Madras High Court
Commissioner Of Income-Tax vs Ramnath Goenka on 19 August, 2002
Equivalent citations: [2003]259ITR26(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The assessment years with which we are concerned are 1980-81 and 1981-82.
2. The common question referred to us for consideration, at the instance of the Revenue, is "whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the business loss brought forward from earlier years should be set off towards the dividend income ?"
3. The Assessing Officer and the appellate authority had rejected the assessee's claim that the carried forward losses from the assessee's business should be set off against his dividend income during the assessment year as the dividends were derived from the shares which were held as stock-in-trade. On a further appeal to the Tribunal, the Tribunal held that the carried forward losses of the years 1977-78 and 1978-79 were required to be set off against the income from dividend, to the extent of that income, as the shares were held by the assessee as stock-in-trade.
4. Learned counsel for the Revenue submitted that that view of the Tribunal is erroneous. His submission was that the decision on which the assessee had relied before the Commissioner had been rightly distinguished by the Commissioner on the ground that the language of Section 24(2) of the Indian Income-tax Act, 1922, was materially different from that found in Section 72(1) of the Income-tax Act, 1961. The decision which had been cited before the Commissioner, but which was not followed by the Commissioner is Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21, a decision rendered by a three-judge Bench of the apex court.
5. Section 24(2) of the Indian Income-tax Act, 1922, without its provisos which are not relevant for our present purpose, reads as under :
"24. (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 had 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 transactions 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 : provided 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, but no loss shall be so carried forward for more than eight years."
6. Section 24(1) of the 1922 Act provides that where the 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.
7. Section 71 of the Income-tax Act, 1961, is similar to Section 24(1) of the 1922 Act and permits the set off of losses computed under one head against income computed under another head in the same assessment year.
8. Section 72(1)(i) of the 1961 Act provides that so much of the loss as has not been set off shall be carried forward to the following assessment year and shall be "set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year". Section 72(1)(ii) permits the carry forward of the amount of the loss not so set off to the following assessment year and so on. Such carry forward is permissible only for a period of eight assessment years immediately succeeding the assessment year for which the loss was first computed as provided in subSection (3) of Section 72. The proviso to Section 72(1)(ii) is not attracted to the facts of the present case and, therefore, no reference is being made thereto.
9. In the case of Western States Trading Co. P. Ltd. , which arose under the Indian Income-tax Act, 1922, the court considered the right of the assessee to set off the dividend derived from shares held as trade assets against the loss computed under the head "Profits and gains of business or profession". The following passage in that judgment sets out the law which is required to be applied to this case (page 25) :
"On the second question once it is accepted that the colliery business was carried on for a part of the relevant assessment year the assessee would be entitled to get a set-off under Section 24(2) of the Act if the shares on account of which the dividends were received formed part of the assessee's trading assets. It is well settled by the decisions of this court (see CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306) that Section 6 of the Act classifies the taxable income under the several heads but the scheme is that income-tax is one tax and Section 6 only classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. While Sub-section (1) of Section 24 provides for setting off the loss under one of the heads mentioned in Section 6 against the profits under a different head in the same year, Sub-section (2) provides for the carrying forward of the loss for one year and setting off the same against the profits or gains of the assessee from the business in the subsequent year or years. It was emphasised in the aforesaid decision that Sub-section (2) of Section 24 in contradistinction to Sub-section (1) is concerned only with the business and not with its heads under Section 6 of the Act. Dividends are included in the meaning of income under Sub-section (1A) of Section 12 which is the residuary head. Applying the principles adverted to before, the amount of dividends would form a part of the income from the business of the assessee if the shares were a part of the assessee's trading assets and the assessee would be entitled to a set-off as claimed against the loss from its business incurred during the previous years. It does not appear to have been disputed at any stage that the shares formed part of the stock-in-trade of the share dealing business of the assessee. There could be no reason, therefore, for the assessee not being entitled to the set off claimed. The High Courts have consistently taken the view that business loss carried forward from earlier years can be set off against dividend income derived from shares held as stock-in-trade (vide CIT v. Shrikishan Chandmal [1966] 60 ITR 303 (MP) and CIT v. Bhavnagar Trust Corporation (P.) Ltd. [1968] 69 ITR 278 (Guj)). The second question, therefore, should have been answered in favour of the assessee."
10. The law so laid down by the apex court in relation to Section 24(2) of the 1922 Act is equally applicable to an assessment under the Income-tax Act, 1961, having regard to the fact that the language employed in Section 72(1) is not materially different from what had been provided in Section 24(2) of the 1922 Act. Section 72(1) in its opening part refers to the head "Profits and gains of business or profession" and the loss determined under that head not being set off against income under any other head of income in accordance with the provisions of Section 71 and permits the carry forward of such loss to later assessment years. The set-off in those assessment years is to be "against the profits and gains, if any, of any business or profession carried on by him ..."
11. Section 24(2) of the 1922 Act in Sub-clause (ii) refers to the setting off of such carried forward loss against the "profits and gains, if any, of any business, profession or vocation carried on by him in that year . . ."
12. The adjustment of the carried forward loss under the 1922 Act as also under the 1961 Act is against the profits and gains of business or profession. Neither Act while referring to that adjustment refers to the heads of income. As held by the apex court in the case of Western States Trading Co. P, Ltd. , the amount of dividend would form part of the income from the business of the assessee if the shares were a part of the assessee's trading asset even when the dividend received on those shares had been computed as being part of the assessee's income under the head "Other sources". The apex court in very clear terms approved the view that had been taken by the High Courts consistently that "business loss carried forward from earlier years can be set off against the dividend income derived from the shares held as stock-in-trade".
13. The question referred to us is answered in favour of the assessee and against the Revenue.