Commissioner of Income-Tax, Punjab v. Kulu Valley Transport Co. (P) Ltd.

Grover, J. These appeals arise from a judgment of the Punjab High Court answering the following question which had been referred to it by the Income tax Appellate Tribunal in the affirmative and in favour of the assessee :

"Whether the losses of Rs. 1,51,520/- and of Rs. 48,977 /- returned by the assessee in January .1956 for the assessment years 1953-54 and 1954-55 respec-tively require in law to be determined and carried for-ward under s. 24(2) of the Income tax Act?"

(I) 52 l.T.R. 609. (2) 49°1.T.R. 846. The assessee Kulu Valley Transport Co. (P) Ltd. is a private company incorporated under the Indian Companies Act 1913 having its registered office at Pathankot. In January 1956 the company voluntarily filed returns under s. 22 ( 3) of the Income tax Act 1922, hereinafter called the "Act", 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 company under s. 22(2) of the Act. The Income-tax Officer held that since the returns had been filed after the statutory period the company was not entitlei:! to carry forward the losses for both the years in the subsequent assessments. Before the Appellate Assis-tant Commissioner two main points were urged. The first was that the delay in the submission of the returns should have been condoned and secondly the returns should have been treated as having been made under s. 22 ( 3) in which case also they · would be valid returns under s. 22(2<'.\) by reading sub-sections (3) and ( 1 ) of s. 22 together. The Appellate Assistant Commissioner did not find any sufficient or reasonable cause for condoning the delay. On the second point he decided against the company. The Tribunal agreed with the view of the Appellate Assistant Commissioner and on the main point held that the company. was not entitled to the benefit of carrying forward the losses as it had not filed the returns in accordance with section 22(2A) of the Act.

Section 24(2) contains substantive prov!Slons relating to carrying forward of the loss. It provides that where any assessee sustains a loss or profit or gains in any year being a previous year in any business, profession or vocation and the loss cai:mot be wholly set off under sub-s. (I) (of s. 24) 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. Sub-section 2A of s. 22 was inserted by the Income tax (Amend-ment) Act 1953 w!Th effect from April 1, 1952.

"If any person who has not been served with a notice under sub-section (2) has sustained a loss of profits or gaJns in any year under the head "Profits and gains of business, profession or vocation", and such loss or any part thereof would ordinarily have ben carried forward under sub-section (2) of s. 24, he shall, if he is to be entitled to the benefit of the carry forward of loss in any subsequent assessment, furnish within the time specified in the general notice given under sub-section ( 1 ) or within such further time as the Incom~-tax Officer in any case may allow, all the particulars required under the prescribed form of return of total income and total world income in the same manner as he would have furnished

C.l.T. v. K. v. TRANSPORT co. (Grover,!.) 4 BI a return under sub-section ( 1) had his income exceeded the maximum amount not liable 'to income tax in his case, and all the provisions of this Act shall apply as if it were a return under sub-section ( 1) ."

According to s. 22 (1) the Income-tax Officer was to give public notice on or before the first day of May in each year by publication in the prescribed manner r.equiring every person whose total income during the previous year exceeded the maximum amount which was not chargeable to income tax to furnish within such period not being less than 60 days as might be specified in the notice a return of his total income and total world income during that year. The Income-tax Officer could in his discretion extend the date for the delivery of the return .. Under s. 22(2) if the income-tax Officer was of the opinion that income of any person was of such amount as to render him liable to income tax b.c could serve a notice on him requiring him to furnish within siJch period not being less than 30 days ;a return showing his total income and total world income during the ·previous year. The date for delivery of the return could again be exten~d in the dis-cretion of the Income-tax Officer. Section 22 ( 3) provided that if any ·person had not furnished a return within the. time allowed by or under sub-s.{ 1) or sub-s. (2) -or having filrnished a return under either of those suh-sections discovered any-amount or wrong statement therein, he Cl)uld furnish a return or ll:"i:evised return at any time before the assessment was made. Thus the scheme of s. 22 is that a public or general notice is t~ be given. ev~ry year by the Incor.1e-tax Officer OI' he could even give .an mdlVldual or spe<:i_al notice. · But if a person. has n()t furnisheli. a return wit!Un the time allowed by or under the first two sub-sections of s. 22 he could furnish a return at any time before the assessment is made. It is well settled by now ·that a return can always be filed at any time before the assessment is made. The Income-tax Officer has to make the assessment on· that return and he could not choose to' ignore it. The question that immediately arises is whether in case of a voluntary return in which loss has been shown and determined the Incomo-tix Officer can decline to give the benefit under s. 24(2) of carrying forward the loss on the ground that the assessee did not comi>IY with the provisions of s._ 22(2A) of the Act. tn other words when there is an express provision in that sub-section which must be avililed of if the the assessee is to be entitled to the benefit of carrying forward of loss in any subse-, quent assessment can he take advantage of the pf9visions of s. 22 ( 3 ) and claim that since he has filed a voluntary return before anv assessment has been made and if it be determined that he has suffered a loss lre is entitled to cariy forward that loss.

