1. Business loss set-off claim — Non-resident status during loss year — Integration of Indian State into taxable territories — Carry forward of losses under Section 24, Income-tax Act. (Para 2 , 3 , 4 )
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1962 Supreme(SC) 70
SUPREME COURT OF INDIA
J.C.Shah : M.Hidayatullah : S.K.Das
Indore Malwa United Mills
Versus
Commissioner Of Income-tax (Central) Bombay
Case No. : 149 , 150 of 1961
Date of Decision : 2/19/62
Advocates Appeared: Dadachanji J.B. : Gutpa D. : Kolah R.J. : Mathur O.C. : Narain Ravindra : Sastri K.N.Rajagopal
Important Points
Business losses incurred by a non-resident assessee on income accruing outside taxable territories (and not received within them) cannot be carried forward and set off against future profits, as Section 24 applies only to losses of profits or gains that would have been assessable.
Subject
Tax Law - Income Tax
Act Referred
Headnote
(A) Indian Income-tax Act, 1922 - Sections 4(1), 14(2)(c), and 24(1) & (2) - Set off and carry forward of business losses - Non-resident assessee - Loss incurred in a territory not then taxable - Whether such loss can be set off against future profits after the territory becomes part of taxable territories - Section 24(1) and (2) refer to loss of profits or gains which would have been assessable in the taxable territories - Loss incurred by a non-resident on income accruing outside taxable territories, which was not liable to tax, cannot be carried forward and set off against future taxable income. (Paras 9, 10)
Facts of the case:
A company engaged in the manufacture and sale of textile goods incurred business losses in a previous year when it was treated as a non-resident and its manufacturing unit was located in a territory that was not then part of the taxable territories. In subsequent assessment years, the territory became part of the taxable territories and the company became a resident. The company sought to carry forward and set off the entire business loss from the year it was a non-resident against the profits of the subsequent years.
Findings of Court:
The court found that the loss incurred during the year the assessee was a non-resident, accruing in a territory not then taxable, was not a loss of "profits or gains" as contemplated under the Act for the purpose of set-off.
Issues: Whether business losses incurred by a non-resident assessee in a territory not then taxable can be carried forward and set off against business income of subsequent years after the territory becomes part of the taxable territories.
Ratio Decidendi: The provisions for carrying forward and setting off losses under Section 24 apply only to losses of profits or gains that would have been assessable in the taxable territories if they had been profits. Since a non-resident is not chargeable on income accruing outside the taxable territories and not received within them, such losses are not eligible for set-off under Section 24. The nature of the loss is determined by the law applicable in the year the loss occurred. (Paras 9, 10)
Result: Appeals dismissed with costs.
Facts of the case:
A company engaged in the manufacture and sale of textile goods incurred business losses in a previous year when it was treated as a non-resident and its manufacturing unit was located in a territory that was not then part of the taxable territories. In subsequent assessment years, the territory became part of the taxable territories and the company became a resident. The company sought to carry forward and set off the entire business loss from the year it was a non-resident against the profits of the subsequent years.
Findings of Court:
The court found that the loss incurred during the year the assessee was a non-resident, accruing in a territory not then taxable, was not a loss of "profits or gains" as contemplated under the Act for the purpose of set-off.
Issues: Whether business losses incurred by a non-resident assessee in a territory not then taxable can be carried forward and set off against business income of subsequent years after the territory becomes part of the taxable territories.
Ratio Decidendi: The provisions for carrying forward and setting off losses under Section 24 apply only to losses of profits or gains that would have been assessable in the taxable territories if they had been profits. Since a non-resident is not chargeable on income accruing outside the taxable territories and not received within them, such losses are not eligible for set-off under Section 24. The nature of the loss is determined by the law applicable in the year the loss occurred. (Paras 9, 10)
Result: Appeals dismissed with costs.
Legal Category Hierarchy
Table of Contents
2. Whether a non-resident is entitled to carry forward and set off business losses incurred in an Indian State against subsequent business income under Section 24(2). (Para 6 )
3. Section 24 applies only to taxable profits or gains; losses incurred by non-residents from income accruing outside taxable territories are not contemplated for set-off under the Act. (Para 9 , 10 )
4. For the application of Section 24(2), losses must be of a nature that could have been set off under Section 24(1) as taxable losses. (Para 10 )
5. Appeals dismissed; High Court's answer regarding the non-allowability of the loss set-off upheld. (Para 11 )
6. Can a non-resident set off losses incurred from income accruing outside taxable territories under Section 24 of the Income-tax Act?
