1971 (5) TMI 23 - HC - Income Tax

Carried forward and set-off of loss in the sales of an asset - As the loss of the assessee relating to the year 1951-52 cannot be called as loss under the head capital gains even as per the law as stood in 1958-59, it cannot be carried forward and set off against capital gains of the year 1956 onwards - Whether evidence of market value is necessary to determine the market value of property acquired for the purpose of capital gains held that in the circumstances of the case, the capital gain of the assessee could not be calculated on the basis of the third proviso to section 12B(2)

Issues Involved:
1. Set off of capital loss incurred in the assessment year 1951-52 against capital gains in the assessment year 1959-60.
2. Valuation of shares under the third proviso to section 12B(2) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Set off of Capital Loss Incurred in the Assessment Year 1951-52 Against Capital Gains in the Assessment Year 1959-60:
The primary issue was whether the assessee could carry forward a capital loss of Rs. 1,05,067 from the assessment year 1951-52 and set it off against capital gains in the assessment year 1959-60. The relevant legislative changes were noted, including the introduction of section 12B in 1947, which initially made capital gains taxable, and subsequent amendments in 1949 that suspended the taxation of capital gains for transactions after March 31, 1948, until it was reintroduced on April 1, 1957.

The court observed that sections 24(2A) and 24(2B) provided for the set-off and carry forward of capital losses but did not change when section 12B was suspended. The court concluded that since there was no provision for taxing capital gains between April 1, 1948, and March 31, 1956, any loss during this period could not be considered a loss under the head "capital gains." Therefore, the loss incurred in 1951-52 could not be carried forward to 1959-60.

The court also rejected the argument that the right to carry forward losses under section 24(2B) was independent of the chargeability under section 12B. It emphasized that the loss must be under the head "capital gains," which was not applicable for transactions in the year 1951-52. Consequently, the court held that the assessee was not entitled to carry forward the loss to 1959-60.

2. Valuation of Shares Under the Third Proviso to Section 12B(2) of the Indian Income-tax Act, 1922:
The second issue concerned whether the fair market value of the shares as of January 1, 1954, should be considered instead of the actual cost of acquisition. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal all rejected the assessee's claim, noting that the assessee failed to provide sufficient evidence to establish a higher market value for the shares.

The court explained that under the third proviso to section 12B(2), the fair market value could be substituted for the actual cost if the Income-tax Officer was satisfied with the fair market value as of January 1, 1954. However, the assessee's evidence, including balance sheets showing losses and general claims of increased asset value, was insufficient to determine the precise fair market value. The Tribunal held that the connection between increased assets and share value was too remote and far-fetched.

The court agreed with the Tribunal, stating that without concrete evidence to establish the fair market value, the benefits of the third proviso could not be granted. Therefore, the capital gain had to be calculated based on the actual cost of acquisition.

Conclusion:
The court answered both questions in the affirmative and in favor of the department. The assessee was not entitled to carry forward the capital loss from 1951-52 to 1959-60, and the valuation of shares could not be based on the fair market value as of January 1, 1954, due to lack of sufficient evidence. The Commissioner of Income-tax was awarded costs of Rs. 200.

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