Karnataka High Court
Commissioner Of Income-Tax vs Sree Valliappa Textiles Ltd. on 8 August, 1986
Equivalent citations: (1986)57CTR(KAR)65, [1986]166ITR548(KAR), [1986]166ITR548(KARN), [1986]29TAXMAN150(KAR)
JUDGMENT R.S. Mahendra, J.
1. In this reference made under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore (hereinafter referred to as the "Tribunal"), at the instance of the Commissioner of Income-tax Karnataka-II, Bangalore (hereinafter referred to as "the Commissioner"), referred the following question of law for the opinion of this court :
"(1) Whether, on the facts and in the circumstances of the case, section 80J of the Income-tax Act does not postulate that the claim for deficiency relating to an earlier assessment year, should have been made in that earlier year and quantified in that years' assessment before its deficiency can be carried forward and set off against the profits of the subsequent years?
(2) Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to have the relief under section 80J computed in respect of the assessment year 1968-69 in the assessment proceedings of the assessment year 1973-74 and have it carried forward to 1974-75 in which it is set off against the assessee's income?"
2. In order to appreciate the questions referred to us, it is necessary to notice the facts as found by the Tribunal in the first instances.
3. M/s. Sree Valliappa Textiles Ltd., the assessee, is a private limited company incorporated under the Companies Act and is engaged in the manufacture of textiles. For the assessment year 1968-69 relevant to the previous accounting year, the assessee did not make any claim for relief under section 80J on the ground there was no profit for that year. But the assessee claimed that relief under section 80J of the Act, for the later assessment years 1969-70 to 1972-73 in the assessment precedence of those years and it claimed that the deficiency computed under section 80J of the Act for the assessment year 1969-70 to 1972-73 should be set off against the income of the assessment year 1973-74. This claim was conceded by the Income-tax Officer. A further claim was made that though it did not claim relief under section 80J of the Act and such a relief was not computed for the assessment year 1968-69, the same should be computed in the course of assessment proceedings for the assessment year 1973-74 and allowed set off against the income for 1973-74. This claim was not entertained by the Income-tax Officer. The assessee appealed against the order of the Income-tax Officer before the Appellate Assistant Commissioner, who, by his order dated December, 6, 1976, considered the claim for computation and carry forward of relief under section 80J of the Act for the assessment year 1968-69 and set off the same in the assessment year 1973-74. In doing so, the Appellate Assistant Commissioner, followed the order of the Income-tax Appellate Tribunal, Bombay Bench, in M/s. A. B. C. & Co. Ltd. Bombay v. ITO, Commercial Circle IV (2), Bombay (ITA Nos. 3073 and 3074 (Bombay)/1973-74) where it had "observed that section 80J(3) of the Act does not expressly provide that the assessee should have actually claimed the deficiency and got it computed by the Income-tax Officer for the earlier year of occurrence of such deficiency before it can be carried forward and set off against the profit from the industrial undertaking of the current year" and following a decision of the Calcutta High Court in CIT in Govindala Dutta [1958] 33 ITR 639 allowed the assessee's claim. Being aggrieved by such an order of the Appellate Assistant Commissioner, the Revenue filed a second appeal before the Tribunal. It consider the contentions raised before it, but preferred to follow the decision of the Income-tax Appellate Tribunal, Bombay Bench, Bombay in M/s. A. B. C. and Company limited's case (ITA Nos. 3073 and 3074 (Bombay)/1973-74) and dismissed the appeal and affirmed the order of the Appellate Assistant Commissioner.
4. Sri K. Srinivasan, learned senior standing counsel for the Department, appeared for the Revenue and Sri G. Sarangan, learned advocate, appeared for the assessee.
5. Sri Srinivasan has urged that under section 80J of the Act, a claim for relief must be made and quantified for the portlier year and it is only then it can be carried forward for the subsequent year and set off.
6. Sri Sarangan has urged that section 80J of the Act does not provide that the claim must be made for that very year, computed and carried forward to the subsequent year and that such a claim can be made in any year when there is profit for being adjusted from out of the profits.
7. Section 80J in so far as it is material for our purpose reads :
"80J. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under section 80HH or section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial under taking or ship or business of the hotel, as the case may be, computed in the manner specified in sub-section (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) :
Provided that in relation to the profit and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacturer or produce article or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date or from the business of a hotel which starts functioning after that date, the provisions of this sub-section shall have effect as if for the words 'six per cent.', the words 'seven and a half per cent'. Had been substituted....
