1998 (3) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Set-off of business loss incurred in Malaysia against business income earned in India.
2. Applicability of Section 72 of the Income-tax Act.
3. Impact of change in residential status on the set-off of losses.

Issue-wise Detailed Analysis:

1. Set-off of Business Loss Incurred in Malaysia Against Business Income Earned in India:
The primary issue was whether the assessee, who incurred a business loss in Malaysia during the assessment year 1976-77, could set off this loss against his business income earned in India for the assessment year 1978-79, after becoming a non-resident. The assessee was a resident of India in 1976-77 and carried forward a net loss of Rs. 28,699 from his Malaysian business. After becoming a non-resident in 1977-78, the assessee claimed the right to set off the carried-forward loss against his Indian business income. Both the Income-tax Officer and the first appellate authority rejected this claim, but the Tribunal allowed it, holding that under Section 72, the assessee had a vested right to carry forward the loss.

2. Applicability of Section 72 of the Income-tax Act:
The Tribunal's decision was challenged by the Revenue, which argued that the Tribunal's view was inconsistent with Sections 5(2), 70, and 72 of the Act. The Revenue's counsel emphasized that the loss from the Malaysian business could not be set off against the Indian business income once the assessee became a non-resident. The Supreme Court's decision in CIT v. Harprasad and Co. P. Ltd. was cited, stating that the concept of carry forward of loss involves set-off against profits of a subsequent year and is only applicable if the income is from a taxable source. The court held that if the income from a subsequent year is from a non-taxable source, the carry forward of loss is not permissible.

3. Impact of Change in Residential Status on the Set-off of Losses:
The Revenue also cited the Supreme Court's decisions in Indore Malwa United Mills Ltd. v. CIT and Reliance Jute and Industries Ltd. v. CIT to support their argument. These cases reinforced that the law applicable in the assessment year governs the right to carry forward and set off losses. The proviso to Section 72(1)(i) was highlighted, which requires the business in which the loss was originally computed to continue in the relevant assessment year. The assessee's change in residential status meant that the Malaysian business was no longer subject to Indian tax laws, thus disqualifying the set-off claim.

Conclusion:
The court concluded that the assessee could not set off the loss from the Malaysian business against the Indian business income after becoming a non-resident. The proviso to Section 72(1) necessitates that the business in which the loss was incurred must continue to be taxable under Indian law. Since the Malaysian business was no longer taxable due to the assessee's non-resident status, the set-off was not permissible. The Tribunal's finding that the business continued was erroneous because the Malaysian business was a different source from the Indian business. The court held that the assessee's voluntary change in status disentitled him from claiming the set-off benefit. Therefore, the question was answered in the negative, in favor of the Revenue, with costs awarded to the Revenue.