# [1975] 3 S.C.R. 696

- **Citation:** [1975] 3 S.C.R. 696
- **Court:** Supreme Court of India
- **Decided:** 1975-02-25
- **Bench:** Y. V. Chandrachud, R. S. Sarkaria, A. C. Gupta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1975-3-s-c-r-696-6471
- **Pages:** 9

## Headnote

Income-tax Act (ll of 1922)
Sections 128, 22(2A), 24(2A) & (2B)-
B
Capital loss incurred in 1/te year when capital gains were not exigible to taxlf could be set against capital gains in subsequent years.
By the Income-tax and Excess Profit Tax (Amendment) Act, 1947 s. 12B
was inserted in the Indian Income-tax Act, 1922 .. making capital gains which
arise after March 31. 1946, taxable. The same A':t inserted sub-sections (2A)
and (2B) in s. 2.4 of the Income-tax Act.
As a result of the Indian Finance
Act, 1949 which restricted the operation of s. 12B to capital gains ari.sing
before April l, 1948, a.nd the Finance (No. 3) Act of 1956 which restored
C
tax on capital gains with effect from. April l, 1948 capital gains arisinll from
1-4-1948 to 31-3-1956 were not taxable.
For the assessment vear J 955-56 which relates to the period when ce.pital
gains were not taxable the assessee claimed a loss of Rs. 84,862/- arisini: from
the 5a\e of certain sharc:s.
The Income-tax Officer disallowed the loss on the
ground that it was a los.s of capital nature.
The Appellate Assistant Commissioner, .in appeal, held that the assessee's claim was exaggerated, that the. actual
.lo!! wa, only Rs. 28,662/- and agreed with the Income-tax Officer that the IO!s
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was not a revenue loss but a capital loss.
Before the Tribunal the assessee contended that the amount of Rs. 28,662/. which had been held to be a capital
IE>ss by the authorities ~ihould be allowed to be carried forward and set off
agairat profits and gains under the head "Capital gains" earned in future as laid
down in. s. 24(2A) and (2B).
The Tribunal held in favour of the ass(:ssee.
The High C0urt, in reference, confirmed the order of the Tribunal holding that
the effe:t of sub-section:; (2A) and (28) of s. 24 read with sections 6 and
12B was that if a capital loss was incurred in a Year in which a. c~pital gain
did not attract tax under section l 2B even then such loss would still be loss
£
under the head 'capital i~ains' 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 word5 '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 s. 6 classifies
F
income under six heads the main charging provision is s. 3 which levies incometax as only one tax on the 'total income' of the assessee a5 defined in s. 2(15).
An income in order to come within the purview of that definition must satisfy
two conditions, (a) it rnust comprise the 'total amount of income. profits. and
gains refeued to in s. 4(1), 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 tu charge. [702F-703BI
(2) The concept of ~arry forward of loss does not stand in vacuo.
Itf: sole
G
purpose is to set off the loss against the profits of a subsequent year.
Set off
implies that the tax is exigible and the assessee wants to adjust the loss a1~ainst
prcfit tn reduce the tax demand.
Tt follows that if such set off is not nermissible
or possible owi11g to the income or profits of the subsequent year being from a
non-.taxable source, then~ would be no point in allowing the loss to be carried
forward.
Also, if the Joss arising in the previouJ year was under a hea•i not
chargeable to tax it covld not be allowed to be carried forward and absorbed
ag<tinst income in a subsequent year from a taxabb source. [704C-E]
(3) Capital gains would be covered bv the definition of income ins. 2(6C)
II
only if they were chargeable under s. l 2B.
But s. 12B was not operative in
the vears 1948 to 1956. Thus in the relevant previous year and the asses~;ment
year· or even in he sub

## Text

696
COMMISSIONER OF INCOME TAX (CENTRAL) DELHI
A
\I.
HARPRASAD & CO. (P) LTD.
February 25, 1975
[Y. V. CHANDRACHUD, R. S. SARKARIA AND A. C. GUPTA, JJ.]
Income-tax Act (ll of 1922)
Sections 128, 22(2A), 24(2A) & (2B)-
B
Capital loss incurred in 1/te year when capital gains were not exigible to taxlf could be set against capital gains in subsequent years.
By the Income-tax and Excess Profit Tax (Amendment) Act, 1947 s. 12B
was inserted in the Indian Income-tax Act, 1922 .. making capital gains which
arise after March 31. 1946, taxable. The same A':t inserted sub-sections (2A)
and (2B) in s. 2.4 of the Income-tax Act.
