Commissioner of Income Tax v. A. R. Alagappan — 1998 DIGILAW 328 (MAD)

Judgment :- R. JAYASIMHA BABU, J. The common question arising out of the assessments of the assessee for the asst. yrs. 1977-78 and 1978-79 and referred to us for our decision is, as to whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the business loss incurred in Malaysia by the assessee for the accounting year 1976-77; when he was a citizen of India having business income in India and also in Malaysia, can be set off against the business income earned in India for the asst. yr. 1978-79 when he became a non-resident. The assessee was a resident of India in the year 1976-77 and the computation of his income from the business that he carried on in Malaysia showed a net loss. That loss was allowed to be carried forward to the subsequent assessment year, as the income earned from the Indian business in that year was insufficient to set off that loss from the Malaysian business against the profits on the Indian business. The amount so allowed to be carried forward was a sum of Rs. 28, 699. The assessee became a non-resident during the asst. yr. 1977-78. The assessee, after becoming a non-resident, was no longer required to include the income from his business in Malaysia in his return of income for the purpose of taxation under the Indian IT Act, 1922 in view of s. 5(2) of the IT Act. Nevertheless, the assessee claimed a right to set off the loss incurred by the assessee in his Malaysian business in the earlier assessment year against his income from his business in India to the succeeding assessment year. That claim of the assessee was negatived by the ITO as also by the first appellate authority. Nevertheless, the assessee claimed a right to set off the loss incurred by the assessee in his Malaysian business in the earlier assessment year against his income from his business in India to the succeeding assessment year. That claim of the assessee was negatived by the ITO as also by the first appellate authority. The Tribunal, however, took a different view in the matter and allowed the claim holding that under s. 72 of the Act, the assessee had a vested right to carry forward the loss, and once the loss had been computed, it was required to be allowed in the subsequent assessment years, especially in view of the fact that the Revenue had not questioned the computation of the loss in the assessment year in which that computation was made.The learned counsel for the Revenue submitted that the view of the Tribunal is not in accordance with the requirements of the Act, more particularly, ss. 5(2) , 70 and 72 of the Act. It was submitted that the assessee, admittedly, had two different sources of income, one in India, and the other in Malaysia, both being taxable under the head "Business income", that the loss suffered was in the Malaysian business and the Malaysian business was taken out of the purview of the Indian IT Act by the assessee becoming a non-resident during the asst. yr. 1977-78 and continuing to be a non-resident thereafter, as a consequence of which the assessee became disentitled to set off the loss incurred in a business which was no longer subject to the provisions of the Indian IT Act. The counsel submitted that though the assessee had a right when he was a resident to claim the benefit of set off, and carry forward of the losses from the Malaysian business against the income from the Indian business, such computation for each of those businesses having been made separately, the assessee had no right, after becoming a non-resident, to claim a set off of loss incurred in a foreign business against the income earned for the current assessment year from the Indian business, and in which year in the income from the foreign business was no longer subjected to tax under the Indian IT Act. The learned counsel relied upon the decision of the Supreme Court in the case CIT vs. Harprasad & Co. The learned counsel relied upon the decision of the Supreme Court in the case CIT vs. Harprasad & Co. (P) Ltd. in support of his submission that the concept of carry forward of loss cannot be considered in isolation, and that it involves the notion of set off which would be possible only against the profits of that business in a subsequent year. It was held by that Court in the case of Harprasad & Co. (P) Ltd. (supra) that : "The concept of carry forward of loss does not stand in vacuo. It involves the notion of set off. Its sole purpose is to set off the loss against the profits of the subsequent year. It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains, it any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. If follows that if such set-off is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing loss to be 'carried forward'. