1975 (2) TMI 2 - SC - Income Tax

Whether the capital loss could be determined and carried forward in accordance with the provisions of section 24, when the provisions of section 12B, itself were not applicable - capital loss could not be determined and the assessee is not entitled to the carry-forward benefit because capital gains did not form part of the total income revenue s appeal allowed

Summary

Issues Involved:
1. Capital Loss Determination and Carry Forward: Whether the capital loss of Rs. 28,662 could be determined and carried forward in accordance with the provisions of section 24 of the Indian Income-tax Act, 1922, when the provisions of section 12B of the Income-tax Act, 1922, were not applicable in the assessment year 1955-56.

Issue-wise Detailed Analysis:

1. Capital Loss Determination and Carry Forward:
The key question referred to the High Court was whether the capital loss of Rs. 28,662 could be determined and carried forward under section 24 of the Indian Income-tax Act, 1922, despite section 12B not being applicable in the assessment year 1955-56. The High Court had answered this question in the affirmative, but the Supreme Court re-evaluated this stance.

Facts and Circumstances:
- The assessee, a private limited company, purchased shares in 1952 and received bonus shares in 1953.
- The shares were sold in September 1953, resulting in a claimed loss of Rs. 84,862, which was initially disallowed by the Income-tax Officer as a capital loss.
- The Appellate Assistant Commissioner reduced the loss to Rs. 28,662 and classified it as a capital loss.
- The Tribunal allowed the capital loss to be carried forward and set off against future capital gains.

Contentions:
- Revenue's Argument: The revenue contended that capital gains in section 24(2A) referred only to gains taxable under section 12B. Since capital gains were not taxable in the relevant period (April 1, 1948, to March 31, 1956), the loss could not be carried forward.
- Assessee's Argument: The assessee argued that the right to carry forward a loss under any head recognized by section 6 did not depend on the taxability of income under that head. The loss should be adjustable against future capital gains under section 24.

Legal Provisions and Interpretation:
- Section 6: Enumerates heads of income, including capital gains.
- Section 12B: Deals with the computation and taxability of capital gains, which was not applicable from April 1, 1948, to March 31, 1956.
- Section 24(2A) and (2B): Allows the carrying forward of capital losses to be set off against future capital gains.

Supreme Court's Analysis:
- The Court emphasized that the charging provisions of the Act indicated that "income" includes both profits and losses, and these must be computed in the manner laid down in the Act.
- Since section 12B was not operative during the relevant period, capital gains or losses could not be computed or charged under the Act.
- The Court clarified that the concept of carrying forward a loss is inherently tied to the possibility of setting it off against future taxable income. Since capital gains were not taxable during the relevant period, the loss could not be carried forward.
- The Court noted that the assessee had not shown any capital losses in the return, claiming it as a revenue loss instead. The Income-tax Officer's finding of a capital loss was incidental and not necessary.

Conclusion:
- The Supreme Court concluded that during the period when section 12B did not make capital gains chargeable, an assessee was neither required to show income under that head in the return nor entitled to file a return showing capital losses for the purpose of carrying them forward.
- The Court reversed the High Court's decision, ruling in favor of the revenue, and held that the capital loss of Rs. 28,662 could not be carried forward.

Final Judgment:
- The appeal was allowed with costs, and the High Court's judgment was reversed in favor of the revenue.

Summary:
The Supreme Court held that the capital loss of Rs. 28,662 could not be carried forward under section 24 of the Indian Income-tax Act, 1922, for the assessment year 1955-56, as section 12B, which dealt with the taxability of capital gains, was not applicable during that period. The judgment emphasized that the concept of carrying forward a loss is tied to the possibility of setting it off against future taxable income, which was not permissible in this case.