As a result of the Indian Finance
Act, 1949 which restricted the operation of s. 12B to capital gains ari.sing
before April l, 1948, a.nd the Finance (No. 3) Act of 1956 which restored
C
tax on capital gains with effect from. April l, 1948 capital gains arisinll from
1-4-1948 to 31-3-1956 were not taxable.
For the assessment vear J 955-56 which relates to the period when ce.pital
gains were not taxable the assessee claimed a loss of Rs. 84,862/- arisini: from
the 5a\e of certain sharc:s.
The Income-tax Officer disallowed the loss on the
ground that it was a los.s of capital nature.
The Appellate Assistant Commissioner, .in appeal, held that the assessee's claim was exaggerated, that the. actual
.lo!! wa, only Rs. 28,662/- and agreed with the Income-tax Officer that the IO!s
D
was not a revenue loss but a capital loss.
Before the Tribunal the assessee contended that the amount of Rs. 28,662/. which had been held to be a capital
IE>ss by the authorities ~ihould be allowed to be carried forward and set off
agairat profits and gains under the head "Capital gains" earned in future as laid
down in. s. 24(2A) and (2B).
The Tribunal held in favour of the ass(:ssee.
The High C0urt, in reference, confirmed the order of the Tribunal holding that
the effe:t of sub-section:; (2A) and (28) of s. 24 read with sections 6 and
12B was that if a capital loss was incurred in a Year in which a. c~pital gain
did not attract tax under section l 2B even then such loss would still be loss
£
under the head 'capital i~ains' 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 word5 '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 s. 6 classifies
F
income under six heads the main charging provision is s. 3 which levies incometax as only one tax on the 'total income' of the assessee a5 defined in s. 2(15).
An income in order to come within the purview of that definition must satisfy
two conditions, (a) it rnust comprise the 'total amount of income. profits. and
gains refeued to in s. 4(1), 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 tu charge. [702F-703BI
(2) The concept of ~arry forward of loss does not stand in vacuo.
Itf: sole
G
purpose is to set off the loss against the profits of a subsequent year.
Set off
implies that the tax is exigible and the assessee wants to adjust the loss a1~ainst
prcfit tn reduce the tax demand.
Tt follows that if such set off is not nermissible
or possible owi11g to the income or profits of the subsequent year being from a
non-.taxable source, then~ would be no point in allowing the loss to be carried
forward.
Also, if the Joss arising in the previouJ year was under a hea•i not
chargeable to tax it covld not be allowed to be carried forward and absorbed
ag<tinst income in a subsequent year from a taxabb source. [704C-E]
(3) Capital gains would be covered bv the definition of income ins. 2(6C)
II
only if they were chargeable under s. l 2B.
But s. 12B was not operative in
the vears 1948 to 1956. Thus in the relevant previous year and the asses~;ment
year· or even in he subsequent yeac, 'capital gains' or 'capital losses' did not
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697
form par: 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.
l.703B-D]
(4) Under· s. 22(2A) it is a condition precedent to the carry forward and set
off of the loss that the assess~e must file a return either in response to a general
notice, under s. 22( 1) or voluntarily, without any individual notice unuer subsectio•1 (2). If he does not file the return for the year in which the loss wa.q
i"ncurred and get the loss computed by the Income-tax Officer, th~ right to carry
forward the loss v.'ill 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. [7030-F]
( 5) In the instant case, the asscssee 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 asmsee'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-Ci]
( 6) Section 24 (2) expressly refers to loss, 'in any busines$; 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 asse~see. Therefore, under s. 24(1) and (2) the assessee had
no independent right to carry forward his capita I 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 19 56-57 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 instlmt case could not
be absorbed or set off against such capital gains.
[704F]
C!VIL APPELLATE JURISDICTION : Civil 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, !. Ramamurthy and R. N. Sachthey, for the-appellant.
