1963 (7) TMI 91 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 34 for carrying forward losses under section 24(2)(iii) of the Income-tax Act, 1922.
2. Scope of enquiry under section 34 of the Income-tax Act, 1922.
3. Interpretation of sections 22 and 34 of the Income-tax Act, 1922.
4. Legal fiction created by section 34 and its limitations.

Detailed Analysis:

1. Applicability of Section 34 for Carrying Forward Losses under Section 24(2)(iii):
The primary question was whether the assessee was entitled to carry forward the losses substantiated by the Income-tax Officer for the assessment years 1953-54 to 1955-56 under section 24(2)(iii) of the Income-tax Act, 1922. The court concluded that in a proceeding under section 34, initiated for assessing income alleged to have escaped assessment, the Income-tax Officer could not grant relief to the assessee under section 24(2)(iii) if he concluded that the assessee had suffered losses in the relevant years. The court emphasized that relief under section 24(2)(iii) could only be given "in the course of the assessment of the total income of the assessee" and not in a proceeding under section 34.

2. Scope of Enquiry under Section 34:
The court clarified that the scope of an enquiry under section 34 is limited to assessing or reassessing such income, profits, or gains which have escaped assessment, were under-assessed, or were assessed at too low a rate. It does not cover the entire field of section 23, which pertains to the assessment of the total income of the assessee. The court cited several judgments, including P.L.M.P.L. Palaniappa Chettiar v. Commissioner of Income-tax and In re Kashi Nath Bagla, to support the view that section 34 does not require reopening the entire assessment but is confined to the specific items of escaped income.

3. Interpretation of Sections 22 and 34:
The court examined the relevant portions of sections 22 and 34. Section 22(2A) requires an assessee who has sustained a loss to furnish a return within the time specified to carry forward the loss. Section 34(1) allows the Income-tax Officer to issue a notice for reassessment if income has escaped assessment. The court emphasized that section 34 creates a legal fiction that the notice under section 34(1) is deemed to be a notice under section 22(2) only for the purpose of assessing escaped income, not for reassessing the total income.

4. Legal Fiction Created by Section 34 and Its Limitations:
The court noted that the legal fiction created by section 34 should be limited to its purpose and should not be extended beyond that legitimate field. The court cited the Supreme Court's decision in Bengal Immunity Co. Ltd. v. State of Bihar to emphasize that the legal fiction is to be limited to the purpose for which it was created. The court concluded that section 34 does not confer the power to reassess the total income of the assessee but is limited to assessing the escaped income.

Conclusion:
The court answered the referred question in the negative, holding that the assessee was not entitled to carry forward the losses for the assessment years 1953-54 to 1955-56 under section 24(2)(iii) in a proceeding under section 34. The assessee was directed to pay the costs of the Revenue, with an advocate's fee of Rs. 250.