COMMISSIONER OF INCOME TAX (CENTRAL) DELHI vs. HARPRASAD & CO. (P) LTD.

CIVIL APPEAL No. 494/1970Supreme Court[1975] 3 S.C.R. 69625 February 1975Bench: 3 JudgesAuthor: Y.V. CHANDRACHUD, R.S. SARKARIA, A.C. GUPTA COMMISSIONER OF9 pages
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What were the facts?

The assessee, Harprasad & Co. (P) Ltd., incurred a capital loss of Rs. 84,862/- from the sale of shares during the previous year relevant to assessment year 1955-56. The Income-tax Officer disallowed the loss as it was of a capital nature. The Appellate Assistant Commissioner confirmed it was a capital loss but reduced the amount to Rs. 28,662/-. The assessee contended that this capital loss should be carried forward and set off against future capital gains as per Sections 24(2A) and 24(2B) of the Income-tax Act, 1922. The Tribunal ruled in favour of the assessee. The High Court confirmed the Tribunal's order. The Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the concept of carrying forward a loss is intrinsically linked to its set off against profits in a subsequent year. If such a set off is not permissible or possible due to the non-taxability of income in the subsequent year, there is no purpose in allowing the loss to be carried forward. The Court found that capital gains were not taxable between April 1, 1948, and March 31, 1956, meaning capital gains and losses did not form part of the 'total income' as defined and computed under the Act during that period. Therefore, a capital loss incurred in a non-taxable period could not be carried forward and set off against capital gains in a subsequent year, even if those gains were taxable. The Court also noted that Section 22(2A) requires filing a return for the year the loss is incurred to be eligible for carry forward, and if the loss is from a non-taxable head, neither the assessee nor the officer is obligated to compute or assess it for carry forward purposes. The Court reversed the High Court's decision, holding that the capital loss could not be carried forward.

What were the issues?

1. Whether a capital loss incurred in a year when capital gains were not exigible to tax could be carried forward and set off against capital gains in subsequent years, under Sections 24(2A) and 24(2B) of the Income-tax Act, 1922, when Section 12B was not applicable for the assessment year 1955-56? Assessee's contentions: The assessee argued that Sections 24(2A) and 24(2B) allowed for the carry forward and set off of capital losses against future capital gains, irrespective of whether capital gains were taxable in the year the loss was incurred. They relied on the High Court's interpretation that the effect of these sub-sections, read with Sections 6 and 12B, permitted such carry forward. Revenue's contentions: The Revenue contended that the concept of carrying forward a loss is for the purpose of set off against taxable profits. If capital gains were not taxable, there was no point in carrying forward a capital loss. They argued that a loss from a non-taxable head could not be set off against income from a taxable source in a subsequent year. They also argued that Section 24(2) only covered losses in business, profession, or vocation, not capital losses.

Which sections of the Income-tax Act were involved?

Section 12B,Section 24(2A),Section 24(2B),Section 6,Section 3,Section 2(15),Section 4(1),Section 2(6C),Section 22(2A),Section 22(1),Section 22(2),Section 24(1),Section 24(2)

AI-generated summary — verify with the full judgment below

696 COMMISSIONER OF INCOME TAX (CENTRAL) DELHI A \I. HARPRASAD & CO. (P) LTD.

February 25, 1975 [Y. V. CHANDRACHUD, R. S. SARKARIA AND A. C. GUPTA, JJ.] Income-tax Act (ll of 1922)

Sections 128, 22(2A), 24(2A) & (2B)- B Capital loss incurred in 1/te year when capital gains were not exigible to tax- lf could be set against capital gains in subsequent years.

By the Income-tax and Excess Profit Tax (Amendment) Act, 1947 s. 12B was inserted in the Indian Income-tax Act, 1922 .. making capital gains which arise after March 31. 1946, taxable. The same A':t inserted sub-sections (2A) and (2B) in s. 2.4 of the Income-tax Act.

As a result of the Indian Finance Act, 1949 which restricted the operation of s. 12B to capital gains ari.sing before April l, 1948, a.nd the Finance (No. 3) Act of 1956 which restored C tax on capital gains with effect from. April l, 1948 capital gains arisinll from 1-4-1948 to 31-3-1956 were not taxable.

For the assessment vear J 955-56 which relates to the period when ce.pital gains were not taxable the assessee claimed a loss of Rs. 84,862/- arisini: from the 5a\e of certain sharc:s.

The Income-tax Officer disallowed the loss on the ground

The order continues below.

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