1. Carry forward of business losses — Transition from State income-tax law to Indian Income-tax Act — Application of Removal of Difficulties Order. (Para 1 , 2 , 3 , 4 )
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1962 Supreme(SC) 7
SUPREME COURT OF INDIA
16th January, 1962
B.P. SINHA, C.J.I., J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH AND J.R. MUDHOLKAR, JJ.
Commissioner of Income-tax, Kerala and Coimbatore, Appellant
Versus
Helen Rubber Industries, Ltd. Kottayam, Respondent.
Civil Appeal No. 466 of 1960.
Advocates appeared
Mr. K. N. Rajagopal Sastri, Senior Advocate (Mr. P. D. Menon, Advocate, with him), for Appellant.
Advocates:
K.N.RAJAGOPAL SASTRI, P.D.MENON
K.N.RAJAGOPAL SASTRI, P.D.MENON
Losses sustained under a State law prior to the application of the Indian Income-tax Act must be carried forward and set off only to the extent and for the duration permitted by the original State law, as mandated by the Removal of Difficulties Order, 1950.
Headnote:(A) Indian Income-tax Act, 1922 - Section 24(2); Travancore Income-tax Act, 1121 M.E. - Section 32; Indian Finance Act, 1950 - Sections 3 and 13(1); Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 - Paragraph 3 - Carry forward and set off of previous losses - Whether losses sustained under a State law prior to the extension of the Central Act can be carried forward for a longer period as permitted by the Central Act - The Removal of Difficulties Order provides that such losses shall be set off in the same manner, to the same extent, and up to the same year of assessment as they would have been set off had the State law continued to be in force - The rights of the assessee are neither enlarged nor curtailed by the integration of laws; the State law governs the period of carry-forward for losses incurred during its operation. (Paras 7, 8, 10)
Facts of the case:
An assessee company incurred losses in the account years 1946, 1947, and 1948. The loss for the year 1946 was governed by the State law in force at the time. The assessee sought to carry forward the loss of 1946 to the assessment year 1951-52, claiming a six-year carry-forward period under the Central Act. However, the State law permitted a carry-forward of only two years for the relevant period.
Findings of Court:
The court found that the Removal of Difficulties Order 1950 established a clear dividing line between the operation of the prior State law and the Central Act. Since the loss occurred in a previous year governed by the State law, the rules of that State law regarding the duration of the carry-forward must apply.
Issues: Whether the assessee is entitled to carry forward losses for a period of six years under the Central Act, notwithstanding that the law applicable at the time the loss occurred was the State law which provided for a shorter carry-forward period.
Ratio Decidendi: The court ruled that under Paragraph 3 of the Removal of Difficulties Order, 1950, losses sustained prior to the application of the Central Act must be set off "in the same manner, to the same extent, and up to the same year of assessment" as permitted by the State law. The integration of laws does not enlarge the rights of the assessee to carry forward losses beyond the limit prescribed by the law in force when the loss was sustained.
Result: Appeal allowed.
Legal Category Hierarchy
Table of Contents
2. Whether losses incurred under State law are governed by the carry-forward period of the State law or the extended period under the Indian Income-tax Act. (Para 4 )
3. The Removal of Difficulties Order preserves the right to carry forward losses only in the manner and extent permitted by the original State law. (Para 7 , 8 , 10 )
4. Losses incurred under State law prior to the application of the Indian Income-tax Act are governed by the State law's carry-forward limits per the Removal of Difficulties Order. (Para 8 , 9 , 10 )
5. Appeal allowed — High Court judgment reversed — Carry forward of loss denied. (Para 11 )
6. How does the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 affect the carry-forward of losses incurred under State law?
Losses sustained in any previous year prior to the assessment year ending March 31, 1950, are set off in the same manner, extent, and up to the same year of assessment as they would have been under the State law. (Para 7 , 8 )
7. Does the extension of the Indian Income-tax Act to Part B States enlarge the rights of assessees regarding the carry-forward of previous losses?
