Holding

The Supreme Court held that the benefit of set‑off of capital losses under Section 24 of the 1922 Act is continued by Section 74 of the 1961 Act, and despite Section 80, the loss could be carried forward and set off, and the officer’s failure to issue a formal notice cannot defeat the assessee’s right.

Summary

The Commissioner of Income‑Tax appealed against the Allahabad High Court’s decision in favour of Behari Lal Ram Charan Ltd, which allowed the company to set off a capital loss of Rs 3,17,500 incurred in assessment year (AY) 1957‑58 against capital gains of Rs 3,10,200 in AY 1965‑66. The Revenue argued that the loss was notional and that, under Section 24(3) of the 1922 Act, the loss had to be formally notified by the Income‑tax Officer, which it had not done. The Tribunal and High Court held that the loss was genuine, that the officer’s failure to issue a notice could not be used to defeat the claim, and that the benefit under Section 24 of the 1922 Act was continued by Section 74 of the 1961 Act despite Section 80. The Supreme Court affirmed this view, holding that the provisions of Sections 74(1)(b) and 80 give effect to the set‑off right and that the claim was admissible.

Issues considered

Whether the Income‑tax Officer's order for AY 1957‑58 merged into the Appellate Assistant Commissioner’s order finding the loss notional.
Whether any loss was determined for AY 1957‑58 that could be carried forward to subsequent years.
Whether, in view of Section 80 of the Income‑tax Act, 1961, the loss of AY 1957‑58 could be set off against income of AY 1965‑66.
Whether the requirement of Section 24(3) of the 1922 Act to notify loss applies to a loss under the head ‘capital’.

Legislation cited

Income Tax Act, 1922s. 24(1), s. 24(2A), s. 24(3)
Income Tax Act, 1961s. 74, s. 80

Subjects

capital lossset offcarry forwardSection 24Section 74Section 80Income‑tax assessmentnotional losstribunal

Judgment

COMMISSIONER OF INCOME-TAX, KANPUR A
v.
·BEHAR! LAL RAM CHARAN LTD.

Ai>Rit 22, 1987.
B
[R.S. PATHAK CJ, AND RANGANATH MISRA, J.]

Income-tax Act, 1961: ss. 74 and BO-Claim of set off-When
admissibl~Assessee whether entitled to benefit conferred under s. 24
of 1922Act.

Sub-section (3) llf s. 24 of the Income-tax Act, 1922, required that C
when it was estabilshed that a loss of profits or gains had taken place.
which the assessee was entitled to have set off, the Income-tax Officer
~hould notify lb the assessee by an order In writing the amount of loss as
·computed by him. This benefit was continued in s. 74 of the
Income-tax Ad; i961 Which provides for carrying forward to the fol- D
lowing years tile net loss computed under the head 'capital gains' in
respect.of an assessment year, Section 80, however, interdicts that no
los.s which has not been so determined shall be carried forward and set
off.

The assessee, a private limited company disclosed in its return for
E
. the assessment year 1965·66 capital gains of Rs.3 lacs and odd but
claimed set off of capital loss of a like amount sustained during the
assessment year 1957,58 over sale of shares. This claim was disallowed
by the Income-tax Officer on the footing that when in the assessment
year 1957-58 the loss was claimed it was excluded in the computation of
income as capital loss. A challenge to that order by the assessee was
F
rejected by the Appellate Assistant Commissioner who took the view
that the loss was essentially notional in nature, and that the claim for set
oft'to be admissible, had to be notified by the Income-tax Officer under
. s. 24(3) of the 1922 Act to the assessee by an order in writing. That
having not been done the claim was not admissible.
G
Allowing the assessee's claim, the Tribunal however, came to the
conclusion that the assessee was entitled to the benefit of set off of loss
..,i provided it satisfied that capital IOss was computed under the old Act,
and as in the instant case the Income-tax Officer bad neither computed
the loss nor passed an adverse order, the Income-tax Officer was not
entitled to take advantage of his own failure and reject the assessee's H

1159
1160 SUPREME COURT REPORTS [1987] 2 S.C.R.
.,
A claim on the ground that loss had not been determined as required
under s. 24(3) of the Income-tax Act, 1922.
y
The High Court agreed with the conclusion of the Tribunal and
found against the Revenue.

