Vildirect: IncomeTax-caselaws-1984-VIL-72-ITAT-

1984-VIL-72-ITAT-

Equivalent Citation: ITD 010, 151,

Income Tax Appellate Tribunal BOMBAY

Date: 17.02.1984

ADDITIONAL SECOND INCOME-TAX OFFICER.

CJ. SHAH.

BENCH

Member(s) : A. KRISHNAMURTHY., D. S. MEENAKSHISUNDARAM., V. BALASUBRAMANYAM.

JUDGMENT

Per Shri V. Balasubramanian, Vice President -- All these are departmental appeals.

2. For the assessment year 1967-68, the ITO made an addition of Rs. 10,000 as income from undisclosed sources and started penalty proceedings. He levied a penalty of Rs. 10,000 under section 271(1)(c) of the Income-tax Act, 1961 ('the Act'). This was cancelled by the AAC. Hence, the departmental appeal for this year.

3. The ITO made the addition of Rs. 10,000 as income from undisclosed sources for the reason that a loan allegedly taken of Rs. 10,000 was not satisfactorily explained. It would appear that this amount was shown as a liability to the assessee's wife. When asked to explain the loan the assessee represented that the monies given by his wife were received by her from her father. Subsequently, by filing a revised balance sheet the assessee claimed that he had paid Rs. 10,000 to his wife in 1966 which was returned by her on 3-2-1967. This was the amount which was the subject-matter of dispute. The earlier explanation was stated to be on account of oversight. The ITO disbelieving this explanation treated the sum of Rs. 10,000 as the assessee's income from other source and levied penalty under section 271(1)(c) on the ground that the assessee had deliberately furnished inaccurate particulars. Before the AAC, the assessee pointed out a debit of Rs. 10,000 on 2-3-1967 in the wife's pass book and credit of the same on the same day in his own pass book. The AAC accepted the assessee's claim that the entries in the pass book, prima facie, supported the explanation given by the assessee. The ITO had made the addition through a process of arguments. The assessee's wife was also not examined while rejecting the assessee's explanation. The AAC cancelled the penalty in view of the prima facie evidence supporting the assessee's explanation.

4. Before us, the learned counsel for the department has pointed out that the assessee originally gave one explanation and subsequently another explanation. This itself showed manipulation and furnishing of inaccurate particulars for which the levy of penalty was justified.

5. After hearing the learned counsel for the assessee, who has reiterated the stand before the AAC, we see no reason to differ from the order of the AAC. The assessee has given an explanation for the credit which he sought to support by entries in the pass book also. Prima facie, there seems to be nothing wrong with the explanation. The learned counsel has pointed out that it was due to certain misconceptions and mistakes that the assessee thought that the amount given by the wife had a different origin. Only when he went again through the pass book and other details, the correct position was ascertained and this was put to the ITO also. Merely because the assessee made a mistake in interpreting the entries in the pass book, etc., and for this reason the addition was made, he should not further be subjected to a penalty also for that reason. The mere fact that the assessee did not file an appeal against the addition has already resulted in the addition being sustained. Even though in view of the present explanation it was doubtful whether the addition was justified, certainly there is no case for levy of penalty because apart from what is stated above, all that has happened is that the assessee's explanation was rejected at the assessment stage. No interference with the order of the AAC is called for. The departmental appeal for the assessment year 1967-68 is dismissed.

6. For the assessment years 1977-78 and 1978-79, the department has challenged the AAC's order to the extent he permitted the assessee to carry forward the loss from business for the first year instead of setting it off against income from other heads. The ITO worked out the business loss of the assessee for the assessment year 1977-78 at Rs. 9,109 and setting it off against his income from other sources of Rs. 8,204, and worked out a total loss of Rs. 905. For the assessment year 1978-79, there was a business income of Rs. 6,293 to which income from other sources of Rs. 1,261 being added, there was a positive income of Rs. 7,554 against which the ITO set off the loss carried forward from 1976-77 of Rs. 3,695 and 1977-78 of Rs. 905, thus, working out a net income of Rs. 2,954.