A. K. Sen and H. K. PUl'i, for the respondent.
The Judgment of the Co'CI't 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 s. 66 (1) of the India•, Incometax 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 R.~. 28,662/- could be determined and
carried forward in accordance with thr provisions of Section
24 of the Indian Income-tax Act, 192:.t, 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 tderence is 1955-56 and the relevaQ.t previous
year is from 1-5-1953 to 30-4-1954. On lC\-1-1952 the assessee pur14-470SupCf/75
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SUPREME COUllT REPORTS
[1975] 3 s.c.R.
chased 112-4- shar1es of M/s. Intercontin'!nt Travancore Pvt. Ltd. at a
cost of Rs. 1,12,400/- from M/s. Escorts (A&M) Ltd. In the rek:-
vant accounting year ending on 304-1953 the assessee received 562
bonus sh:i.res from the same company. It thus acquired a total number of 1686 shares. On 3-9-53, i.e. during the relevant previous year
the assessee sold all these 1686 shares !o M/s. Escorts (Agents) Ltd.
for Rs. 84,300 and claimed a loss of Rs. 84,862/- in the income-tax
return filed by it.
The Income-tax Officer disallowed the entire loss
of Rs. 84,862 on the ground that it was a loss of a capital nature.
The assessee carried an appeal to the Appellate Assistant Commii,-
sioner and contended that this loss of Rs. 84, 862 /- was a revenue l0!1s
. arisin)!; out of dealing in shares. The Appellate Assistant Commissionc~r
found that the assessee's claim was exaggerated and that the actual lrn!S
was to the tune of Rs. 28,662/- only. He furthtr held that this l0!1s
of Rs. 28,662/- was not a 'revenue loss' but a 'capital loss' arising out
of change of investments.
Against the decision of the Appellate As~:stant Commissioner tr.e
assessee preferred an appeal before the Tribunal, challenging the findings of the Commissioner both in regard to the amount of loss and rts
nature. At the stage of arguments before the Tribunal, the assessee's
C..ounsel did not press these grounds of appeal but took up the plea that
the amount of Rs. 28,662/- which had been held to be a "capital 10s.!.''
by the authorities below, should be allowed to be carried forward and
set off against profits and gains, if any, under the head "capital gairu"
earned in futr.re, as laid down in sub-sections (2A) & (2B) of s. 24
of the Act.
Despite objection from the Departmental Representativ1~,
the Tribunal allowed this new ground to be raised with the ob&ervation
that ft was "a pure question of law and did not require investigation of
any fresh fact". It further accepted the contention of the a~sessee and
directed that the "capital loss" of Rs. 28,662/- should be carried forward
and ~et off agairu.t "capital gains" it 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~- 66(1) of the 1922 Act.
It was contended before the High Court on behalf ot the Revenue
that the expression "capital gains" in sub-section (2A) of s. 24 has
reference only to section 12B so that the loss suffered in the year i.n
which. the profits under Che head "capital gains" were not taxable, could
not fall within sub-section (2A) of s. 24, S. K. Kapoor J., speaking for
the Division Bench, rejected this contention in these tenns :·
"This argument overlooks the fact that the head of income
chargeable to income-tax are set out in section 6.
~lion 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
~ection 6 inasmuch as it says that "the tax shall be payable
by an assessee under the head "capital gains". This obviously has reference to the Vlth head in section 6. The effect of
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699
sub-section (2A) and (2B) of section 24 read with section 6
and 12B, therefoce, is that if a .capital !oss 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 assessce has any profit
under that head it can still be carriM forward and set oft'
against the taxable capital gain. The Tribunal, was in my
opinion, right in c.oming to the conclusion that it did.'.'
Hence this appeal by the
Commissioner of Income-tax
(Central)
Delhi.
Capiwl Gains Tax for the first time was introdu~ed by the Incomctax and Excess Profit Tax (Amendment) Act, 1947 (No.
22
of
1947) which inserted section 12B in' the Act.
This section made
taxable "capitai £ains" which arose after March 31, 1946 The same
Act of 194 7 added as the Vlth heali "capital gains" in 5. 6 of the
Act. It also inserted sub-sections (2A) and (2B) ins. 24 of the Act.
The Indian Finance Act, 1949 virtually abolished the levy and
restricted the operation of s. 12B to "capital gains" arisin9 before the
1st April, 1948. But s. 12B in its restricted form, andi the VIth head,
'capital gains' in s. 6, and sub-sections (2A) and (2B) of s. 24 were
not deleted and continued to form part of thr. Act. The Finance (No.
3) Act, 1956 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 195758. 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. S. Desai, learned Counsel for the appellant contends that
accordir1g to the scheme of the Act a "capital Joss" 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 'lllder 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 (plu$) or
capita! gains (minus) did not enter into computation of the total
income of the assessee chargeable to tax under s. 3 read with s. 12B
of the Act, the question of carrying forward such loss did not arise,
much Jess could such a loss be set off against the profits of any 6Ubsequent year.