B Dismissing the Appeal. the Court,

HELD: Reading the. provisions of s. 74(l)(b) and s. 80 of the .
Income-tax Act, 1961 together makes it evident that the benefit confer-
red under s. 24 of the 1922 Act has been continued to be given effect to
under the 1961 Act, and notwithstanding the words of s. 80 of the latter
....... -·
c Act, the claim of set off was admissible. The conclusion reached by the
High Court was. therefore, correct. [II66CD]

The Income-tax Officer in the instant case, did compute the }
amount by specifying it in his assessment order. When the assessee had
made the claim and the Income-tax Officer took note of it, his failure to
D comply strictly with the requirement of sub-s. (3) of s. 24 of the 1922
Act could not be permitted to be taken advantage of by the Revenue.
nor could it be used to the prejudice of the assessee. [II64D]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 74 of
1975. -+
E
From the Judgment and Order dated 9.11.1973 of the Allahabad ......
High Court in I.T. Ref. No. 722of1971.

S.C. ·Manchanda, Ms. A. Subhashini and M.N. Tandon for the .....
Appellant.
F
y
J.P. Goyal. Rajesh, Mali Ram Bidwar. and D.P. Mukherjee for
the Respondent.

The Judgment of the Court was delivered by

G RANGANATH MISRA. J. This appeal is by special leave and
the judgment of the Allahabad High Court on a reference under Sec-
tion 256(1) of the Income Tax Act, 1961 (hereinafter referred to as
'tlie A~t') is assailed by the Revenue .

• The relevant assessment year is 1965-66 corresponding to the
H previous year ending on 3l.12.1964. In its return the assessee. a pri-
C.l.T. v. BEHARI LAL [MISRA, J.] 1161

vate limited company, disclosed capital gains of Rs.3, 10,200 but A
claimed set off of capital loss of Rs.3, 17,500 sustained by it during the
assessment year 1957-58 over sale of shares to three associate con-
cerns. It was maintained by the assessee that the loss was sustained in
the previous year relevant to the assessment year 1957-58 and the same
should be set off against the capital gains in the assessment year in
question. The Incotne-tax Officer disallowed the claim for set off on B
the footing that when in the assessment year 1957-58 the loss was
claimed it was excluded in the computation of income as capital loss
and the Appellate Assistant Commissioner while disposing of the
assessee's appeal had stated that it was a notional capital loss. As no
further appeal was carried by the assessee, with the first appellate
order the matter had become final. c
The assessee challenged the rejection of its claim of set off before
the Appellate Assistant Commissioner and he dismissed the appeal by
holding that there was no genuine loss; it was essentially notional in
nature and that the claim for set off to be admissible had to be notified
by the Income-tax Officer under Section 24(3) of the 1922 Act to the D
assessee by an order in writing. That having not been done, the claim
was not admissible. Thereupon the assessee went before the Appellate
Tribunal and reiterated its claim. The Tribunal came to the conclusion
that the assessee was entitled to the benefit of set off of loss provided it
satisfied that its capital loss was computed under the old Act. In its
view as the assessee had filed its return showing the loss and the E
Income-tax Officer neither computed the loss nor passed an adverse
order, the Income-tax Officer was not entitled to take advantage of his
own failure and reject the assessee's claim of carry forward and set off
of loss on the ground that loss had not been determined as required
under section 24(3) of the Income-tax Act, 1922. The Tribunal further
found that the Income-tax Officer had clearly disallowed the assessee's F
claim of revenue loss by holding that it was a capital loss. It found that
the Appellate Assistant Commissioner had no justification to hold that
the claim of loss was not genuine while disposing of the appeal for the
assessment year 1957-58 and ultimately allowed the assessee's claim.
At the instance of the Revenue four questions were referred for opi-
nion of the High Court. G

1. Whether on the facts and in the circumstances of the case, the
Income-tax Officer's order for the assessment year 1957-58 had
not merged in the Appellate Assistant Commissioner's order in
which the Appellate Assistant Commissioner had given a clear
finding that the loss was notional?
H
1162 SUPREME COURT REPORTS (1987) 2 S.C.R.

A 2. If the answer to the above question is in the negatjve, whether
any loss could be said to have been determined for the assess·
ment year 1957-58, which could be carried forward to subsequent
years?

3. Whether in view of the provisions of Section 80 of the
B Income-tax Act, 1961, the loss claimed for the assessment year
1957-58 could be set off against the income determined for the
assessment year 1965-66?

4. Whether the Tribunal was justified in law in holding that the
provisions in Section 24(3) regarding intimation of losses deter-
c mined by the Income-tax Officer do not apply to the loss falling
under the head 'capital'?

The High Court found that the Income-tax Officer in the assessment
order for 1957-58 had mentioned:

D "Net loss as per profit and loss
account-adjust Rs.3, 17,205.