The assessee claimed that the loss of Rs. 9,109 for the assessment year 1977-78 should be carried forward and not set off against his income from other sources of Rs. 8,204. Thus for the assessment year 1977-78, his total income would be Rs. 8,204 whereas for the assessment year 1978-79, he would have a carry forward loss to be set off against business income of Rs. 3,695 from the assessment year 1976-77 and Rs. 9,109 for the assessment year 1977-78. The AAC interpreting sections 71(1) and 72(1) of the Act accepted the assessee's claim. Hence, the departmental appeals for these two years. Sections 71(1) and 72(1) read as under :

"71. (1) Where in respect of any assessment year the net result of the computation under any head of income other than 'Capital gains' is a loss and the assessee has no income under the head 'Capital gains', he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head."

"72. (1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and--

(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :"

Under the former, the assessee is 'entitled to have the amount of such loss set off against his income' under any other head. Under the latter section, so much of the loss as has not been set off shall be carried forward to the following assessment year. The first section represents a right vested in the assessee even as the second section obliges the loss to be carried forward--which also is a right granted to the assessee. It is settled law that a person can exercise a right or waive the same. Under the Act, the assessees are entitled to several deductions, reliefs and advantages. Where they satisfy the conditions necessary for availing of all these advantages, the ITO cannot deny the advantages to them. But even while they satisfy all these conditions, if they do not claim the advantages or would like to waive the benefit of such addition for a particular year, there is no provision in law which would bind them to availing of this addition. Thus, when an assessee is entitled to the reduction of an expenditure or an allowance but the assessee does not want such benefit, the ITO cannot compel him to take advantage of the same. Both as a matter of general law and because of the absence of any 'compelling' provisions under the income-tax statute in this regard this proposition has to be accepted. Thus, when for the assessment year 1977-78 even though the assessee is 'entitled' to have the business loss set off against his other income but he does not want the same, the ITO cannot compel him to avail of this set off. Applying section 71(1), therefore, and taking into account the assessee's desire not to take advantage of the entitlement under that sub-section, the business loss for that year cannot be set off against the assessee's other income. Section 72(1) is a different section. Under that section whatever loss is not adjusted against other income (for whatever reason) for any year can be carried forward. By the assessee exercising an 'option' so to say of not setting of his business loss against other income the provisions of section 72(1) operating on this situation would entitle him to have the business loss of that year carried forward and set off in the subsequent year. The AAC's order for both the assessment years 1977-78 and 1978-79 in this regard has to be upheld.

7. All the departmental appeals are dismissed.

Per Shri D.S. Meenakshisundaram, Judicial Member -- I have perused the order of my learned brother, Shri V. Balasubramanian, Vice President.

2. I agree that the appeal of the department against the cancellation of penalty of Rs. 10,000 under section 271(1)(c) for 1967-68 has to be dismissed.

3. However, I find it difficult to agree with the reasoning and conclusion dismissing the department's appeals for 1977-78 and 1978-79 in para 6 of my learned brother's order. On the facts set out in para 6 on page 3, the ITO is left with no choice but to compute the total income in the manner he has done in the assessment orders for these two years under section 71(1). In fact, it is the statutory duty of the ITO to do so under section 71(1) and it does not depend on the whim and fancy of an assessee. I am unable to find anything in section 71(1) which gives any option to an assessee in this matter. The language of section 71(1) compels the ITO to compute the total income in the manner he did in the assessment order. This is not a case of any failure or omission on the part of an assessee to make any claim for deduction or allowance, where it may be argued that it is for the assessee to make or not to make a claim before the ITO. Here it is a case while determining the assessee's total income, the above position emerges on facts placed before the ITO, who is bound in law to make or allow this set off of loss under one head of income against profit under another head of income under section 71(1), to arrive at the true total income of the assessee for every assessment year. If we are to accept the assessee's contention, we will be ignoring the provisions of section 71(1), which is not permissible in law and the assessments will not be on his true total income for these two years. Further, the ITO's action is in conformity with law in section 71(1). If authority is required, please see the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 at pages 91, 97 and 98.

4. The two orders of the Tribunal relied on by the assessee are incorrect and cannot be considered as good law in view of the Supreme Court decision referred to above.