As against this, Sbri Ashok Sen, learned Counsel for the assessee
maintains that a right to carry forward a loss under any of the heads
enumerated in s. 6, is. not dependent upon the taxability of income
under that head; it is sufficient if at the relevant time "capital 9ain~" is
one of the heads cf income recognized by the charging s. 6 and the
loss is adjustable ae:ainst "capital rrains", if anv, in future under s. 24.
H
·The argument proceeds; thats. 6(vi) was not lying inert on the statute
boo]< but was operative, throughout, for the purpose of calculating the
losses under that head. Shri Sen compared the non-taxability of
700
SUPREME COURT REPORTS
[1975] 3 S.C.R.
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 learn.ed
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 s. 6. Such a person notwithstanding the fact that he
had no assessable income has a ri3ht to file a return and get his losses
con~puted by the Income-tax Officer merely for the purpose of carrying
forward the loss. The Income-tax Oillcer, it is added, ca1mot ignore
th·:! return filed by the assessec, voluntarily, showing losses even though
such a return is filed beyond time. ln this connection, Shri Sen has
referred to Commissioner of fllcome-tax,
Punjab
v. Kulu
Vai/ey
Transport Co. Ltd.('), Jaikisha11 Gopikishan and Sons v. Commissioner vf Income-tax, .M.P.(2) and Commissioner of
Income-1~ax,
M .. dhya Pradesh v. Khushal Cha·id Daga(8).
Before dealing with the contentions canvassed, it will &c 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 sectio11 4
computed in the manner laiJ 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 i11come. Section 6
enumerates six heads of incone, profits and gains chargeable to incometax. They are :
" ( i) Salaries.
(ii) Interest on securities.
(iii) Income from property.
(iv) Profits and gains of business, profession or vocation.
(v) Income from other sources.
(vi) Capital gains."
Sections 7, 8, 9, W, 12 and 12B relate to payability and computation of tax under the various heads of income. The material part of
s. I 2B at the relevant time was as follows :
"12B ,(1) The tax shall be payable by an assessee under
the head "Capital gains" in ~espect of any profits or gains
arising from the sale, exchange or trnnsfer of a capital ass·~t
effected after the 3 I st day of March I 946 and before the 1st
day of April, 1948 and such profits and gains shall be deemed
to be income of the previous yenr in which the sale, exchange
or transfer took place."
'
l l 7 7, f. T. R. 518 (S.C.).
(2) B4. !. T. R.(~5·
(3) 41. l. T. R. 177 (S.C.)
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Section 22(1) requires a general notice to be published requiring
every person whose total income during the previous year exceeds the
maximum non-taxable limit to file a return. Sub-s·~ction (2) of this
section enables the income-tax Officer to issue no.ice to any such
person requiring him to furnish a return. Sub-section (2A)-which was
inserted by !he Income-tax Amendment Act 25 of 1953 with effect
from 1-4-1952-provides:
i.If any person who has not been served with a notice
under sub-section (2) has sustained a loss of profits or
gains in aey 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-s. (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-s. ( 1 ) all the particulars required
under the prescribed form of return."
The material purt of s. 24 runs thus :
"24. ( 1 ) Where any assessce sustains a loss of profits
or gains in any year under any of the heads mentioned ;n
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 chargcabl<: under the head "Profits and Gains of business, profession
or voc,ation", any loss sustained in speculative transaction
which a1e 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 asscssee sustains a Joss of profits or
ga;ns 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
Joss where the assessee had no other head of income shall be
carried forward to the following year, and
( i) where the loss was sustained bv him in a business
consisting of speculative transactions, it shall be set
off only against the profits and galns. if .iny, of any
business in speculative transaction carried on by him
in that year;
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(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 anv business, profession or vocation carried on by him in that year pro-
702
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SUPREME COURT REPORTS
[1975] 3 S.C.R.
vided that the business, profession or vocation in which
the loss was originally sustained continued
to
be
carried on by him in that year; ar.d
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. NcJtwithstanding anything contained in
sub-section
( 1 ) , where the loss sustained is a loss falling under the head
"Capital gains'', such loss shall not be set off except against
any profits and gains falling under that head.