(i) Loss on sale of investment being
capital Rs.3, 17 ,500-00

E
(ii) Income-tax Rs. 204-00

Total Rs.3, 17,704-00
Income Rs. 499-00"

F It is true that in appeal the Appellate Assistant Commissioner
had held:·

"A perusal of the assessment records show that the appel·
lant held 2,500 ordinary shares in M/s. B.R. Ltd. These
shares were held on investment account and were not
G stock-in-trade of the Company. M/s. B.R. Ltd. is an
associated concern and the shares were sold to allied con-
cerns and a loss of Rs.3,17 ,500 was worked out. Firstly, the
shares were investment shares. Secondly, the price for
which the shares were transferred to another associated
concern was a notional price. The management just trans·
H ferred the shares held by one company to another company
C.I.T. v. BEHARI LAL [MISRA, J.] 1163

under their control and management. Of course, the trans- A
fer was not a trading activity. In these circumstances, I hold
that the Income-tax Officer has rightly disallowed the loss
claimed, the same being notional capital loss."

The High Court found that both the Income-tax Officer as also the
B
Appellate Assistant Commissioner had found that the loss was a capi-
tal loss. The High Court fur•her found:-
~

- ~
"In our opinion, this Section (Section 80 of the 1961 Act)
cannot apply to a case where in law a return could not have
been filed under Section 139. That is to say in relation to
assessment years prior to the coming into force of the c
Income-tax Act, 1961 a return could not possibly have been
filed under Section 139 because in these years this Section
was not on the Statute Book. But if Section 80 is construed
to mean that a return fifod under the Income-tax Act 1922
is also within its purview then in our opinion the require-
D
ment of this Section was equally fulfilled because the asses-
see has for the assessment year 1957-58 filed a return of loss
which loss had been de1ermined by the Income-tax Officer
in the assessment order."

t The High Court took the view that in the order for assessment
E
year 1957-58, the Appellate Assistant Commissioner has referred to
-- the claims of loss as notional when he really meant that it was an
estimate. It agreed with the conclusion of the Tribunal and found
against the Revenue.
J ...
Section 24 of the 1922 Act which applied to the assessment year
F
1957-58 as far as relevant provided:
"i
"(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
G
that year ....... "

(2A) Notwithstanding anything contained in sub-section
(1), where the loss sustained is a loss falling under the head
'capital gains', such loss shall not be set off except against
any profits and gains falling under that head." H
1164 SUPREME COURT REPORTS (1987] 2 S.C.R.

, . , .. ;. ·.-{iB) .Where. an asses~7e sustain~ a loss su~h as is referred\
A , :; ,, . to in sub-section {2A) and the loss cannot be wholly set off \
in accordance' with the provisions o( that sub-section, the
portion not so set off shall be carried' forward to th& follow-
, . . , ing year and set off against capital gains for that year, and if ·
. ' "j ·:·· -. .. ·.1 :· it cannot be so set off, the amourit·thereofnot so ·set off
B shall be' car;ied forward to the following year and so on.
So, however, that no loss sh.all b~ carried forward for more
"";
:than eigM years ...•. ~ .. ~ ; ~ ~ .•.. , ; .... : . : '.. ; : ... , ' .. ; . "

, c•. (3) "When,' ill the course ~f the assessment of the toial in-
"' come of any assessee, it is established .tiiai a loss of profits'
". : ' or gains has taken place which he is entitled to have set off
· C · . .. ·" · under the provisions of this seetion, the Income-tax Officer
' ''" ., 'shall notify to, the assessee by' orderiit writing the amount '
1 ,of.the loss·as'computed.by him:for the'purposes of this ·
. section.·'~- -·
4

• • , • ' • • •

I . . . 4 •• : • • , • :. - -- , ·_ • • • • • • , ' • • •• ••

D . , , :The High Court has found that thelricome-tax Officer did rom•, .
put.e the amount by.specifying it i.n his.a.ssessment order. When the . ·
assessee had made the.claim ·and he: took note of it,"his'failure.'to
comply strictly with the rl!quirement ofsub-seciion (3) .of section 24
should not be permitted to.be taken advantage of by the Reveiltie,.rior
' should it be used to the:prejudice ofthe. assessei:. . ' ' ' '

E ', ., .· · Since ~et
off hi; been in the cl~~ed
J96S-66to ·. assesslli~nt ye~ .~
which the Act of J961 applied., ids necessary to ium atiention to the ·
relevant provisions thereof and they are in sections 74 ·and 80. For'
.convenience they ar~ extracted: . : . , • , · · · . · : · ,' ..