5. In view of the above discussion, I find myself unable to agree with my learned brother's order dismissing the department's appeals for the two assessment years 1977-78 and 1978-79. I would respectfully follow the decision of the Supreme Court and restore the orders passed by the ITO in these two years.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 -- We, the following members having differed on the following point, hereby refer the matter to the President under section 255(4) of the Act :

"1. Whether, on the facts and in the circumstances of the case, the assessee is compelled, whether he wants the benefits or not under section 71(1) of the Act, to set off any loss under one head of income against income from another head in the same year ?

2. If the answer to question No. 1 is in the negative :

Whether, on the facts and in the circumstances of the case, the loss carried forward of the earlier year is not to be set off under the provisions of section 72(1) ?"

THIRD MEMBER ORDER

Per Shri A. Krishnamurthy, Judicial Member -- This case has been referred by the President to me as a Third Member for hearing on the following points of difference between the Members who heard the appeals originally :

2. If the answer to question No. 1 is in the negative :

Whether, on the facts and in the circumstances of the case, the loss carried forward of the earlier year is not to be set off under the provisions of section 72(1) ?"

2. The assessment years involved are 1977-78 and 1978-79. The short facts on which the dispute in this case arises are that for the assessment year 1977-78, the assessee had a loss computed under the head 'Profits and gains of business or profession' and he had also income from 'other sources'. For the assessment year 1978-79, he had a positive income under the head 'Profits and gains of business or profession' and also income under the head 'Income from other sources'. The assessee claimed that the loss under the head 'Profits and gains of business or profession' (is hereinafter referred to as 'business loss' in short), should not be set off against income from other sources, in that year, but should be allowed to be carried forward and set off against positive income in the following year.

3. According to the learned Accountant Member (Vice President) the assessee's contention has to be accepted while according to the learned Judicial Member, the business loss for the assessment year 1977-78 has necessarily to be set off against income under the other head 'Income from other sources' in this case for computing the total income for that year and such set off does not depend upon the fact as to whether the assessee wants such a set off or not. According to him, to accept the assessee's contention and hold that the set off need not be made when the assessee does not want set off is to ignore the provisions of section 71(1) and it is not permissible under the law. According to him, the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case negatives the contention of the assessee.

4. The determination of the claim of the assessee in this case, according to me, rests on the interpretation concerning the provisions of the Act relating to the set off and carry forward of loss and, in particular, the provisions of section 71(1) in the light of the Supreme Court decision adverted to by the learned Judicial Member. Before referring to the decision of the Supreme Court, it is as well to have a look at the provisions of the statute in this connection. Section 70 of the Act provides for set off of loss from one source against income from another source under the same head of income. Section 71 provides for set off of loss from one head against income from another. According to the provisions of section 71(1), relevant for determination in this case, where the net result of the computation under any head of income other than 'Capital gains' is a loss and the assessee has no income under the head 'Capital gains', as in this case, the assessee shall, subject to the provisions of Chapter VI of the Act, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. The words, that the assessee shall be entitled to have the amount of such loss set off against income assessable under any other head, prima facie, vests the assessee with a right to claim that the loss incurred by him under one head should be set off against income under any other head for the assessment year. It is, according to me, a necessary implication of the conferment of this right on the assessee that he can choose to waive such a right, if he considers it necessary or advantageous for him to do so. The language does not imply a compulsion on the part of the assessee to accept to set off of loss under one head of income against income under another head, or a mandate on the ITO to thrust such set off on the assessee even if the assessee does not desire it. It is well settled that when a particular language is used by the Legislature, the Legislature must be presumed to have intended that effect must be given to the plain and ordinary meaning of the language used by it and as I read the language used in the section, the obvious intention of the Legislature is that it is a benefit or right conferred on the assessee, which the assessee may avail of if he is so advised. That this is the intention of the Legislature would be obvious from the fact that a different language has been used in other sections of this Chapter providing for carry forward and set off of losses. Before I refer to other sections, in which different language is used, I may also refer to the provisions of section 70 where a similar language, as is used in section 71(1), has been used in regard to the set off of loss in respect of one source failing under one head of income against income from any other source under the same head. In both sub-sections (1) and (2), the language used is that 'the assessee shall be entitled . . .'

