Full Judgment
2. For the assessment year 1965-66, the assessee, which is a private limited company, disclosed income from interest on securities, loss from business amounting to Rs. 10,68,106 and income from other sources in the form of dividend income of Rs. 3,32,418, from which an amount of Rs. 83,104 was deducted at source as tax. In the statement of income filed with the return of income, a claim was made that the whole of dividend income of Rs. 4,15,522 received from M/s. Devidayal Tube Industries Ltd., being a new industrial undertaking within the meaning of Section 84 (as it then was), was exempt from tax under Section 85.
The ITO passed the assessment order on 20-3-1970. In the computation of income, he included dividend income of Rs. 4,15,523 along with an item of income from other sources amounting to Rs. 3,90,000 to arrive at a figure of Rs. 8,05,525 which along with income from interest on securities (Rs. 9) he adjusted against business loss which he determined at Rs. 8,43,992. The balance of the loss of Rs. 38,460 was carried forward by him.
3. The assessee took the matter in appeal before the AAO. On several grounds one of which read as under : That the ITO has incorrectly assessed in our hands the dividend from M/s. Devidayal Tube Industries Ltd. which is a new industrial undertaking and as such the said dividend amount being exempt under Section 85 read with Section 84 of the Income-tax Act, 1961.
The Appellate Asst. Commr. (Central), Range-I, dealt with this appeal as well as the appeal for the assessment year 1966-67 in a joint order dated 23-3-1972. In this order, he set aside the assessments, for both the years on the main ground of appeal challenging addition on account of unexplained hundi loans. The assessment was re-framed by the ITO in consequence of the appellate order dated 23-3-1972. The assessee apparently pressed its claim for relief under Section 85, which was dealt with by the ITO as under: 6. The assessee has claimed a deduction of Es. 2,49,312 under Section 80M on a gross dividend of Rs. 4,15,522 received by it firm its shareholdings of Devidayal Tubes Pvt. Ltd. This claim of the assessee cannot be admitted for the reason that the deduction contemplated under Section 80M is from the total income of the assessee and during the year under consideration the business loss of the assessee being for more than the income from other sources the assessee has no total income from which the deduction under Section 80M can be allowed. The assessee's claim that the deduction should first be allowed from its dividend income before setting off income from other sources against the business loss is not acceptable.
Although the ITO has referred to Section 80M, the exemption that was claimed was under Section 85 which was applicable for the relevant assessment year. Against this finding of the ITO, the assessee filed an appeal to the CIT (Appeals) on 28-2-1980. The CIT (Appeals) dealt with the claim of the assessee in this regard in para 2 of his order dated 27-3-1980 as under : 2. The next contention of the appellant is that he is entitled to relief under Section 80M on dividend receipts from M/s. Devidayal Tube Industries Private Ltd. The appellant is also entitled to rebate on the gross dividend income and in view of the Supreme Court's decision in Cloth Traders, the ITO is directed to recompute the relief and enhance the loss accordingly.
While giving effect to the order of CIT (Appeals), the ITO observed that the deduction allowable under Section 80M being 60 per cent of Rs. 4,15,523 being Rs. 2,49,312 was not adjustable as the total income of the assessee, after giving effect to the order of the AAO, resulted in a net loss of Rs. 6,08,257. On receipt of the order of the ITO giving effect to the CIT(A)'s order dated 31-7-1980, the assessee made an application on 6-9-1980 stating that certain losses and reliefs amounting in all to Rs. 20,56,666 which were due to it for being carried forward had not been allowed. An item of relief under Section 80M of Rs. 2,49,312 was also included in this claim. At this stage, the file had come within the jurisdiction of IAC, Asst., Range VI-A, who passed an order under Section 154 on 22-1-1982. While dealing with the claim of relief on dividend income, the IAC gave the following finding : Hence the deduction under Section 85 would amount to Rs. 4,15,523.
However the assessee is not actually entitled to the benefit of this deduction on account of the set off of the business loss against the dividend income under Section 71 and the absence of any provision for carry forward of such deficiency under Section 85.
Against this finding, yet another appeal was filed to the CIT (A) by the assessee on 3-3-1982. The question raised before the CIT (A) was whether deductions under Sections 84 and 85 as they stood at the relevant time should be allowed to be carried forward if they cannot be absorbed against current year's tax liability. The CIT (Appeals) held that the provisions of Sections 84 and 85 do not provide for any deduction from the total income but provide that income-tax shall not be payable by the assessee on certain part of the profits and gains from an industrial undertaking or on certain types of dividend. From this, he deduced that the question of allowing any rebate of income-tax can arise only if there is any positive income. Against this finding of the CIT (Appeals), an appeal was filed to the Tribunal and the Jabalpur Bench of the Tribunal camping at Bombay dealt with this issue in their order in ITA No. 5411/Bom/83, dated 11-11-1985. The Tribunal, on review of the relevant facts, observed in para 10 of their order that at no stage before the lower authorities the assessee had claimed that the dividend income should not be set off against business loss. However, before them, the counsel for the assessee argued that the dividend income should not be set off against business loss as per the provisions of Section 71. Reliance was placed on a decision of the Supreme Court in the case of Seth Jamnadas Daga v. CIT [1961] 41 ITR 630, whereas for the department reliance was placed on the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. The Tribunal refused to go into this issue in the appeal against the order under Section 154. One more point was raised before the Tribunal which was that the carry forward of loss has to be decided in the year under appeal. It was argued that the loss is to be determined under Section 157 in the year of assessment. Reliance was placed on a decision of the Supreme Court in Saroj Aggarwal v. CIT [1985] 156 ITR 497, Niranjan Lal Earn Chandra v. CIT [1963] 49 ITR 177 (All.) and CIT v Khushal Chand Daga [1961] 42 ITR 177 (SC). On this argument, the Tribunal gave the following finding : We accept the assessee's contention that the question of carry forward of loss, depreciation, etc., is to be determined in the year under consideration and not in subsequent assessment year. On this limited point, we restore the matter to the file of the CIT (A) to examine the assessee's contentions on merit and then to decide the issue.
