P L D 1962 (W (PLP)

S. A. MAHMOOD, J.-On three applications under section 66(1) of the Income-tax Act, made by the Commissioner of Income-tax, North Zone, the Income-tax Appellate Tribunal, Pakistan, has referred the following question to this Court for its opinion :- "Whether, in the circumstances of the case, the assessee is entitled under section 24 (2) of the Income-tax Act to set-off the losses in respect of the assessment years 1947-48 and 1948-49 against the profits of the assessment year 1951-52." The assessee Messrs Sheikco Ltd., Ismailabad, Multan, is a private Ltd. Co., carrying on business of commission agency. The Company suffered losses in the account years relevant to the assessment years 1947-48 and 1948-49 and did not file any return for these years. Consequently no assessment for these years was made. In respect of the assessment year 1949-50, the assessee filed a voluntary return claiming a set-off of the losses of the preceding years. Likewise for the assessment years 1950-51 and 1951-52, in respect of which proceedings under section 34 of the Income-tax Act were started, the assessee claimed a similar set-off. The trading result as determined for the assessment years 1949-50 and 1950-51 was a loss, and, therefore, no question of any set-off of previous losses arose in so far as these years were concerned. Before the Income-tax Officer the assessee claimed a set-off of his losses in the account years relevant to assessment years 1947-48 and 1948-49 against the profits in the assessment year 1951-52, but the Income-tax Officer turned down the assessee's claim on the grounds that he not having filed a return, the losses had not been determined by the Income-tax Officer, and that the assessment for 1948-49 was then beyond the normal scope of proceedings under the Income-tax Act. He, however, conceded the assessee's claim to carry forward the determined loss of Rs. 27,570 during the assessment year 1949-50, and the lose of Rs. 27,558 during the assessment year 1950-51, and these losses were ordered to be set-off against the profits during the assessment year 1951-52. The Appellate Assistant Commissioner agreed with the Income- tax Officer and relying on O. M. Ahmad Sahib v. Commissioner of Income-tax, Madras ((1951) 22 I T R 87), dismissed the assessee's appeal, who then appealed to the Appellate Tribunal. The Tribunal relying on the decision in All India Groundnut Syndicate Ltd. v. Commis sioner of Income-tax, Bombay City ((1954) 25 I T R 90) and disagreeing with the other case, allowed the appeal for the account years relevant to the assessment years 1947-48 and 1948-49, also. The grounds were that "the right to claim the relief only arose to the assessee In the assessment year 1951-52 when the assessee had made profits and had sought to set-off the losses incurred during the previous years against such profits, and that the fact that the Income-tax Officer had not, for any reason, (may be that he was not aware of such losses as the assessee had not filed any return) computed the losses of the earlier years could have no bearing on the right of the assessee which arose In the year 1951-52." In the result the Tribunal directed that the Income-tax Officer should proceed to compute the losses incurred in the two account years relevant to the assessment years 1947-48 and 1948-49 and that "such losses should also be carried forward and set-off against the profits of the assessment year 1951-52." 2. Mr. Abdul Haq, learned counsel for the Commissioner of Income-tax relied before us on the case of O. M. Ahmad Sahib v. Commissioner of Income-tax, Madras and argued that it was necessary for an assessee to file a return, even in case of a loss, so that an assessment Is carried out, and loss under head "profits and gains of business, profession or vocation" is determined under subsection (3) of section 24, so as to be carried forward and set-off against assessment for a year, during which profit is earned. The argument is that such loss can only be established and determined in the course of an assessment, that it is a determined loss which can be claimed as a set-off under sub section (2) of section 24, and which has to be intimated to the assessee under subsection (3) of section 24 ; and that it follows that if a return has not been filed, the loss under the head cannot be carried forward to be adjusted against profits of another year of assessment. In the above noted case relied upon by the learned counsel, the assessee carried on business in yarn and cloth and income-tax assessment proceedings were initiated under section 22 (2) of the Act, calling upon him to make a return of his income for the assessment year 1943-44. Later the Income-tax Officer found that the assessee was doing business in the assessment year 1942-43, and issued a notice under section 34 read with section 22 (2) calling upon him to file a return of his income for the assessment year 1942-43 also. In pursuance of this notice, the assessee filed a return for the assessment year 1942-43 and showed a loss of Rs. 7,875. His accounts were called for and examined, and the proceedings were closed with a note that his income was `nil' and this was communicated to the assessee. For the assessment year 1943-44, the Income-tax Officer held "as there was no assessment made during the previous years and no loss was determined, the claim of the assessee for deduction of the sum of Rs. 7,875 as loss during the previous years could not be allowed." The Appellate Assistant Commissioner and the Income-tax Appellant Tribunal agreed with the Income-tax Officer. On an application under section 66 (1) of the Act, the Appellate Tribunal referred the following question for its opinion to the High Court. "Whether on the facts of the case, the loss of Rs. 7,875 claimed, but which had not been determined in the assessment for the year 1942-43, can be