(3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of section 64 and before making any deduction under Chapter VI-A or section 280-O) in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967 (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or, where there not such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in sub-section (1) (as computed after allowing the deductions if any, admissible under section 80HH or section 80HHA and the said sub-section (1)) in respect of the previous year relevant to the next following assessment year, and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains, the whole or balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly to set off, it shall be set off against such profits and gains assessed for the next following assessment year and so on :
Provided that -
(i) in no case shall the deficiency or any apart thereof be carried forward beyond the seventh assessment years as reckoned from the end of the initial assessment year :
(ii) where there is more than one deficiency and each such deficiency relates to a different assessment year, the deficiency which relates to an earlier assessment year shall be set off under this sub-section before setting off the deficiency in relation to a letter assessment year :
Provided further that in the case of an assessee being a co-operative society, the provisions of this sub-section shall have effect as if for the words 'fourth assessment year', the words 'sixth assessment year' had been substituted...."
8. Sub-section (1) section 80J of the Act provides that where the gross total income of an assessee includes any profits and gains, there shall be allowed in computing the total income of an assessee, a deduction from such profit and gains "the relevant amount of capital employed during the previous year". Sub-section (3) of section 80J of the Act provides that where there is deficiency, it shall be carried forward and set of against the profit and gains referred to in sub-section (1) in respect of the previous year relevant to the next following assessment year and if there are not such profits and gains for that assessment year or where such deficiency exceeds such profits and gains, the whole or balance of the deficiency shall be set off against such profits and gains for the next following assessment year and if and in so far as such deficiency cannot be wholly set off, it shall be set off against such profits and gains assessable for the next following assessment year and so on.
9. The scheme of section 80J of the Act is where the gross total income of an assessee includes any profits and gains, he shall be allowed a deduction from such profits and gains, the relevant amount of capital employed during the previous year in computing the total income. Where there is a deficiency, such deficiency shall be carried forward and set off against the profits and gains in respect of the previous year relevant to the next following assessment year and if there are no profits and gains for that assessment year or where the deficiency exceeds such profits and gains, the whole or balance of such deficiency shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly set off, it shall be set off against such profits and gains assessable for the next following assessments year and so on.
10. Sri Srinivasan relied on the following decisions : CIT v. Kulu Valley Transport Co. P. Ltd. . In this case, the assessee-company voluntarily filed returns under section 22 (3) of the Indian Income-tax Act, 1922, showing losses of Rs. 1,51,520 and Rs. 48,977 for the assessment years 1953-54 and 1954-55, respectively. No notice had been served on the assessment under section 22 (2). The question that fell for consideration in that case was "Whether the losses of Rs. 1,51,520 and Rs. 48,977 returned by the assessee in January, 1956, for the assessment years 1953-54 and 1954-55 respectively, required in law to be determined and carried forward under section 24 (2) of the Income-tax Act ?"
11. The argument on behalf of the assessee what that section 24 (2) confers the right to carry forward the loss to the subsequent year, provided the conditions contained in the sub-sections are satisfied. The assessed had satisfied all the conditions. Section 22 (2A) is only a procedural provisions providing that when once a return has been furnished in accordance therewith, all the a provisions of the Act become applicable as if it were a return under sub-section (1). That would attract section 22 (3) and, therefore, a voluntary returns showing profit or loss can be filed even after the period mentioned in sub-section (2A) has expired so long as the assessment has not taken place. It was argued on behalf of the Revenue that section 22, prior to its amendment in the year 1953, did not make any provision for the filing of a loss return voluntarily. Section 22 (1) only required return of taxable income to be filed and it was only section 22 (2) which required the filing of a return of profits or loss in pursuance of the notice by the Income-tax Officer and it was, therefore, by virtue of the provision of section 22 (2A) that a loss return can be filed where a person has not been served under sub-section (2) in order to get the benefits of the carrying forward of the loss under section 24 (2). This is provided by sub-section (2A) of section 22.
