any in the immediate subsequent years
Sub section 2 of section 24 expressly refers to loss in any business profession or vocation 
It does not cover a Capital loss or the minus income under the head capital gains  which at the relevant time were not chargeable and did not enter into computation of the total income  of the assessee under the Act
It may be remembered that the concept of carry forward of loss does not stand in vacuo
It involves the notion of set off
Its sole purpose is to set off the loss against the profits of a subsequent year
It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains if any of the subsequent year
Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand
It follows that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a nontaxable source there would be no point in allowing the loss to be carried forward
Conversely if the loss arising in the previous year was under a head not chargeable to tax it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source
Now let us test the claim of the assessee in the light of the above principles
The capital loss of Rs 28662 in the present case was sustained in September 1953 that is in the previous year 1953 54
Let us assume that in the subsequent years 1955 56 and 1956 57 when the capital gains were not taxable he made huge capital gains far exceeding this loss could he be obliged to show those capital gains ill his return Could the loss of the year 1953 54 be absorbed or set off against such capital gains of the subsequent years The answer is emphatically in the negative
The cases cited by Shri Sen are not relevant
In all those cases the heads of income under which the losses were sustained were chargeable to tax
None of them was a case of capital loss  pertaining to the period 1948 to 1957
For the foregoing reasons we are of the opinion that the High Court was in error in answering the question referred to it in favour of the assessee
We would reverse that answer in favour of the Revenue
In the result the appeal is accepted with costs
Appeal allowed


Summary:
By the Income tax and Excess Profit Tax Amendment Act 1947 section 12B was inserted in the Indian Income tax Act 1922 making capital gains which arise after March 31 1946 taxable
The same Act inserted sub sections 2A and 2B in section 24 of the Income tax Act
As a result of the Indian Finance Act 1949 which restricted the operation of section 12B to capital gains arising before April 1 1948 and the Finance No 3 Act of 1956 which restored tax on capital gains with effect from April 1 1948 capital gains arising from 1 4 1949 to 31 3 1956 were not taxable
For the assessment year 1955 56 which relates to the period when capital gains were not taxable the assessee claimed a loss of Rs 84862 arising from the sale of certain shares
The Income tax Officer disallowed the loss on the ground that it was a loss of capital nature
The Appellate Assistant Commissioner in appeal held that the assessee s claim was exaggerated that the actual loss was only Rs 28662 and agreed with the Income tax Officer that the loss was not a revenue loss but a capital loss
Before the Tribunal the assessee contended that the amount of Rs 28662 which had been held to be a capital less by the authorities should be allowed to be carried forward and set off against profits and gains under the head Capital gains earned in future as laid down in section 242A and 2B
The Tribunal held in favour of the assessee
The High Court
in reference confirmed the order of the Tribunal holding that the effect of sub sections 2A and 2B of section 24 read with sections 6 and 12B was that if a capital loss was incurred in a year in which a capital gain did not attract tax under section 12B even then such loss would still be loss under the head capital gains  and if in a subsequent year the assessee had any profit under that head it would still be carried forward and set off against the taxable capital gain
Allowing the appeal to this Court HELD  1 From the charging provision of the Indian Income tax Act it is discernible that the words income  or profits and gains should be understood as including losses so that both must enter into computation wherever it becomes material of the taxable income of the assessee
Although section 6 classifies income under six heads the main charging provision is section 3 which levies income tax as only one tax on the total income  of the assessee as defined in section 215
An income in order to come within the purview of that definition must satisfy two conditions
a it must comprise the total amount of income profits and gains referred to in section 41 and b it must be computed in the manner laid down in the Act
If either of these conditions fails the income will not be a part of the total income that can be brought to charge
702F 703B 2The concept of carry forward of loss does not stand in vacuo
Its sole purposeis to set off the loss against the profits of a subsequent year
Set off impliesthat the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand
It follows that if such set off is not Permissible or possible owing to the income or profits of the subsequent year being from a non taxable source there would be no point in allowing the loss to be carried forward
Also if the loss arising in the previous year was under a head not chargeable to tax it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source
704C E 3 Capital gains would be covered by the definition of income in section 26C only if they were chargeable under s  12B
But section 12B was not operative in the years 1948 to 1956
Thus in the relevant previous year and the assessment year or even in he subsequent year capital gains  or capital losses  did not 697 form part of the total income of the assessee which could be brought to charge and were therefore not required to be computed under the Act
That is condition b which total income  must satisfy is not satisfied in the present case
703B D 4 Under section 222A it is a condition precedent to the carry forward and set off of the loss that the assessee must file a return either in response to a general notice under section 221 or voluntarily without any individual notice under subsection 2
If he does not file the return for the year in which the loss was incurred and get the loss computed by the Income tax Officer the right to carry forward the loss will also be lost
But if the loss is from a source or head of income not liable to tax or exempt from tax neither the assessee is required to show the same in the return nor is the Income tax Officer under any obligation to compute or assess it much less for the purpose of carry farward
703D F 5 In the instant case
the assessee in his return had not shown any capital loss  but claimed the loss as a revenue loss
The Income tax Officer should have rejected the assessee s claim to carry forward the loss merely on the ground that it was not a revenue loss and he need not have given a finding that it was a capital loss because capital gains were not taxable during the year
703F G 6 Section 242 expressly refers to loss in any business profession or vocation 
It does not cover a capital loss under the head capital gains  which at the relevant time were not chargeable and did not enter into computation of the total income of the assessee
Therefore under a 241 and 2 the assessee had no independent right to carry forward his capital loss even if it could not be set off owing to the non taxability of capital gains against future profits in the immediate subsequent years
704B C 7 Assuming therefore that the assessee in the subsequent years 1955 56 and 1956 57 when the capital gains were not taxable made huge capital gains he would not be obliged to show those capital gains in his return
Therefore the loss suffered by him in the relevant assessment year in the instant case could not be absorbed or set off against such capital gains
704F