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source." * It is, therefore, clear that unless there is a taxable source, the question of setting off of carry-forward loss does not arise, as the loss is determined only for the purpose of being adjusted against the income from the taxable source. The counsel also relied on the decision of the Supreme Court in the case of the Indore Malwa United Mills Ltd. vs. CIT, wherein it was held that the reference to profits or gains in s. 24(1) of the Indian IT Act, 1922 refers to taxable profits or taxable gains, and it has no reference to income accruing or arising without British India, or without the taxable territories, which were not liable to be assessed in the case of non-residents and the loss claimed could not be carried forward and set off. It was further held that for determining the nature of the losses in question in that case for the relevant year, being 1948-49, the year in which the losses occurred, the fact that during the two asst. yr. 1950-51 and 1951-52, Indore was part of India could not give the assessee a right to set off under s. 24(2) of the Act.Reliance was also placed by the counsel in the case of Reliance Jute & Industries Ltd. vs. CIT, which was also a case that arose under s. 24(2) of the Indian IT Act 1922. The Court held that it is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year, unless otherwise provided expressly, or by necessary implication, and that a right claimed by an assessee under the law in force in a particular assessment year is ordinarily available only in relation to a proceeding pertaining to that year. The Court rejected the claim of the assessee in that case that it had a vested right to have the unabsorbed loss carried forward from year to year until it was completely absorbed. The unabsorbed loss in that case has been carried forward from the asst. yr. 1950-51, and the set off had been claimed in the asst. yr. 1960-61, notwithstanding the amendment made to s. 24(2)(iii) by the Finance (No. 2) Act, 1957, which prescribed a period of limitation for carrying forward to eight year, no period of limitation having been prescribed prior to the date of coming into force of the Amending Act. The Court held that there was no question of the assessee possessing any vested right under the law as it stood before the amendment, and that the unabsorbed loss for 1950-51 could not be, therefore, set off against the income of the appellant for the asst. yr. 1960-61. The Court held that there was no question of the assessee possessing any vested right under the law as it stood before the amendment, and that the unabsorbed loss for 1950-51 could not be, therefore, set off against the income of the appellant for the asst. yr. 1960-61. The counsel for the Revenue also placed strong reliance on the language employed in the proviso to s. 72(1)(i) , which reads as under : "Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year .........." * The business in respect of which the loss was originally computed, it was submitted by the counsel, must continue to be carried on in the previous year relevant to the assessment year, before the assessee can claim the benefit of the carried forward loss incurred in relation to that business. The computation of that loss, it was, submitted was the computation made in relation to the business, and, if the assessee carried on more than one business, then it is the business in which the loss was originally computed that should be carried on and it would not be sufficient, if the other business in which the loss had not occurred in the earlier year, alone continued to be carried on. The learned counsel for the assessee, on the other hand, submitted that the assessee is entitled to the benefit of set off claimed, as s. 72(1) of the Act does not require that in cases where a resident becomes a non-resident in a later assessment year, such an assessee becomes disentitled to carry forward the loss and set if off against his Indian income in cases where the loss had been suffered in the earlier year in his foreign business at the time when the assessee was a resident. The counsel also contended that the word 'business' used in the proviso refers to the head of 'income' and not the 'source' and that once loss had been computed under the head 'Business', if the assessee carried on any business in the later assessment year, he would be entitled to claim the benefit of the set off. It was also submitted by the counsel that the Tribunal had recorded a finding that the business was continued to be carried on. It was also submitted by the counsel that the Tribunal had recorded a finding that the business was continued to be carried on. It was, therefore, submitted that every requirement of s. 72 of the Act had been satisfied by the assessee and the Tribunal had rightly allowed the relief sought by the assessee.We are unable to accept the submissions so made for the assessee. As rightly submitted by the counsel for the Revenue, the taxability of income from the business which is required to be continued is material for the purpose of deciding the assessee's right to set off the loss incurred in that business in an earlier assessment year, when the income from the business was liable for taxation under the Indian IT Act. If that business in which the loss had been incurred in the earlier year was no longer subject to the provisions of the Indian IT Act by reason of the assessee having become a non-resident, and that business being one carried on outside India, the assessee cannot set off against the income from the Indian business loss suffered in the foreign business in an earlier year. The words used in the proviso to s. 72(1) of the Act are significant. It expressly states that an essential requirement for claiming the benefit of set off is that the business or profession, '...... for which the loss was originally computed continued to be carried on by him'. The object of that proviso