12. The court explained that the amendment in 1953 seems to have been made to clarify the law about the filing of a return showing loss voluntarily. It was declared that such a return could be validly made and the Income-tax Officer could not have ignored the return and had to determine these losses. Section 24 (2) confers the benefit of losses being set off and carried forward and there is no provision in section 22 under which losses have to be determined for purposes of section 24 (2). Section 22 (2A) says that in order to get the benefit of section 24 (2), the assessee must submit his loss returns within the time specified by section 22 (1). That provision must behead with section 22 (3) for the purpose of determining the time within which a returns has to be submitted. It can well be that section 22 (3) is merely a proviso to section 22 (1). Thus a return submitted at any time before the assessment is made is a valid return. In considering whether a return made is within time, sub-section (1) of section 22 must be dread along with sub-section (3) of that section. A return whether it is a return of income, profits and gains or of losses must be considered as having been made within the time prescribed, if it is made within the time specified in section 22 (3). In other words, if section 22 (3) is complied with, section 22 (1) also must be held to have been complied with. If compliance has been made with the latter provisions, the requirement of section 22 (2A) would stand satisfied.
13. It is therefore, clear from the enunciation made by the Supreme Court that a return whether it is a return income, profits or gains or of losses must be consider if it is made within the time prescribed and the losses, if any, have to be determined and carried forward as section 24 (2) confers the benefit of losses being set off and carried forward.
14. In Addl. CIT v. Gurjargravaures P. Ltd. , the assessee had not claimed the rebate under section 84 (now section 80J) before the Income-tax Officer, but a ground was taken before the Appellate Assistant Commissioner that the Income-tax Officer erred in not giving the said benefit but the Appellate Assistant Commissioner dismissed the appeal. On further appeal, the Tribunal held that as the entire assessment was open before the Appellate Assistant Commissioner, he should have entertained the claim and directed the Income-tax Officer to allow the appropriate relief. On a reference, the High Court held that the Tribunal was competent to so hold and direct. On appeal, the Supreme Court held that as neither was any claim made before the Income-tax Officer nor was there any material on recorded in support thereof and from the mere fact that such a claim was allowed in subsequent year, it could not be assumed that the prescribed conditions justifying a claim for exemption under section 84 were also fulfilled, the Tribunal was not competent to hold that the Appellate Assistant Commissioner should have entertained the question of relief under section 84 or to direct the Income-tax Officer to allow the relief. This decision lays down that the claim for rebate should be made before the Income-tax Officer and the conditions prescribed for getting the rebate under section 84 has to be fulfilled in the year in which the rebate is claimed.
15. In Anchor Pressings (P.) Ltd. CIT [1975] 100 ITR 375 (All), the assessee had failed to claim the rebate allowed under section 84 of the Act, (now section 80J) as a new undertaking in its return or even at the Appellate stage. The question, therefor, was whether the assessee can claim rebate by way of rectification proceedings under section 155. The Allahabad High Court held that it cannot be said that there was any mistake, much less a mistake apparent from the record which would enable the assessee to resort to section 154 of the Act to get relief under section 84 (now section 80J). This case is of no assistance to the Revenue.
16. Sri Srinivasan maintained that these decisions clearly point out that the claim for deduction has to be made in each year even if there is loss, by filing a return of loss and have the loss determined and then carried forward to the subsequent years. According to him, the assessee has first to satisfy the conditions prescribed under section 80J(1) get the los determined and what is not deducted under section 80J(1) has to be carried forward and set off as provided under section 80(3) and, therefore, without a computation of loss under section 80J(1) there canoe be "carry forward" and set off of loss under section 80J(3) in the subsequent year.
17. Sri Sarangan relied on the following decisions in support of his submissions : CIT v. Manmohan Das (deceased) . This decision only lays down that it is the Income-tax Officer who deals with the assessment of the subsequent year who has to determine whether the loss in any year may be carried forward to the following year and set off against the profits and gains of the subsequent year under section 24 (2) and a decision recorded by the Income-tax Officer who computes the loss in the previous year that the loss cannot be set off against the income of the subsequent year is not binding on the assessee. This decision does not lay down that it is not necessary for the Income-tax Officer who deals with the assessment of the subsequent year has to compute the loss in the previous years and also determine whether such loss computed may be carried forward and set off against the income of the subsequent year.
18. It follows from the decision in Manmohan Das' case , that the loss of profits in the previous year has to be computed by the Income-tax Officer and whether this loss of the previous year, as is not set off under section 24 (1), may be carried forward to the following year and set off against the profits for that year under section 24 (2) has to be determined by the Income-tax Officer dealing with assessment of the subsequent year. This decision is, therefore, no authority for the proposition that los of profits in any year need not be computed by the Income-tax Officer in that year but it may be computed and determined by the Income-tax Officer dealing with the assessment for the subsequent year who is required to determine whether the loss of previous year may be set off against the profits of the year. This decision is no assistant to the assessee.