To give effect to this order of the Tribunal, CIT (Appeals)-VIII, passed an order on 21-5-1987. The finding of the CIT (A) in this year was contained in para 3 and read as under : Relief under Section 84 related to the income of newly established industrial undertaking. It will be seen that there are no provisions of carry forward of the deficiency as has now been provided in Sub-section (3) of Section 80J. The appellant's claim for carry forward of deficiency of claim under Section 84 was therefore rightly rejected by the ITO.It is against this finding of the CIT (Appeals) that the assessee has again come in appeal.
4. The only substantial argument taken in this appeal is that the loss to be carried forward should be quantified as per the provisions of the Income-tax Act. The first specific ground is that the learned CIT (Appeals) referred to the claim under Section 84 in his order, while really the Tribunal has remanded back the case to determine the claim under Section 85 and then the quantum of loss. In support of this ground, Shri Kirit Mehta, the learned representative for the assessee, pointed out that an additional ground was raised on 9-12-1971 before the AAC (page 10-D of the compilation) in which it was claimed that the ITO had incorrectly assessed in their hands dividends from M/s.
Devidayal Tube Industries Ltd., which is a new industrial undertaking and the said dividend was exempt under Section 85 read with Section 84 of the IT Act, 1961. It was pointed out that the reference to Section 80M made by the ITO in the body of the order was wrongly mentioned.
However, a claim for relief under Section 80K was made by the assessee in its letter dated 28-7-1978 at item 6 of the various reliefs claimed.
In the course of arguments, the assessee's representative tended to expand the scope of the claim for relief not only to Section 80K but also to Section 80M, although initially his claim was restricted to the relief available in terms of Section 85 as it existed before its replacement after 1-4-1968 by Section 80K. Referring to Section 71(1), the learned representative stated that the expression 'entitled to' has the effect that such loss as the assessee wanted would be set off against its income, and it gave an option to the assessee and the provisions of Section 71(1) should be so interpreted that if there are two interpretations possible, the one beneficial to the assessee should be preferred. Prima facie, we fail to understand how it could be gathered from the directions of the Tribunal reproduced in the later part of the preceding para hereinabove that the Tribunal had given specific directions for determining the claim under Section 85. Our finding on a plain reading of the Tribunal's order and all the relevant orders leading to it is that the Tribunal had set aside the matter on a limited question of determining the loss, depreciation, etc., to be determined in the year under consideration and not in subsequent assessment year. When the issue was raised before the Tribunal that dividend income should not be set off against business loss as per the provisions of Section 71, the Tribunal declined to go into this issue is an appeal against the order under Section 154. The Tribunal gave a finding to that effect in para 10 of their order. Therefore, it in incorrect to say that the Tribunal had remanded the case with a direction to determine the claim under Section 85 and then the quantum of loss. Without prejudice to these observations, in our opinion, even if the provisions of Section 85 are to be taken into account, there cannot be any change in the figure of loss determined by the CIT(A) for the following reasons. Section 85 as it stood on the statute book and as was applicable to the assessment year 1965-66 read as under : 85. Dividend from new industrial undertaking or hotel business or ship.-Subject to any rules that may be made by the Board in this behalf, income-tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him out of the profits and gains derived by a company from an industrial undertaking or the business of a hotel or a ship to which Section 84 applies as is attributable to that part of such profits and gains on which income-tax is not payable by the company under Section 84.