setoff In the assessment for the year 1943-44 under section 24 (2) of the Income-tax Act ?" The first contention before the High Court was that in a proceeding under section 34, the Income-tax Officer was bound under section 24 (3) of the Act to ascertain the amount of the loss and his failure to dis charge the statutory duty could not be taken advantage of by the Department to disentitle the assessee to claim the benefit of section 24 (2) of the Act. This contention was repelled on the authority of Arglo-French Textile Co- Ltd. v. Commissioner of Income-tax, Madras ((1950) 18 I T R 906) where it was pointed out that the relief contemplated by section 24 (3) of the Act could be granted only in the course of assessment of the total income of the assessee, and as a proceeding initiated under section 34 was not -a proceeding intended to assess the total income of the assessee, the duty under section 24 (3) was not cast on the Income-tax Officer, as that provision is not attracted by section 34. The second contention urged on behalf of the assessee (which has also been raised before us on behalf of the assessee) was that even in the assessment year 1943-44 the Income-tax Officer should have, for the purposes of giving benefit to the assessee of the provisions of section 24 (2), determined the loss, which the assessee had suffered during the previous years, and for this reliance was again placed on section 24 (3). The argument raised was that the language of section 24 (2) did not restrict the duty of the Income tax Officer to determine the loss only of the particular assessment year, which was being considered, but he was bound to determine also the loss of the previous years with a view to give benefit to the assessee of section 24 (2). Dealing with this argument, the learned Judges observed that at first sight the argument appeared to be attractive, because there was no express restric tion in the subsection limiting the duty of the Income-tax Officer to the determination of the loss of the particular assessment year, with which he was dealing, because it says "where it is established that a loss of profits and gains has taken place" and does not say "where the loss took place in the assessment year under consideration or in the previous years," and pointed out that duty was cast only if the assessee was entitled to have the loss set-off under the provisions of section 24 (7) (which was introduced, for the first time, by the Amending Act of 1939). In order to claim the benefit of section 24 (4) it must be establish ed that there was a loss, which was already ascertained but which could not be completely wiped out by setting it off against the profits under a different head under section 24 (1), and that there was a balance which was to be carried forward to the subsequent years. Thus the balance of loss contemplated under section 24 (2) is an "ascertained balance" and not "undetermined balance," and that where a right is claimed under section 24 (2), the question of ascertaining the loss of a previous year could never arise, and, therefore, there would be no duty compelling the Income-tax Officer to determine a loss of the previous assessment years. It was further observed that section 24 (3) could only apply to a case where in the same assessment year there was a loss under one head and profits under another head. The learned Judges finally answered the question in the negative, holding that the Income-tax Officer was not bound under section 24 (3) to determine during the assessment year 1943-44 the loss which occurred to the assessee in the year 1942-43. 3. On behalf of the assessee, Mr. Abdur Rahim, his learned counsel, relied on the cases of All India Groundnut Syndicate Ltd. v. Commissioner of Income-tax, Bombay City ; Commissioner of Income -tax, West Bengal v. Vovindalal Dutta ((1958) 33 I T R 630) and Commissioner of Incom3-tax, Madhya Pradesh v. Khushhal Chand Dagga ((1961) 42 I T R 177). In the first case, the assessee put in returns showing loss, but the Income-tax Officer took income of three assessment years as nil, and exempted it under section 23 (3). The assessee made a profit for the subsequent year and against it claimed as a set-off the loss incurred in the previous years. The Income-tax Officer disallowed the claim on the ground that the loss had not been notified as required by section 24 (3). Chagla, C. J. with Tendolkar, J. held that the right which the Legislature conferred upon an assessee under section 24 (2) of the Income-tax Act, 1922, to carry forward the loss of previous years for a period of 6 years was an absolute and unqualified right, which was not made conditional upon any computation made by the Income- tax Officer or any notice issued by him under section 24 (3) and that the assessee was entitled under section 24 (2) to set-off the loss against the profits. The learned Judges also held that it was clear that subsection (3) of section 24 cast a duty on the Income-tax Officer to compute the loss and to notify it to the assessee, that it was enacted to crystalise the loss in a particular year of assessment, so as to leave no dispute with regard to that loss and to give notice to the assessee of the amount at which the loss was computed. It was observed that whereas the right was conferred under subsection (2) of section 24, subsection (3) was merely a machinery or procedural section which provided how and when the Income-tax Officer should compute the loss and how he should communicate the loss, but the Department could not be allowed to raise the contention that because their own officer had failed to discharge his statutory duty, the assessee was deprived of his right, which the law had given to him under subsection (2) of section 24, for it was an elementary principle of law that no person could put forward his own default in defence to a right asserted by the other