No. Section 24(1) and (2) refer to taxable profits or gains. Since a non-resident is not chargeable on income accruing outside taxable territories and not received in India, such losses are not contemplated for set-off under these provisions. (Para 9 , 10 )
7. How is the nature of a loss determined for the purpose of carry-forward and set-off under Section 24(2)?
The nature of the loss is determined by the conditions existing in the year the loss occurred. To be eligible for carry-forward under Section 24(2), the loss must be of a nature that could have been set off under Section 24(1). (Para 10 )
8. What was the effect of Section 14(2)(c) on losses incurred within Indian States?
Section 14(2)(c) exempted income accruing in Indian States unless received in British India. Consequently, the provisos to Section 24 ensured that losses incurred in Indian States could only be set off against profits accruing in Indian States. (Para 9 )
S.K.DAS, J.
(1) THESE are two appeals on a certificate of fitness granted by the High Court of Judicature at Bombay under s. 66A(2) of the Indian Income-tax Act, 1922. The relevant facts which have given rise to them are shortly stated below.
(2) THE Indore Malwa United Mills, a limited liability company, is the appellant before us and will be referred to in this judgment as the assessee company. The respondent is the Commissioner of Income-tax(Gentral), Bombay. The assessee company carried on a business of manufacture and sale of textile goods. The manufacture was made at its mills in Indore which was Indian State before integration and had its own law as to income-tax known as the Indore Industrial Tax Rules, 1927. The sales of textile goods were made at various places, some inside and some outside the taxable territories of British India. For and upto the assessment year 1949-50 the assessee company was treated as a non-resident within the meaning of s.4A of the Indian Income-tax Act, 1922. For the assessment years 1950-51, and 1951-52 which are two assessment years under consideration, the account years were the calendar years 1946 and 1950 respectively. Indore became a part of the taxable territories within the meaning of the Indian Income- tax Act is the two assessment years and the assessee company was held to be resident and ordinarily resident" with the meaning of- that Act. Upto the assessment year 1949-50 that part of its profits which was received in British India was subjected to tax together with its other income which accrued in British India, namely, interest on securities and interest on bank accounts. In the assessments made for the assessment years 1948-49 and 1949-50 the position of the assessee company was stated to be as follows: 1948-49 Income under the head Interest on securities ... Rs. 1,032 Income under the head "Other-sources interest from banks ... Rs. 231 Rs. 1,263 Business loss ... Rs. 1,992.00. Balance of loss Rs. 729.00 carried forward. 1949-50 Interest on securities ... Rs. 1,023 Bank interest ... Rs. 213 Rs. 1,236 Less : loss of 1948-49 set off ... Rs. 729 Total income ... Rs. 507
(3) IN making the calculation of business profits or loss received or arising in the taxable territories, a proportion was struck between the total turn-over of the assessee company and its sales the proceeds whereof were received in the taxable territories. The following table, which is part of the order of assessment of 1950-51, shows clearly how the calculation was made.
Net profit Depreciation Business Total Sales for Business profit Other Total income
of the as per income turnover which considered as income for
Assessment company the Indian of the of the proceeds having been accruing the purpose
before Income-tax company company were received in the in the of assess
year allowance Act received taxable taxable ment under
of in the territories (by territories the Indian
depreciation (Col. 2 taxable apportioning the Income-tax
minus territories amount in Act.(Col.7
col.3) col. 4 in the plus col. 8)
proportion of
col 5 : col. 6)
1 2 3 4 5 6 7 8 9
Rs. Rs. Rs. Rs. Es. Rs. Rs. Rs.
1946-47 1,81,71,152 52,68,048 5,05,296 1,854 5,07,150
1947-48 - - 1,45,22,377 5,46,322 21,028 1,467 22,495
1948-49 : Loss -- 1,57,82,905 60,000 1,992 1,263 729
(loss) (loss)
(4) DURING the course of the assessment proceedings for 1950-51 the assessee company claimed that it was entitled to a set off of the entire losses of the assessment year 1948-49 which, it was common ground before the Tribunal, came to Rs. 5,19,590.00, and not merely the proportionate loss. The assessee company also claimed that the depreciation allowances of the two years 1948-49 and 1949-50 to which effect could not be given in those years and which had, therefore, to be carried forward should be added to the depreciation allowance of 1950-51 and be set off against the profits and gains of the assessee company liable to assessment in t