The argument 001 Jw,Jialf of the assessee is thats. 1.4f2) con-fers the right to carry forward the loss to the following year pro-vided the conditions contained in the sub-section are satisfied. There is no further requirement that has to be fulfiled so far as the substantive Jaw is concerned. Section 22(2A) is merely a proce-dural provision and it also provides that once a return has been furnished in accordance therewith all the provisions of the Act become applicable as if it were a return under sub-section ( 1 ) . That would attracts. 22(3) and therefore a voluntary return can be filed ev.im after the period mentioned ln sub-s. (2A) has expir-ed so long as the assessment has not taken place. It is pointed out that supposing a return is filed showing income X but the Income-tax Officer in the assessment proceedings holds that there has been a Joss and the assessee was mistaken in showing a profit, the assessee in such circumstances can certainly claim the benefit of s. 24 ( 2). If that is possible there is no reason or justification .for holding that although he could claim the benefit of s. 24(2) by filing a voluntary return in the given illustration he would be deprived of that benefit if he filed a return voluntarily showing a loss except in compliance with s. 22(2A). On the other hand the contention on behalf of the revenue is that s. 22 before its amendment in the year 1953 did not make any provision for the filing of a loss return voluntarily. Under s. 22(1) returns which were invited were only of taxable income. No return which in the opinion of thC person making it was a loss return was intended to be filed under s. 22(1 ). It was only under s. 22(2) that the return that was required to be filed was in pursuance of the indi-vidual no~ce given by the Income-tax Officer. . Since by this notice a return in the prescribed form had to be filed by a person to whom the notice was issued whether it was of profit or loss, a loss return could' therefore be filed only in pursuance of a notice served under s. 22(2) but not voluntarily. It is by virtue of the provisions contained in s. 22(2A) that a loss return can be filed where a person has not been served under sub-s. (2) in order to get the benefit of the carrying forward of the loss under s. 24 ( 2). This is indeed expressly provided by sub-s. (2A) of s. 22.

It would appear that the position before the amendment in 1953 with regard to the filing of a voluntary return of loss was not clear. Although apparently under the provisions of s. 22 there was no bar to the filing of such a return in the same way as the return showin~ profit could be filed under s. 22 ( 3) there was conflict of judicial opinion on the point. The Calcutta High Court had held in Commissioner of Agricultural income tax v. Sultan Ali Gharami(') and Commissioner of Income tax, West Bengal v. Govindlal (2) that voluntary returns showing a loss coufd not be regarded as returns at all and the Income-tax Officers was not required to make any assessment on them. The Bombay High

C.l.T. v. K. v. TRANSPOllT co. (Grover,/.) ' 463 Comt, however, had taken a different · view m Ranchhoddas Kaisondas v. Commissioner of Income tax, Bombay City('). In that case the return which had been filed voluntarily was below the taxable limit. According to the Bombay High Court such a return could be validly filed under s. 22(3) and the Income-tax Officer could not ignore it so long as the return had been filed before any assessment had been made. In Commissioner of Income tax, Bombay City v. Ranchhoddas Karsondas(') which was an appeal against that decision this Court while upholding the Bombay view observed :

- "It is a little difficult to understand how the exis-tence of a return can be ignored, once it has been filed. A return showing income below the taxable limit can be made even in answer to a riotice under s. 22 ( 2) . The notice under section 22( 1) .requires in a general way ., what a notice under section 22(2) requires of an indivi-dual. If a return of income below the taxable limit is a good return in answer to a notice under s. 22(2), D' there is no reason to think that a return of a similar kind

in answer tq1a public notice is no return at all".