5. Now in contrast, it may be noticed that under section 72(1), which provides for carry forward of and set off of business losses, it is provided that when the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, etc., and such loss cannot be or is not wholly set off against income under any other head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or the whole loss, as the case may be, shall be carried forward to the following assessment year and it shall be set off against profits and gains of any business or profession, etc., for the assessment for that year and where it cannot be so fully set off, the balance, not set off should be carried forward to the next following assessment year and so on. See also the language used in section 73 of the Act which gives no option either to the assessee or the ITO to act in accordance with the provisions. See also the mandatory language used in sections 74, 74A, 75 to 80 of the Act. It is obvious that the Legislature has deliberately used a different expression in the latter sections from 72 onwards as compared to sections 70 and 71 which, according to me, leaves no scope for any doubt that the set off provided in sections 70 and 71 is clearly a right given to the assessee to claim set off of loss if he so desires. Therefore, on a plain reading of the language used in the sections, there can be no doubt, according to me, that the assessee can claim that he does not want set off of loss under one head or income against income under any other head.

6. Since, according to the learned Judicial Member, the action of the ITO in not accepting the assessee's claim and setting off the loss against the income under other head is in conformity with the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd.'s case and the Supreme Court decision is binding on all the authorities as it declares the law finally for the country, it is necessary to consider the decision and to see how far it impinges on the construction which I have sought to place on the provisions according to the plain language of the section as I understand. In the Supreme Court decision in the case of Cambay Electric Supply Industrial Co. Ltd. one of the points involved was whether the unabsorbed depreciation and unabsorbed development rebate are deductible or not in computing the profits under section 80E(1) of the Act. It was held, having regard to the construction placed on the provisions of section 80E, that in computing the total income of the assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at a figure that would be exigible to deduction of 8 per cent contemplated by section 80E(1). It was pointed out that in sub-section (1) of section 80E, expression 'total income' is followed by the words 'as computed in accordance with the other provisions of this Act' in parenthesis and it was held that the mandate of these words clearly negatives the argument that the expression 'total income' has been used in the sense of commercial profits. It was held that the expression 'total income' should be, in the absence of anything in the context suggesting to the contrary, be construed in accordance with the definition, contained in section 2(45) of the Act which defines it as 'the total amount of income referred to in section 5, computed in the manner laid down in this Act'. It is obvious that the Supreme Court in this case was concerned with the construction of section 80E and the meaning of the term 'total income' as computed according to the provisions of the Act. The Supreme Court, according to me, is an authority for the proposition that the total income for the purpose of the Act must be computed in accordance with the provisions of the Act. It was observed at page 94 that since in that case it is income from business which was under consideration, the same will have to be computed in accordance with sections 30 to 43A of the Act which would include section 32(2) (which provides for carry forward of depreciation) and section 33(2) (which provides for carry forward of development rebate for eight years). Thus, it is held in computing the total income, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8 per cent contemplated by section 80E(1), because that section provides for 'deduction in the case of a company where the total income (as computed in accordance with the provisions of this Act) includes any profits and gains attributable to the business of generation, etc. . . .' Now, if we refer to section 33(2), which provides for a case where full effect of depreciation allowance cannot be given effect to in any particular year, it says that such allowance or part thereof as could not be given effect to shall be added to the amount of allowance of depreciation for the following previous year and deemed to be part of that allowance. The language clearly implies that there is no option either for the ITO or the assessee in regard to the carry forward of the depreciation of one year and its being treated as part of the allowance for the following year, etc. Similarly, in the provisions of section 33(2), which provides for carry forward of the development rebate, the language used for carry forward and set off is in mandatory terms, without any option to either party, the assessee or the ITO to act otherwise than as provided in the section. Therefore, it is clear that in computing the profits and gains in accordance with sections 30 to 43A, which would include sections 32(2) and 33(2), the depreciation and development rebate to be carried forward and set off has necessarily to be allowed and this is what has been held by the Supreme Court. It may also be necessary to refer to the observations of the Supreme Court in regard to the provisions of section 72 at page 97 as a reference has been made to the same in the order of the learned Judicial Member.