The scheme of this and several other such Sections under Chapter VII was that a rebate from tax liability was to be given in respect of certain types of income. Section 84 provided that income-tax shall not be payable by an assessee on so much of the profits and gains derived from industrial undertaking or business of a hotel, etc., to which this section applies as does not exceed 6 per cent per annum on the capital employed in such undertaking. The computation of capital employed for this purpose was prescribed under the rules. The relief available in respect of income from new industrial undertaking under Section 84 was in the form of a rebate from tax. Such rebate from tax was calculated by applying the average rate of tax payable by an assessee to that portion of the tax liability which related to the income of such industrial undertaking. The income-tax rebate contemplated in Section 85 was a consequential relief provided to the shareholders or owners of shares who derived income from dividend, a portion of which came out of profits of a company or an industrial undertaking to which the provisions of Section 84 applied. The rationale behind this section was that if the tax rebate was to be given on the income of an industrial undertaking of a company, consequential tax rebate should be available to the shareholders on such portion of their dividend income as is paid to them out of the exempt portion of the profits of such industrial undertaking. The manner of providing such exemption was in the form of tax rebate both under Sections 84 and 85. The basic assumption behind this scheme of exemption in the form of tax rebates was that in the event of there being a positive tax liability, tax liability calculated at the average rate on a portion of the income intended for exemption would be reduced from the total tax liability. In this context, it would not be out of place to refer to Sub-section (5) of Section 84 as it then existed which provided that the profits and gains derived from an industrial undertaking or business of a hotel or from a ship to which this Section applies shall be computed in accordance with the provisions contained in Chapter IV-D. Chapter IV-D as it existed then and it exists now provides for the manner in which the profits and gains of business are to be computed from Sections 28 to 44. The implication of this Section is that in the event of there being a negative income, loss computed in accordance with the provisions of Chapter IV-D, Section 84 will not have any application. We are not aware whether in the present case rebate under Section 84 was allowed in the case of a company which declared dividends received by the assessee ; but, in our opinion, the logical consequence of such interpretation would be that rebate under Section 85 would also not be available in the case of an assessee whose income represented a negative figure or a loss either at the assessment stage or after giving effect to the decisions of the appellate authorities. Since the exemption was in the form of tax rebate, it could only be given in a case where there would prima facie be a tax liability. If such exemption could not be given on account of the fact that there was no tax liability, there was no way by which such exemption could be carried forward to a subsequent year because there was no provision to that effect in the Act as it stood at the relevant time. The rationale behind this interpretation would be clear if the scheme of the Act as it now stands after the introduction of Chapter VI-A is considered.
Sections 81 to 85C were deleted by the Finance (No. 2) Act, 1967 with effect from 1-4-1968. The present Chapter VI-A was substituted by the same Finance (No. 2) Act, 1967. The main scheme of this Chapter was that it provided for straight deductions in respect of certain types of income or items of expenditure as specified in Section 80C to Section 80VV. Thus, the scheme of tax rebates which existed till 1968 was replaced by a scheme of straight deductions in respect of items on which the Govt. wanted to give relief to assessee. These deductions were in respect of payments as in Sections 80C to 80GG or in respect of incomes as in Section 80H to Section 80T. Section 80K was inserted in place of Section 85 with effect from 1-4-1968. In broad terms, it provided that where the gross total income of an assessee who is an owner of shares of a company and who is chargeable to tax on income by way of dividend on shares includes any income by way of dividend, there shall be allowed in computing his total income a deduction from such income by way of dividend an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship on which no tax is payable or in respect of a company which is entitled to deduction under Section 80J. Section 80A(2) provided that the aggregate amount of deductions under this Chapter (Chapter VI-A) shall not in any case exceed the gross total income of the assessee. Thus, deductions under this Chapter could not be given to the assessee which would have the effect of converting his income into a negative figure. Certain specific exceptions were made as in Section 80J(3) where a provision for carry forward of unabsorbed deficiency under Section 80J was provided. All this discussion would indicate that the rebate under Section 85 of the type claimed by the assessee in respect of dividend received by him from out of the profits of the new industrial undertaking cannot be calculated so as to enhance the loss of the assessee and the determination of the loss of the year under account is the limited objective of the ITO as per the directions of the Tribunal hereinabove. We are, therefore, satisfied that the CIT (Appeals) was fully justified in giving the directions that he did and no enhancement in the figure of the loss determined by the lower authorities is called for merely on account of the alleged availability of rebate under Section 85 to the assessee on its dividend income because such rebate can be availed of by the assessee only if there is a tax liability by the very scheme of the Sections as they stood then and as is discussed in the foregoing paragraphs. Section 71(1) provides that 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, 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. This Section cannot be interpreted to mean that the assessee can compel the ITO not to adjust income under one head against loss under the other. The entitlement, if any, given by Sub-section (1) of Section 71 is for set off of a positive income against the loss suffered and no other option in this regard can be read into the language of the section because if that was the intention of the Legislature, a specific provision to that effect would have been made. Chapter VI deals with aggregation of income and set off or carry forward of losses. This is a procedural section enabling the ITO in his task of computing the total income of the assessee from various heads. The various provisions of the section are for the benefit of the ITO and are not intended to confer any benefit on or give option to the assessee. There are only three exceptions to the general rule that a loss from a source of income may be set off against any other income for the same assessment year under any other head. These are losses arising from speculation (Section 73) losses in respect of sale of capital assets (Section 74) and the losses of the type specified in Section 74(1). It would thus be clear that wherever the Legislature wanted to make an exception to the general rule of intra-head adjustment of losses against income, such exceptions have been specifically spelt out in Chapter VI. We are, therefore, of the opinion that no option to the assessee is available under Section 71(1) and we reject the argument of Shri Mehta.