'/ · :· ' - c. 1 The amendment in 1953 seems to have bei:n made to clarify the law about the fi_ling of a return ,~bowing a' loss voluntarily. It was declared that such a return could be validly made. The time which was specified for filing the return was on the same lines as in su.b-s. ( I ) of s. 22 and all the provisions of .the Act were to apply as if it was a return under sub-s. (1 ).

New the question which was submitted for the .opinion of the High Court in the present case, consisted of two parts, viz. ( 1) whether the loss returned by the assessee for the assessment years in question was required in law to be determined by the Income-tax Officer and ( 2) whether_ those losses could be carried forward after being set off under s. 24(2) of the Act. The first part of the question stood concluded by the decision of this Court in Ranchhoddas Karsondas' case('). The Income-tax Officer could not have ignored the return and had to determine those losses. Section 24 ( 2) confers the benefit of losses being set off and carried forward and there is no provision in s. 22 under which losses have to be determined for the purpose of s. 24(2). The. question which immediately arises is wh~ther s. 22(2)(A) places any limitation on that right. This st1b-section which has been reproduced before simply says that in order to get the benefit of s. 2412) the assessee must submit his loss return within the time specified bys. 22(1). That provision must beread withs. 22(3) for the purpose of determiiiing the time within which a return has to be submitted. It can well be said thats. 22(3) is merely a proviso.to s. 22(1), Th1,1s 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-s. ( 1) of s. 22 must be read ,along with sub-~. ( 3) of'.,that section. A return whether it is a "return of income, profits-or gains or of loss must be considered as having been made within the time prescribed if it is made withi11 lbe time specified in s. 22 ( 3). In other words if s. 22 ( 3) is eomplied with s. 22( 1) also must be held to have been complied with. If compliance has. been made with the latter provision the requirements of s. 22(2) (A) would stand satisfied. .

On behalf of the revenue it is pointed out that a great deal of inconvenience will result if a voluntary return can be entertained at any time in accordance with s. 22 ( 3) when loss is involved and m. order to give the assessee the benefit of the carry forward of the loss of number of assessments would have to be reopened. It is difficult to accede to such an argument merely on the ground of inconvenience. Moreover it is common ground that a voluntary return cannot be filed beyond the period specified in s. 34 ( 3) of the Act. It cannot be overlooked that even if two views are pos-sible the view which is favourable .to the assessee must bl' accepted while construing the provisions of a taxin~ statute.

In the judgment under appeal reliance was placed on a deci-sion of the Bombay High Court in Radhakrishna Rungta & Others v. Seventh Income-tax Officer C-II Ward Bombay(') and in our opinion the view taken therein is sound and must be upheld.

The appeals fail and are dismised with costs. One hearing fee.

ORDER

In accordance with the decision of the majority, these appeals fail and are dismissed with costs, one hearing fee.

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 859 and 860 of 1966.

Appeals from the judgment and order dated April 6, 1966 of the Punjab High Court in Income-tax Reference No. 42 of 1962.

'Jagadish Swarup, Solicitor-Genera/ and 8. D. Sharma, for the appellant (in both the appeals).

8. Sen, S. K. Dholakia and Vineet Kumar, for the respondent (in both the appeals).

Ll2Sup.Cl[70-IS

The Judt!uient of K. s. HEGDE and A. N. GROVER, JJ. was d•liver11d by GROVER, J.J. C. SHAH, J. gave a dissenting Opinion.

