Case: Commissioner Of Income Tax (Central) Delhi Vs. Harprasad &amp; Co. (P) Ltd

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 C. J. In re Kamdar, (1946) 14 ITR 10 at p. 21 = (AIR 1945 Bom 442 at p. 445) "forms 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.19. 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 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 sub-section (1) of Section 22 or voluntarily, without any individual notice under sub-section (2) of that section. 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 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 case, 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 assessees claim to carry forward the loss merely on the ground that it was not a "revenue loss." His further finding that it was a "capital loss" was only incidental and, in fact, was not necessary.20.From what has been said above it follows as a necessary corollary that during the period S. 12B did not make income under the head 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 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 subsection are lacking in the present case.21. Nor do we find any substance in the contention that under sub-section (2) read with sub-section (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-taxability of capital gains, against future profits, if 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.22. 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 non-taxable 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.23. Now let us test the claim of the assessee in the light of the above principles. The "capital loss" of Rs.28,662/- in the present case, was sustained in September l953 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 in 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.24. 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 1957.25. 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]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 minusm what has been said above it follows as a necessary corollary that during the period S. 12B did not make income under the head 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 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 subsection are lacking in the present case.21. Nor do we find any substance in the contention that under sub-section (2) read with sub-section (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-taxability of capital gains, against future profits, if 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.22. 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 non-taxable 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.23. Now let us test the claim of the assessee in the light of the above principles. The "capital loss" of Rs.28,662/- in the present case, was sustained in September l953 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 in 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.24. 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 1957.25. 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.