19. The Allahabad High Court in Addl. CIT v. Sheetalaya [1979] 117 ITR 658, the Calcutta High Courts in Indian Aluminium Co. Ltd. v. CIT [1980] 122 ITR 660 and the Madras High Court in CIT v. Bluemount Ceramics Ltd. [1980] 123 ITR 385, have held that deduction was permissible even in a case where the claim had not been made in a preceding assessment year in which loss had been sustained but was made in subsequent year when profits were made against which the deduction could be adjusted. The Andhra Pradesh High Court in CIT v. Veljan Hydrair (P.) Ltd. [1985] 151 ITR 734, has also taken a similar view following the decision of the High Court of Allahabad, Calcutta and Madras.
20. In CIT v. Mattoo Worsted Spinning and Weaving mills , the court held that (at pages 1027 and 1028) "the relief under section 80J for the assessment year 1967-68, though not claimed for the purpose of carry forward and set off as provided in section 80J(3) of the Act, in that assessment year, could on the facts established be allowed, as it was a mistake apparent from the record within the meaning of section 154 of the Act, in the assessment for the assessment year 1970-71" and "that, as found on the facts and in the circumstances of the case, the right to claim the deduction under section 80J arose to the assessee only in the assessment year 1970-71, when the profits were made for the first time and not in the assessment year 1967-68, when no right to claim deduction had accrued to the assessee, although the claim actually related to the assessment year."
21. We are in respectful agreement with the view taken in all these case that the right of an assessee to carry forward and set off under section 80J(3) of the Act arises where there is profit in the subsequent year. But to carry forward and set off, the loss is to be computed in the previous year. If loss is not computed for the previous year, there is nothing for the assessee to carry forward and set of against the income for the subsequent year. The Income-tax Officer, computing the loss for the previous year cannot determine whether the loss so computed can or cannot be set of against the income of the subsequent year. It necessarily follows that the Income-tax Officer who deals with the assessment for the subsequent year and who is competent to carry forward the loss cannot compute the los in the previous year. It is only when the loss in the previous year is computed, the Income-tax Officer dealing with the assessment for the subsequent year can decide whether that loss may be carried forward and set off against the income of the subsequent year. As rightly pointed out by Sri Srinivasan section 80J (1) and (3) have to be read together and not in isolation. We have first to as certain the scope and ambit of section 80J(1) of and it is only thereafter consider the scope and ambit of section 80J(3). It therefore, follows that there has to be computation of loss under section 80J(1) and it is only the deficiency that can be carried forward and set off under section 80J(3). The decision on which reliance was placed by Sri Sarangan have consider section 80J(3) of the Act independently without reference to section 80J(1) of the Act and are, therefore, of no assistance to him.
22. It was, however, maintained by Sri Sarangan that no loss except as is provided under section 80 of the Act can be carried forward and set off. Section 80, on which reliance was placed, reads :
"80. Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed under section 139 shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) of section 74 or sub-section (3) of section 74A."
23. Section 80 is in Chapter VI which deals with the aggregation of income and set off or carry forward of loss and only regulates that no loss which has not been determined in pursuance of a return filed under section 139, shall be carried forward and set off under section 72(1), section 73(2), section 74(1), section 74A(3) and the other provisions in Chapter VI itself. Section 80 does not regulate the other provision of the Act. The scheme of section 80J is very clear and does not require that a claim for computation should be made only where there is profit and gain. The section provides that where there is profit and gain, the relevant amount of capital employed during the previous year shall be allowed as a deduction in the profit or gain and if there is deficiency, it shall be carried forward and test off against the profit and gain of the next year, and the following assessment year till it is wholly set off. This necessarily means that a claim must be made first under sub-section (1) of section 80J of the Act and if there is a deficiency, it is only then it has to be carried forward to the next following assessment year, and if there is still a deficiency, it has to carried forward to the next following assessment year and so on.
24. In the light of our above, discussion, we furnish our answer to the question referred to us as hereunder :
Question No. Answer
1. Question No. (1). Answered in the negative, in
favour of the Revenue and
against the assessee.
2. Question No. (2). Answered in the negative, in
favour of the Revenue and
against the assessee.
25. But, in the circumstances of the case, we direct the parties to bear their own costs.