Shah, J.. The Kulu Valley Transport Co. (P) Ltd.- hereinafter called 'the Company'--<lid not file returns of income in respect of the assessment year 1953-54 and 1954-55 within the period specified in the general notice under 11. 22 ( l) of the In-come-tax Act, 1922. In January 1956 the Company filed volun-tary returns disclosing loss of inco111e in the course of its business amounting to Rs. 1,51,520/- and Rs. 48,977 respectively for the two years in question. The· Income-tax Officer refu~ed to deter-mine the loss, observing-

"This is a loss case and the return has been filed after the statutory time. . The Company is therefore not entitled to the benefit of carry forward of loss in the subsequent assessments. The case is, th~refore, filed." Against the order of the Income-tax Officer, appeals were pre-ferred to the Appell<1te Assistant Commissioner. That Officer rejected the Company's reyuest for extension for filing the returns, and dismissed the appeals, observin11~

"The return made under s. 22(2AJ can only be taken to be a return under sub-s. ( 1) of s. 22 for the pufJJose of this Act, if it is made· within the satutory time prescribed in sub-s. (2A) of s. 22."

The Income-tax Appellate Tribunal in second appeal held that the expression "all the provisions of this Act shall apply as if it were a return under sub-section (-1)" in sub-s. (2A) only applies to a vaTid return i.e .. return which is filed within the time-limit prescribed under sub-s. (I ) .. The Tribunal rejected the contention that a voluntary or return disclosing loss of income sub-mitted after the expiry the perio<l for filing a return under .sub-s. (1 ) may be deemed to be a return under sub-s. (3), and the loss disclosed therein must be determined under sub-s. (2) of s. 24 to qualify the assessee to carry it in the following year.

At the instance of the assessee the Tribunal referred the following question to the High Court of Punjab :

"Whether the losses. of Rs. 1,51,520 and of Rs. -48,977 return.ct by tlie assessee in January 1956 for the assessment years 1953-54 and 1954-55 respec-tively require in law to be determined and carried for-ward under s. 2-4(2) of'the Income-tax Act ?"

The High ·Court answered the question in the affirmative. The Commissioner of Income-tax has appealed to this Court with certificate granted by the High Court.

Sub-section (2A) of s. 22 which was added to s. 22 by s .. 14 of Act 2S of 1953 with effect from April I, 1952, provid~s:

"If any person who has not been served with a notke under sub-section (2) has sustained a loss of profits or gains in any year under the head "Profits and gains of business, profession, or vocation", and such loss of any part thereof would ordinarily have been carried forward under sub-section ( 2) of section 24, he shall, if he is to be entitled to the benefit of the carry forward of loss in any subsequent assessment, furnish within the time specified in the general notice given under sub-section ( I) or within such further time as the Income-ta.x Officer in any case may alk,w. all the particulars re· quired under the prescribed form of return of total income . . . . in the same manner ·as he would have furnished a return under sub-section ( l ) had his income exceeded .the maximum amount not liable to in-come-tax in his case, and all the provisions of this Act. shall apply as if it were a return under sub-section (I ) :· On the plain words used by the Parliament, sub-s. (2A) applies only where the return is. filed within the time specified in the general notice under sub-s. ( l) or within such further time as the Income-tax Officer may allow. A return not filed within the time prescribed l>Y sub-s. (I) or time extended by the Income-tax Officer does not comply with the requirement of sub-s. (2A ). and the assessee cannot claim that the loss be detennined and carried forward.

The High Court however held that a voluntary return filed after the expiry of the period specified in sub-s. (l) but before·the assessment is made must still be entertained as a return filed under sub-s. ( 3), ev~n if it returns a loss of income under the head "'Profits and gains of business, profession or vocation". In the view of the High Court, sub-s. ( 3) of s. 22 applies to all returns whether disclosing a profit or loss, and whether made voluntarily or pursuant to notice under sub-s. (2), and on that account even if the return is filed beyond the period prescribed by s. 22 ( I ) . and discloses a loss the Income-tax Officer was bound to determine the loss so that it may be carried forward in the following year. In reaching that conclusion the High Court purported to rely upon Commissioner of Tncome-tax, Bombay City TT v. Ranclzlwtlas u7sup.CI/70-l6 · Karsondas(') and Radhakrishna Rungta & Ors. v. Seventh Income-tax Officer, C-ll Ward, Bombay(2 ).