clearly is to ensure that the income from the business in the later assessment year would be subjected to taxation under the Indian IT Act. If the income from such a business were continued to be subjected to the tax under the Indian law, the loss incurred in the earlier year would be a loss which could be set off against the income from that business in the subsequent year or years. If the income from such a business were continued to be subjected to the tax under the Indian law, the loss incurred in the earlier year would be a loss which could be set off against the income from that business in the subsequent year or years. If the assessee by a voluntary act of his own changes his status from resident to non-resident; thereby taking his income from his foreign business out of the purview of the Act, he cannot, at the same time, retain the right to set off the loss incurred in the foreign business against his income from the Indian business in a subsequent year.The fact that the loss, set off of which was claimed, was a loss that was incurred in the business in Malaysia, is undisputed. The claim made before the ITO clearly stated that fact. The observations made by the Tribunal that requirements of s. 72(ii) of the Act were satisfied as the business in which loss was incurred was being continued, is clearly erroneous as the order of assessment shows, and it was not disputed at any stage by the assessee that the loss incurred was in Malaysian business which business was a source different from the Indian business, and only the income from the business in India was to be computed under the head "Profits and gains of business or profession". The continuance of the business in Malaysia, when these income from that business was not subject to Indian income-tax, it not in anyway material. The fact that after setting off the loss incurred in the Malaysian business against the income from the Indian business in the earlier year, the unabsorbed loss was allowed to be carried forward, does not render the loss as the loss from the Indian business and the continuance of the Indian business alone would not qualify the assessee for claiming the benefit of the provision of carry forward of the unabsorbed loss. The position of the assessee in this case is similar to what would have happened even if the assessee had continued as a resident of India, but had closed down the Malaysian business. He would then not have been entitled to claim the benefit of the unabsorbed loss incurred in that business, which was no longer being carried on in the subsequent assessment year. He would then not have been entitled to claim the benefit of the unabsorbed loss incurred in that business, which was no longer being carried on in the subsequent assessment year. Rendering that business non-taxable under the Indian IT Act would bring about the same result. That business does not exist for the purpose of the Indian Act as the assessee is neither required to submit return in respect of the income from that business nor does the ITO have any jurisdiction in relation to that business carried on by a non-resident outside India.The Act is one intended to tax income in the hands of residents, those who are ordinarily residents and those who are non-residents, in respect of their income arising, accruing or derived in India and in respect of residents, their global income. The Act cannot be applied piecemeal, the benefit being given to the assessee in respect of a loss suffered outside India even when that business is no longer available for being brought to taxation under the Indian IT Act. As held by the apex Court, it is the law that is in force in the year of assessment that is to be enforced, and the assessee has no vested right in carrying forward such unabsorbed loss. The benefit of that carried forward loss can be claimed only to the extent permitted by law in force in the year of assessment. In this case, it is no doubt true that the law had not been amended but the applicability of that law was altered by reason of the change in the status of the assessee. The effect so far as the assessee was concerned was the same. The assessee disentitled himself from claiming the benefit of s. 72 of the Act by his act of changing his status, which resulted in the income from the foreign business not being available for taxation under Indian IT Act. The proviso to s. 72(1) clearly contemplates continued jurisdiction of the assessing authority over the business in respect of which the loss had been incurred in the previous year, and set off of which is claimed in the subsequent year to the extent the loss remained unabsorbed. The proviso to s. 72(1) clearly contemplates continued jurisdiction of the assessing authority over the business in respect of which the loss had been incurred in the previous year, and set off of which is claimed in the subsequent year to the extent the loss remained unabsorbed. If that jurisdiction is lost, whether on account of an amendment to the law or by the voluntary act of the assessee becoming a non-resident, the assessee would be disentitled to claim the benefit of the carry forward of such unabsorbed loss. We, therefore, answer the question referred to us in the negative, in favour of the Revenue, and against the assessee. The Revenue shall be entitled to costs in a sum of Rs. 1, 000 (rupees one thousand only).