No, the Order creates a dividing line between the application of State law and the Indian Income-tax Act, preserving existing rights under State law without enlarging or curtailing them. (Para 10 )
8. Which law governs the carry-forward of losses for a previous year that occurred before the Indian Income-tax Act was extended to a Part B State?
Such losses are governed by the law in force in the Part B State at the time the loss occurred, as mandated by the Removal of Difficulties Order. (Para 8 , 9 )
Judgment
HIDAYATULLAH, J. :The Commissioner of Income-tax, Kerala and Coimbatore, has filed this appeal against the judgment and order of the High Court of Kerala dated October 31, 1958,* by which the High Court answered in favour of the respondent (Helen Rubber Industries, Ltd., Kottayam) the following question :
"Whether under the provisions of the Indian Income-tax Act the petitioner is entitled to carry forward the loss for a period of six years notwithstanding the act that during the period when the loss had occurred, the law applicable was the Travancore Income-tax Act ?"
The High Court has granted a certificate under S. 66A(2) of the Income-tax Act. Two questions were referred to the High Court in compliance with an earlier order of the High Court under S. 66 (2); but with the other question, we are not concerned in this appeal.
2. Messrs. Helen Rubber industries; Ltd. is a Company, which was incorporated in the former State of Travancore with its registered office at Kottayam. In the year 1941, the assessee Company granted a lease of the factory to certain persons for a period of 15 years. From that year, the rent and royalty received from the lessees were the only source of income. Disputes having arisen, the lessees suspended payment from June 1946. Litigation followed; but the dispute was settled by the assessed Company receiving Rs. 23,000/- odd in full satisfaction. With the details of these disputes and their settlement, we are not concerned. The year of account of the assessee Company is the Calendar year. Before the extension of the Indian Income-tax Act, there was in force in Travancore State, the Travancore Income-tax Act, 1121 M. E. (Act XXIII of 1121 M. E.) which came into force on the first day of Chingom 1122 M. E. (August 17, 1946). The assessment year under the Travancore Act ended on the last day of Karkadakom, which corresponds to August 16, 1947 Thus, for the account year, 1-1- 1946 to 31-12-1946 of the firm, the assessment year was 1123 M. E. (17-8-1947 to 16-8-1948).
3. The assessee Company declared losses in the account years, 1946, 1947 and 1948. These losses, together with the dates of the account years and the assessment years are tabulated below :
Year of account Year of assessment Loss
1946 (1-1-1946) to 31-12-1946) l123 M. E. (17-8-1947 to 16-8-1948) Rs. 4031-10-0
1947 (1-1-1947 to 31-12-1947) 1124 M. E. (17-8-1948 to 16-8-1949) Rs. 6605- 1-6
1948 (1-1-1948 to 31-12-1948) 1125 M. E. (17-8-1949 to 16-8-1950) Rs. 2604-18-9
Total Rs.13,241- 9-3
4. The dispute in this case is about the right of the assessee Company to carry forward the loss of the year 1946 under the provisions of the Travancore Act read with S. 24 (2) of the Indian Income-tax Act and the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, to the assessment year, 1951-52, in the assessment of the Company for its year of account, the Calendar Year, 1950. The Income-tax Officer held that the loss of the year 1946 could not be carried forward to that year, since it had lapsed after two years under S. 32 of the Travancore Act, and S. 24(2) was not applicable, in view of paragraph 3 of the Order mentioned above. The order of the Income-tax Officer was confirmed in appeal by the Appellante Assistant Commissioner and the Appellate Tribunal. The Tribunal was moved for a case, but declined to state one ; but the High Court called for statement of the case under S. 66(2) and the abovementioned question was decided in favour of the assessee Company. The only question argued in this appeal is whether the High Court was right in the answer it gave. The assessee Company was not represented at the hearing before this Court.
5. The Indian Income-tax Act was extended to Travancore-Cochin by S. 3 of the Indian Finance Act, 1950. By S 13(1) of the same Act, it was provided :
"If immediately before the 1st day of April, 1950, there is in force in any Part B State...............any law relating to income-tax.................that law shall c