The view expressed by the High Court cannot, in my judg-ment be sustained. The assessee who has sustained loss. of inco~e under the head "Profits and gains of business, profession or vocation" and who has not been served with a notice under ~ub-s. ( 2) may qualify for carrying forward the loss in any sub-sequent year of assessment must furnish within the time specified in the general notice under sub-s. ( I ) or such time as may be extended by the Income-tax Officer a return in the prescribed form disclosing that loss. Under a return filed not in compliance·with a notice under sub-s. (2) disclosing loss and filed beyond the time C· specified in the general notice. or extended time, the assessee can-not claim to carry forward the loss. The view expressed by the High Court _renders sub-s. (2A) otiose.

It is implicit in the conclusion reached by the High Court that . the right to carry forward loss which is expressly restricted by sub-s. (2A) may still b.e exercised under sub-s. ( 3). In deter-D' . mining whether the view expressed by the High Court is pennis' si ble, it is necessary to refer to the decisions of the Courts under s. 22 before it was amended by Act 25 of 1953. It was held in interpreting s. 22 before it was amended that a return filed beyond the period specified in the general notice, if filed before the assess-ment is made, must, if it disclosed profit exceeding the maximum exempt from tax, be dealt with according to the provisions of the Act. There was a coiiftict of decisions on the question whether a return could be filed voluntarily disclosing income below the limit I of exemption. In P. S. Rama Iyer v. Commissioner of Income- . tax( 3 it·was held that a return disclosfog profit below the maxi-

) mum exempt from tax was a valid return : the Calcutta High Court in Commissioner of Agricultural Income-tax v. Sultan Ali(') I expressed a contrary view. This court in Ranchhoddas Karson-

das's case('), agreeing with the Bombay High Court held that a return disclosing income below the taxable limit submitted volun-tarily in ~swer to the general notice under s. 22 (I J of the Income-tax Act is a good return : it is a return such as the assessee considers represents his true income, and that a return in answer to the general notice under s. 22(1) or in.answer to a notice under s. 22(2) of the Income-tax Act may by virtue of s. 22(3) be filed at any time before assessment. A return voluntarily made bef~re the assessment cannot be ignored by the Income-tax Officer. In Ranchhoddas Karonda' s case(') the assessee had returned without a notice under ·s. 22(2) income which was less than the H·

(IJ 361.T.R. 569. (2) 491.T.R. 846.

(3) 32 l.T.R. 458. (4) 20 I.T.R. 432. maximum exempt from tax. But the case did not deal with a return in which loss was disclosed by the assessee. In Anglo. French Textile Co. Ltd. v. Commissioner of Income-tax, Madras : No. 4(') the assessee Company had submitted a "nil return" pur-suant to a notice under s. 22(2). The Income-tax Officer com· puted the income of the Company under s. 23 ( 1) of the Income· tax Act, 1922 as "nil". Proceedings were later started under s .. 34 of the Income-tax Act to assess the income which the Income-tax Officer believed to ha•e escaped assessment. The assessee then claimed that the loss of profits sustained by it in the previous year should be determined in the proceeding under s. 34 and such loss should be allowed to be carried forward and set off against the income which may be determined for the year for which the 1iotice under s. 34 was issued. The High Court of Madras. decid-ed the case on 11 point which is not relevant here. The case was carried. to this Court in appeal. In Anglo-French Textile Com-pany Ltd. v. Commiss~oner of Income-tax Madras(") this Court held that where no return w~ filed by an assessee at any stage of the case disclosing any income. profits or gains at all and proceed-ings were later started under s1'.34, the assessee could not claim in the course of tjlose proceedin~ that a certain loss of a previous year should be determined and1recorded. The Court observed at pp. 85 & 86:

"There is no provision fu the Act which entitles the assessee to have a loss recor!led or computed, unless something is to be done with the loss. Thus, under Section 24 (1 ) a loss can be set off against an income, profit or gain and under sub-section (2) the balance of a loss can be carried forward to a following year on the conditions set out there. Except for this, there is ;1othing eJse that can be called in aid.

But under sub-section (2) the loss can be carried forward when "the loss cannot be wholly set off under sub-section ( 1)" and in that event only the "portion not so set off' (an be carried forward. We are therefore thrown back on sub-section ( 1).