party. A person could not say that a party claiming a right is deprived of the right because "I have committed a default and the right is lost because of that default." It was further observed that a right to claim a relief, which the assessee was claiming, only arose to the assessee in the assessment year when the assessee had made a profit and sought to set-off the losses incurred during the previous years against the profits and that the fact that the Income-tax Officer had not computed the loss of the earlier years had no bearing upon the right of the assessee, which arose to him in that year. There was nothing to prevent the Income-tax Officer from computing those losses, which the assessee may have incurred earlier, which he had failed to do. This case is distinguishable from the present case, because the assessee had filed returns for the years of loss and it was the Income-tax Officer, who had failed to compute the losses under section 24 and to convey the determined loss to the assessee under section 24 (3), which he had to do. 4. In the second case Chakravarti, C. J. and Guha, J. held that "as the returns filed by the assessee in respect of the assessment years 1946-47 and 1947-48 were voluntary returns, which showed a loss, they were no returns at law and the Income-tax Officer was not required to make any assessment on them, and that the assessee had an unqualified right, subject only to the limitations contained in section 24 (2) of the Income- tax Act, to have his losses carried forward and set-off against the losses of subsequent years irrespective of whether assessments were made in respect of the earlier years ; and that, therefore, the Income-tax Officer had to determine in the assessment for the year 1948-49 the losses incurred by the assessee in the earlier years and to allow a set-off in respect thereto, for under section 22 (1) of the Act, as it stood before its amendment in 1953, a person was required to file a return only if his total income during the previous year exceeded the maximum amount, which was not chargeable to tax. The return contemplated was thus only a return of income, and not a return of loss, and not even a return of income, but a return of taxable income. Not only had a person no duty but he had even no right to file a return voluntarily if he had suffered a loss." To come to the conclusion, at which they arrived, the learned Judges had to strain the language of the section, and contrary to the definition in the Act had to hold that the word "assessee" in section 24 (2) of the Income-tax Act was used in a loose and a general sense meaning merely a person whose income-tax affairs were being considered or who is himself considering the state of his profits and loss, and that the expression "previous year" had also been used in section 24 (2) in a loose and general sense and meant only a year, which for income-tax purposes, would be an account ing year relative to an assessment year, irrespective of whether any assessment was actually made." The learned Judges in effect followed the first case. This case is also distinguishable as the assessee had filed returns for the years of loss. The learned Judges followed the view of Chagla, C. J. and Tendolkar, J. in so far as they held that the assessee had an unqualified right to have his losses carried forward and set-off against profits and gains of the year of assessment. 5. There is thus a conflict of decision in the interpretation of section 24 of the Income-tax Act. In order to appreciate its true meaning, intent and purpose it is necessary to set out its relevant part which reads as follows: - "24 (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set-off against his income, profits or gains under any other head in that year (2) Whether any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, under the head "Profits and gains of business, profession or vocation," and the loss cannot be wholly set-off under subsection (1), the portion not so set-off shall be carried forward to the following year and set-off against the profits and gains, if any, of the assessee from the same business, pro fession or vocation for that year ; and if it cannot be wholly so set-off, the amount of loss not so set-off shall be carried forward to the following year and so on but no loss shall be so carried forward for more than six years, and a loss arising in the previous years for the assessment for the years ending on the 31st day of March, 1940, the 31st day of March, 1941, the 31st day of March, 1942, the 31st day of March, 1943, and the 31st of March, 1944, respectively, shall be carried for one, two, three, four and five years respectively. (2-A) * * * * * * * * * * (2-g) * * * * * * * * * * (3) When, in the course of the assessment of the total income of any assessee, it is established that a loss of profits or gains has taken place which he is entitled to have set-off under the provisions of this section, the Income-tax Officer shall notify to the assessee by order in writing the amount of the loss as computed by him for the purpose of this section." In its plain construction subsection (1) entitles an assessee to have a loss of profits or gains under one of the heads mentioned in section 6 adjusted or set-off against his income, profits or gains under any other head, there being six heads in all. This is different from an adjustment under the same head, under section 10 (1) of the Income-tax Act. Subsection (2) provides for carrying forward of loss under only one head, namely, "Profits and gains of business, profession or vocation, " to the succeeding years not exceeding six, In case the loss cannot be wholly set-off under subsection (1). When It is established in the course of assessment of assessee's total income that loss of profits or gains has taken place, which he is entitled to have set-off under section 24, the Income-tax