Decided on January 04,1963

P.C. RAY AND CO. (INDIA) LTD. Respondents


P. B. MUKHARJI, J. - (1.): This is a reference under s. 66(1) of the IT Act by the CIT. The questions we are asked to answer is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the allocation of the loss suffered by the assessee is not material for the purpose of the assessment for the asst. yr. 1950-51 ?"

(2.)THE assessee is M/s P. C. Ray and Co. (India) Ltd., 4, Lyons Range, Calcutta. THE company was trading in timber, jute goods, salts, onions and various other commodities, and they have also been speculating in jute. THE ITO determined the business loss for the asst. yr. 1950-51 at Rs. 4,11,771 and made the remark ''this includes loss from speculation amounting to Rs. 2,71,741 and loss from business, Rs. 1,40,030''. This particular remark has created all the storm and controversy in this reference. THE assessee objected to this remark of the ITO and appealed to the AAC against the ITO's remarks splitting up of the loss as aforesaid. THE main point of the assessee's objection before the AAC was that, if the loss came to be classified in the way it was done by the ITO, the company might lose the benefit of carrying forward and setting off of the losses against the income that might be earned in future years. THE company was trading in jute and hedging transactions were incidental and commonplace to the jute trade. THE transactions were so closely interconnected and dovetailed that no line of demarcation could be drawn differentiating between regular trade and speculation. THE AAC noticed that the losses in 1949-50 and 1951-52 had been given at a consolidated figure and no reason was given why a differential treatment should be made in the asst. yr. 1950-51. What the AAC did was to confirm the figure of business loss as determined by the order of the ITO. But he held ''. . . there was no justification for him to classify the loss as between speculation and regular trade and, to this extent, the appeal is allowed.''
Against that order the ITO appealed to the Tribunal. The Tribunal came to the finding that the order of the AAC was contradictory and that the allocation of the loss was not very material for the purpose of the particular year's assessment. The Tribunal proceeded to observe :

". . . .It might be necessary in the succeeding year or years and the matter be considered at the stage of assessments of those subsequent years. We therefore direct that it will be open to the ITO to decide whether there were two separate businesses and the loss arose in the two separate businesses and it will also be open to the assessee to contend that the business was the same or not. The observation of either the ITO or the AAC will not hold for the assessments of the succeeding years. The appeal is allowed for the sake of statistics."

This Court cannot help saying that the order of the Tribunal is an example of splendid confusion. This Court has not come across the expression "that an appeal is allowed for the sake of statistics". It is difficult to follow what that means in law or in fact. Reading the observations quoted above the Tribunal's order seems to be innocuous and harmless, the suggestion being there that all the the points were kept open for either the assessee or the taxing authorities to contend for their respective points in the assessment of subsequent years when profits might accrue against which setting off of the loss would arise.

(3.)ON a closer scrutiny of these observations and this particular order of the Tribunal, this Court is satisfied that it conceals a confusion and it was not correct for the Tribunal to say that the allocation of the loss was not very material for the purpose of the particular years of assessment which the ITO did. No doubt it is not material in the sense that nothing happens in this particular year of assessment and it is only when in a subsequent year profits may arise that this question of setting off this loss against that profit would arise. From that point of view the subsequent years' assessment would be material. But that is not the whole of the picture. What is to be set off is the loss of this assessment year. Unless therefore this loss of this assessment year is quantified, the sum that has to be set off remains indeterminate. To determine such loss later on in subsequent years, say, 2, 3, 4 or 5 years hence, might not only be difficult but may also be impossible having regard to the loss of evidence in the meantime on the point of loss.
The law on this point is contained in s. 24 of the IT Act, whose sub-s. (1) says : "Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in s. 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." So far as that sub-section is concerned, it is only that particular year which is mentioned. But what is relevant for the purposes of this reference is the older sub-s. (2) of s. 24 as it existed prior to the amendment made by the Finance Act, 1955, and that provision, so far as relevant for the purposes of this reference, is as follows : "Where any assessee sustains a loss. . . . in any business, profession or vocation, and the loss cannot be wholly set off under sub-s. (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it 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." It follows therefore that this loss can be carried forward under s. 24, sub-s. (2), as it existed before the amendment. Now the question is that if the loss can be carried forward, then when and how is the loss to be determined. Here sub-s. (3) of s. 24 of the IT Act provides the answer and it is in these terms : "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 ITO shall notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of this section." Now this statutory provision gives an assessee a right of set off and casts an obligation upon the ITO to notify to the assessee by an order in writing the amount of loss computed by him for the purposes of this section. It appears that, when after setting off a loss under one head against the profits of another head the computation of the total loss of the assessee discloses a loss which the assessee is entitled to carry forward, it is the obligation and duty of the ITO under this sub-section to notify to the assessee by an order in writing the amount of such loss. The obvious object of such a provision is to avoid any dispute in future regarding the quantum of the loss. The order contemplated by this sub-s. (3) of s. 24 can be passed in the course of the assessment of the total income of any assessee. If at the time of making the assessment, the ITO does not make an order under this sub-section notifying the loss, then the question arises whether it defeats the assessee's right to carry forward the loss and set it off against the profits of subsequent years. The matter came up in All India Groundnut Syndicate Ltd. vs. CIT (1954) 25 ITR 90 (Bom), where Chagla C.J. and Tendolkar J. held that this right of the assessee to carry forward the loss of previous years for a period of six years was an absolute and unqualified right and it was not made conditional upon any computation made by the ITO or any notice issued by him under s. 24(3) of the IT Act. But the position, however, has changed since the decision by the introduction of sub-s. (2A) of s. 22 of the IT (Amendment) Act, 1953, whereby an assessee is prevented to carry forward a loss unless he has filed a return in response to a special notice under s. 22(2) or voluntarily under s. 22(2A) of the IT Act.

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