Sub-section ( 1 ) provides that where an assessee sustaips 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." Therefore, before any question of set-0ff c;an arise, there must be (1) a loss under one or more of the heads mentioned in Section 6, and (2) an income, profit or gain under some other head. It follows that when there

is no income under any head at all, there is nothing against which the loss can be set off in that year and unless that can be done sub-section (2) does not come into play ...

The Court held that loss of income will not be determmed, unless the assessee has more heads of income than. one, and the loss under one head is to be set off against income under any other head in that year of account. It 'Vas implicit in the judg-ment, that the taxing authorities will not determme loss under the head "Profits and gains of business, profession or vocation·· when the assessee has no other source of income.

The Parliament apparently realized the hardship involved in• preventing a person who has only one source (sµch source being profession, business or vocation) of income from carrying forward the loss to the subsequent years of assessment and incorporated uy Act 25 of 1953, with effect from April 1, 1952, sub-s. (2A) and enabled the assessee to carry forward the loss when he made a return within the time specified in sub-s. (I). even if there was no other source of income. The Parliament by the same Act amend-ed sub-s. ( 2) .of s. 24 and added the words "so much of the ioss as is not so set off or the whole loss where the assessee had no other head of income" after the words "cannot be whollv set off under sub-section ( 1) ". This was intended to supersede a part of the decision of this Court in Anglo-French Textile Company Ltd's case ( ' ) .

Sub-sections ( 1 ) , ( 2), ( 2A) and ( 3) of s. 22 must he inter-preted in this background. Undeniably sub-s. ( 3) confers upon the assessee a right to submit a return at any time before the assessment is made. Such a return must be voluntary or pursuunt to a notice under sub-s. (2). The return may disclose income or loss : if however the return was made before the Act was amended by the incorporation of sub-s. (2A) in s. 22, and it disclosed loss only, according to the decision of this Court loss will not be determined if there be a single source of income. If it be a return filed not pursuant to a notice under sub-s. (2) of s. 22, and dis-closes a loss of income under the head "Profits and gains of busi-ness" the loss will be detennined and carried forward only if it is made within the period specified in sub-s. (I) or the period extend-ed by the Income-tax Officer. The clause "if he is to be entitled to the benefit of the carry forward of loss" in sub-s. (2A) clearly means that the right to carry forward loss suffered under the head of income computable under s. I 0 may only be exercised if the voluntary return is filed within the period specified in sub-s. (I). Sub-section ( 3) cannot in my judgment be read as implying that

C.I.T. v. K. v. TRANSPORT co. (Grover,/.) 459 notwithstanding the reitrictions placed by sub-s. (2A) a return disclosing loss of income computable under s. IO will not only be entertained but the loss determined and declared under s. 24(3) so as to enable the assessee to carry it forward. If a return of Joss may be filed at any time in pursuance of a general notice under sub-s. (I), sub-s. (2A) will serve no purpose whatever. The limitation placed upon the right to file a return of loss in clear-ly intended to avoid practical difficulties in the administration of the Act. · If the interpretation placed by the High Court be accepted, a tax-payer may avoid making returns pursuant to notice under sub-s. ( 1), and when sought to be assessed in sub-sequent years he may claim to bring before the authorities tran-sactions relating to many previous years which he has not dis-closed.

The view which I am taking was suggested in Tutsi Das Jas-want I.al Kuthiala and Others v. Income-tax Officer, A-Ward, Ambala and Another('); and also in Radhakrishna Rung ta'> case(') at p. 855.

It is true as held by this Court in Ranchhoddas Karonda>'s case(") that a return disclosing income below the taxable limit or disclosing loss cannot be reje(\ted by the Income-tax Officer as not being a return of income. The view to the contrary in Commis-sioner of Income-tax v. Govin'eflal Dutta(') is erroneous. But that does not rnean that the assesse~ may after filing a voluntary return of loss income under the head •IJ>rofits and gains of business" after the period specified in s. 22 (I ) ',claim that the loss be determined and carried forward.

In the present case no notice under sub-s. (2) was issued to the Company, and the Company made a voluntary return. The r"tum was strictly governed by the terms of sub-s. (2A) of s. 22 and upon such a return the Company could not claim that loss or income be determined and carried forward.

I would therefore answer the question in the negative.