7. After considering the Kerala High Court decision in Indian Transformers Ltd. v. CIT [1972] 86 ITR 192 the Supreme Court observed that it is not possible to accept the view that section 72 has no bearing on, or is unconnected with, the computation of the total income of an assessee under the head 'Profits and gains of business or profession' and that actually section 72(1) provides for loss under the head 'Profits and gains of business or profession', which cannot be set off wholly or partly to be carried forward to the following assessment year and set off against profits and gains of any business or profession for that assessment year, and that section 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession'. It was observed that the correct figure of total income which is otherwise taxable under the provisions of the Act cannot be arrived at without working out the net result of computation under the head 'Profits and gains of business or profession'. Therefore, according to me, all that the Supreme Court has stated in this case is that the total income must be computed in accordance with the provisions of the Act and that all the provisions relevant for the determination of the total income must be brought into play for arriving at the figure of total income under the Act. But the manner or the extent to which any such provision would come into play for determination of the total income or has to be taken into account for the purpose will necessarily depend upon the requirement of the section as implied or expressed in the language used therein. In the case of Cambay Electric Supply Industrial Co. Ltd., the Supreme Court has observed at page 98 in regard to the benefit under section 80E, that the question whether special benefit under section 80E as well as the normal or the usual benefit of carry forward of losses of previous years should both be available to the assessee, without one impinging on the other must depend upon the intention of the Legislature and such intention has to be gathered from the language employed.

8. Therefore, according to me, undoubtedly for computing the assessee's total income, the provisions of section 71(1) has to be brought into play to the extent and in the manner required by the express language of the section. If an assessee wants that the loss under one head should be set off against the income under another head, then the total income must be computed by allowing such set off but where the assessee does not desire, the provision is still brought into play, by not setting off loss under one head of income under another head as required by the section itself, in the way, the section has to be interpreted, according to me, as conferring a benefit or a right on the assessee who is at liberty either to avail or not to avail the same. To hold that the loss incurred by the assessee under one head should be set off against income under another head under section 71(1) even where the assessee does not desire it, will, according to me, mean equating the mandatory provisions contained in other sections already referred to by me like sections 72 to 80 with strikingly dissimilar language used in the provisions of section 71(1) which could be done only by doing violence to the express language contained therein, I do not find anything in the Supreme Court decision in the case of Cambay Electric Supply Industrial Co. Ltd. which runs counter to the above construction placed by me.

9. Therefore, on the first point of difference, I agree, with respect, to the view taken by the learned Accountant Member (Vice President) and differ from the view taken by the learned Judicial Member.

10. As regards the second point, while I find that the learned Accountant Member (Vice President) has expressed his view that the assessee will be entitled to carry forward any loss and set it off in the following year, even where the assessee does not avail of the benefit of set off under section 71(1), I find that the learned Judicial Member has not expressed any view separately on this point. However, since the point has been stated as one on which they have differed, I proceed to state my view also on this. Although the learned Judicial Member has not separately dealt with this point in his order, the reference of this point as one on which the two members have differed necessarily implies that according to the learned Judicial Member, where the assessee has not availed of the set off under section 71(1), he is not entitled to the carry forward of loss and set off in the following year. Here also, I find myself in agreement with the view taken by the learned Vice President and I disagree with the view taken by the learned Judicial Member. I have already stated, in considering the first point of difference, that the language used in section 72(1) is mandatory and gives no option either to the ITO or the assessee to treat the loss not set off under section 71 in any manner other than as provided in the section. According to section 72(1), where the net result of the computation under the head 'Profits and gains of business or profession' for any assessment year is a loss to the assessee and such loss cannot be or wholly set off against income under any other head of income in accordance with section 71 than that part of the loss as has not been so set off shall be carried forward in the following assessment year and it shall be set off against the profits and gains of business or profession, etc. Now in this section, where it states that the loss computed under the head 'Profits and gains of business or profession', cannot be or is not wholly set off, it covers not only, according to me, a case where the loss under one head cannot be or is not wholly set off on account of loss or absence of positive income or inadequacy of income under any other head, but also the situation where by the operation of section 71(1), as understood by me, the assessee does not avail of the set off of loss under section 71(1) and, therefore, such loss cannot be or is not set off.

11. In conclusion, I agree with the view taken by the learned Accountant Member (Vice President) on both the points and differ from the views taken by the learned Judicial Member.

12. The case will now go back to the Bench which heard the appeal originally for disposal as required under the provisions of section 255(4).

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