Officer shall notify in writing the amount of loss computed by him for the purposes of carrying it forward. When subsection (1) speaks of adjustment of loss under one head against another and subsection (3) enjoins notification of the amount of the determined loss to the assessee, there must have been filed a return by the assessee, so that adjustment under different heads can be made and the loss not set-off, determined for purposes of being notified. Subsection (2) further provides for carrying forward of loss, under the head, `profits or gains of business, profession or vocation' ; if such loss cannot be set-off under subsection (1). These provisions as enacted, leave no room for doubt that they contemplate an assessment in respect of which a return has been filed. The section taken as a whole provides for an assessment which is being made by the Income-tax Officer in respect of the same year in which an assessee is assessed. This is made clear by the fact that subsection (2) provides for carrying forward of such loss as cannot be setoff under subsection (1), and set-off under sub section (1) is only available in respect of a year, of which assessment is being made by the Income-tax Officer, In respect of prior years. It has been conceded by the learned counsel for the assessee that subsection (1) is only available in that year and not for earlier years. If, therefore, a return has not been filed for a year of loss, then in the year of profit, subsection (2) cannot be availed of, as it provides that such loss as cannot be adjusted under subsection (1), shall be carried forward. If, therefore, an assessee does not file a return for the loss year and claims a certain amount as a loss in the year of profit, how can that loss be set-off under subsection (1) or determined and notified under subsection (3) and carried forward under subsection (2). Learned counsel for the assessee contends that it is open to the Income-tax Officer to call upon the assessee to file a return for the loss year, but he could not refer us to any provision in the Act, which authorised him to do so, it being a year of loss. As stated already, without a return having been filed, the quantum of the loss could not Lave been arrived at, and as subsection (1) could not be availed of in respect of that year, it appears to us that section 24 has no application to a year prior to the year of assessment, which is before the Income -tax Officer. We cannot thus accept the contention raised on behalf of the assessee and accepted by the Appellate Tribunal. The assessee is entitled to have his losses in a year set-off against his gains and profits in the year of assessment and this is a right, but it Is dependent upon the loss having been ascertained, which could only have been done, if a return had been filed and a regular assessment made by the Income-tax Officer, in which case, a duty is cast on the Income-tax Officer to notify the determined loss. If, therefore, no return has been filed and the loss has not been determined, subsection (2) of section 24 cannot be availed of. It appears to us that subsections (1), (2) and (3) are intended to apply to an assessment in the same year and an interpretation to the contrary is not tenable. The con clusion at which we have arrived at, is supported by the decision of the Supreme Court of India in the Anglo-French Textile Co. Ltd. v. The Commissioner of Income-tax, Madras (A I R 1953 S C 111). The learned Judges have held that before any question of set-off can arise, there must be (1) a loss under one or more of the heads mentioned in section 6 and (2) an income, profit or gain under some other head. It follows that when there is no income under any head at all, there is nothing against which the loss could be set-off in that year, and unless that can be done, subsection (2) does not come into play. When no return is filed at any stage of the case, disclosing any income, profits or gains at all, and in the course of proceedings taken under section 34 the assessee claims that a certain loss should be determined and recorded, it was held that it could not be done. 6. The learned counsel for the assessee pressed into service the decisions of Chagla, C. J. and Chakravarti, C. J. in the first two cases cited by him and the decision of the Supreme Court of India in the third case, to the effect that where the Income-tax Officer did not notify to the assessee by order in writing the amount of loss for any year as computed by him under section 24 (3) of the Income- tax Act, the assessee was entitled to have the loss redetermined in a subsequent assessment. These are cases in which returns had been filed and the Income-tax Officer had failed to make an assessment and to determine the loss. In these circumstances it was held that the Income-tax Officer was bound to determine the loss and to allow its set-off. The Income-tax Officer is no doubt bound to make an assessment and to determine a loss under section 24 and to notify It to the assessee for future set-off and if he does not do so the right of an assessee to have the loss set-off in a year of profit, cannot be denied to him by the act of default of the Income-tax Officer. The interpretation of the section as claimed by the learned counsel for the assessee leads to anomalous result and is not permissible, because violence has to be done to Its language and certain words must be omitted from it to arrive at it. 7. For the reasons given above, the assessee not having filed any return In respect of the years 1947-48 and 1948-49 and in consequence there having been no determination of the loss under subsection (3), the loss could not have been carried forward under subsection (2). Our answer, therefore, to the question referred to us for opinion is in the negative. The assessee shall pay the costs of the Department. M. N./A.H. Reference answered in negative.