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2B. Wherean assessee sustains a loss such as is referred
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to in sub-s1~ction (2A) and the loss cannot be wholly set off
in accordance with the provisions of that sub-section, the
portion not so set ofl' sha!l be carded forward to the following
year and set oft against capital gains for that year, and if it
cannot be so sd off, the amount thereof not so set oft 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
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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 t'Otal 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, Office~ shall notify to the assessee by
ord<:r in writing the amount of the loss as computed
by him for the purposes of this section."
s~ction 2( 6C) provides that 'income' includes
(among other
things)-" (vi) any capital gai.n chargeahle 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
'pro~ts ar;d gains' represent
'plus income' whereas losses represent 'minus income' (1).
In other
\\'ords, Io's is negative profit. Both positive and negative profits are
of a revenue character. Both must enter into computaiion, wherever
it beC'Jmes material, in the same mode of the taxable income of i:he
assessee.
Although s. 6 classifies income under six heads, the main
charging provision is s. 3 which levies income-tax, as only one tax,
on the 'total income' of the assessee 3.S defined in s. 2 (15). An income
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in orcier to come within the purview of that definition must satisfy
two conditions. Firstly, it must comprise the "total amount of income,
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(I) CIT v. Ktwamchand Prem Chand 40 ITR 106 (SC): CIT v. E!phinston
Spinning & Weai'ing Mi/is; 40 !TR 142'~f:).
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703
profits and gains referred to in s. 4( 1) ." Secoridly, it must be "co~
puted in the manner laid down in the Act". If either of these cond1tio,ns fails, the income will not be a part of the "total income" th!\t
c!'ln be brought to charge.
Now, capital gains would be covered by the definition of 'income'
in sub-section (6C) of s. 2, only if they were chargeable und~r s. 12B.
As noticed already, s.12B as modified by the Finance Act, 1949, Jid ·
not charg,. any 'capital gains' arising between 1-4-1948 to 1-4-19?7·
lnJced s. 12B was not operative in these years (1948-57). Durmg
this pe'riod, "capital gains", whether on the positive or the negative
side, could not be computed a.nd charged under s. 12B or any other
provisions of the Act. In the instant case, the second condition, name-.
ly, "the manner of computation laid down in the Act" which-to use
the words of Stone C.J. (1)-"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 los..~es" 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 unjer tho Act.
Before the insertion of sub-section (2A) in s. 22 by the amendment of 1-4-1952, an assessee was entitled to carry forward a !os•
even if ho had submitted no return for the year in which the loss was
su~tained. 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 n'Otice under sub-section (1) of s. 22 or voluntarily, without any individual notice 1mder
1mb-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 oy 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 obligati'On to compute or assess it, much less for the purpose of
"carry forward". It is noteworthy that in the instant case, tile assessec
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 l'Oss''. His further finding that it
was !\ "capital loss" was only incidental and, in fact, Wl'lS n_ot nccess.a;t.
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' charneable, 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 s. 22 would not give
him such a right because the operation of that sub-section is,
in
terms, confined to (i) a l'OSs which is sustained "under the head 'profita and gains' of business, profession or vocation" and would ordinarily
(1) In re Kamdar [1946] LT.IC 10, 21.
704
SUPREME COURT REPORTS
[1975] 3 s.c.R.
have been carried forward under sub-section (2) of s. 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-sec·
tion (2) read with sub-section (1) of s. 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-tax.ibility of capital gain&, against future profits, il any, in the immediate subse<J.uent years. Sub-section (2) cif s, 24
expressly refers to loss 'in any business, profession or vocation'. lt does
not cover a. "capital l•oss", or the minus income u11der 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.
Jt 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 permissibilil y and possibility of the carried-forward
Joss being absorbed or set off against the profits and gains, il' any,
of the subsequent year. Set Dff implies that the tax is exigible and the
as,essee wants to a~just the Joss agaii1st profit to reduce the
taxdemand. It follows that if such set-off is not permissible or
,po~sible
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 allr,wed
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 abuve
principles.
111e "cap.ital loss" of Rs. 28,662/- 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 195.S-56 and 1956-57 when
the capital gains were not taxable, he made huge capital gains far exceedin.~ this loss, could he be obliged to show those capital f!ains i!Jr. his
return? Could the Joss of the year 1953-54 be absorbed or set off
against sur;h capital gains of the subsequent years? The answer is
cmpha1ically 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' pert~1in
ing to the period, 1948 to 1957.
For the foregoing reasons, we are of the opinion that the H:igh
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 Re,•enue.
In the result, the dppeal is accepted with costs.
V.P.S.
Appeal allowed.
A
B
c
D
E
F
G
H