' ~-; F . .. ·.·. ''Secricfn ;4; (l){a)Whereiri're;p~ct ~fan; assessri;e~t ~
'·-. ,,_1,year, the net result of the computation .'1;1nder the head 'r-
;, . . · "capital gains'' is a loss, suchlosS.shan,:subject to the other.
. :- provisions o(this Chapter~ be dealt with as follows:, /< _ :,•· :'_·.
~ ... / L "{i) s~~h portion ~fthl"'net I~~ (r~i~ting to short~t~l'ln
capital/assets ,as cannot be ods not whbllyseroff agaiflSt~ '
G income under any head iii accordance with the provisions -
;.,/ i ..-
of section 71 shall be carried forward io the followirigas- •:
,:, ; sessment year arid set off against the capital gains; if any,-.• '
' , ' relating to short-term capital assets as5essable for that ·as-·
'1
I ' sessment year. and, if it cannot be so set off, the amount
H thereof not so set off shall be carried forward to the follow-
ing assessment year a_nd so on."
C.I.T. v. BEHAR! LAL [MISRA, J.) 1165

"(ii) such portion of the net loss as relates to capital assets A
other than short-term capital assets shall be carried forward
to the following assessment year and set off against the
capital gains, if any, relating to capital assets. other than
short-term capital assets assessable for that assessment year
and, if it cannot be so set off, the amount thereof not so set
off shall be carried forward· to the following assessment B
year and so on:
~

Provided that where, in the case of any asses.see not
~ being a company, the net loss computed in respect of such
capital assets for any assessment year does not exceed five
thousand rupees, it shall not be carried forward under this
section."
c

"(b) . Notwithstanding anything contained in the Indian
Income-tax Act, 1922 ( 11) of 1922), any· loss computed
under the head 'capital gains' in respect of the assessment
year .commencing on the 1st day of April, 1961, or any D
~arlier assessmeqt year which is' carried forward in accord-
ance with the provisions of sub-section (2B) of section 24 of
that Act, shall be dealt with in the assessment year com-

+ mencing on the 1st day of April, 1962, or any subsequent
assessment year as follows:
E
.....
(i) in so far as it relates to short-term capital assets, it
shall be carried forward and set off in accordance with the
provisions of sub-clause (i) of clause (a) and sub-section
(2); and

(ii) in so far as it relates to capital assets other Lhan F
short-term capitalassets, it shall be carried forward and set
off in accordance with the provisions of sub-clause (ii) of
clause (a) and sub-section (2)."

"(2)(a) No loss referred to in sub-section (i) of clause (a)
of sub-section (1) or sub-clause (i) or sub-clause (ii) of G
clause (b) of that sub-section shall be carried forward under
this section for more than eight assessment years imme-
diately succeeding the assessment year for which the loss
was first computed under the Act or as the case may be, the
Indian Income-tax Act, 1922 (11of1922).
H
1166 SUPREME COURf ll.EPORTS [ 1987] 2 S.C.R.

A . . '.'(b) No loss referred to in sub-clause (ii) _of clause (a) '
· of sub-section (I) st.~11 be carried forward under this sec- ~
" lion for more thim four assessment years immediately suc-
''. ceeding the assessment year for which the Joss was flrst
computed urider the Act." '

,,
B ; Jr '

',;
·"Seciib'n 80: Notwlthstanding anything contained In this
Chapier, no loss which has not been: rletermlned In !Jllt-
suance of a return filed under Section 139, shall be carried
forward and set off under sub-section ( l) of Section 72 or
-~ - sub-section (2) of Section 73 or sub'section (I) of Section
74 or sub-section (3) of Section 74A." .

· Reading ·th~ provisio~s ~f · Se~tion 74( l)(b,) and Section 80
together, we agree with the submission advanced on beh.:-.!f ui Ifie
assessee that the benefit conferred under Sect[cn i4 llf 192i Ael ~fl
. tinued. to be given effect to under the 't96 i Ad a!!,~ r.uiwlthstanding
0 the w_o~dfogs of section 80 of the latt€f A~t, ihe High Court was righl in
holding that the claim of set off was admissible. In tlllf view, on a bare
an.alysis of 1hese provisions, and withtiUl reference t~ anything mtlte;
th_1s app~al can be ~iSP'?!Ccl of. We find that the Blgll t:tiifrl reached
the correct conclusmn and th~rc I! ntl fnetil ih ihe appeal. Accord-
ingly. it is dismissed with com,
E P.S.S.
\
Appeal dismissed.

I

'. ' .( ~ '

. ', ;

;,,