Soorajmull Nagarmull Vs. Commissioner of Income-tax - Court Judgment

Ajit K. Sengupta, J.

1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1964-65, the following question of law has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is not entitled to set off the long-term capital loss relating to the assessment year 1959-60 beyond the period of four years ?'

2. The facts leading to this reference are in a narrow compass. The assessee is a partnership firm which has been assessed in the status of an unregistered firm for the assessment year 1964-65. A long-term capital loss of Rs. 7,57,320 was assessed for the assessment year 1959-60, under Section 143(3) of the Income-tax Act, 1961. Before the Income-tax Officer, the assessee claimed that this loss should be set off against the long-term capital gains of Rs. 2,67,222 assessed in the assessment year 1964-65. The Income-tax Officer was of the view that the long-term capital loss having been determined in terms of the assessment made under the Income-tax Act, 1961, the time-limit for set off is governed by Section 74(2)(b) of that Act according to which long-term capital loss can be carried forward only for a period of four years. He, therefore, held that the assessment year 1964-65 being outside the time-limit, the long-term capital loss of the assessment year 1959-60 cannot be set off against the long-term capital gains assessed for the assessment year 1964-65.

3. Against the assessment order, the assessee appealed to the Commissioner of Income-tax (Appeals) who upheld the order of the Income-tax Officer on the point. The assessee then came up in further appeal before the Tribunal against the order of the Commissioner of Income-tax (Appeals). The Tribunal noted in its order that the question of carry forward of long-term capital loss of Rs. 7,57,320 and set off against the capital loss is not in dispute. What is in dispute is whether it can be carried forward up to the period of four assessment years or eight assessment years. The gap between the assessment years 1959-60 and 1964-65 is less than eight years but more than four years.

4. Referring to Section 74 of the Income-tax Act, 1961, learned counsel for the assessee contended before the Tribunal that Clause (a) of Subsection (2) of Section 74 was applicable to the facts of the instant case and, therefore, long-term capital loss assessed for the assessment year 1959-60 should be set off against the long-term capital gains assessed for the assessment year 1964-65. It was further contended that, by virtue of Section 24(2B) of the 1922 Act, it was the vested right of the assessee to carry forward the said loss for eight years which right could not be taken away.

5. On behalf of the Department, it was pointed out that the assessment order for the assessment year 1959-60 was framed under Section 143(3) of the Income-tax Act, 1961, and, therefore, the assessee was not entitled to the benefit of Section 24(2B) of the Indian Income-tax Act, 1922, and, as such, Clause (a) of Sub-section (2) of Section 74 was not applicable.

6. The Tribunal considered the provisions of Section 74 of the Income-tax Act, 1961, and Section 24(2B) of the Indian Income-tax Act, 1922, and held that the assessee is not entitled to set off the loss relating to the assessment year 1959-60 beyond the period of four years. The assessee's appeal on the point was, accordingly, dismissed by the Tribunal. At the hearing before us, it has been contended by learned counsel for the assessee that as the return for the relevant year was filed after the commencement of the new Act, the assessment was no doubt rightly done in accordance with the procedure under the new Act. The substantive law to be applied in making the assessment for the relevant year was none the less to be that which was in force on the first day of April of the relevant year and a section like Section 24(2B) of the old Act, which gave the right of carry forward of capital loss for eight years was not a procedural section but a substantive one by reason of the very meaning of the word 'substantive' which, according to Webster's New Dictionary, is 'of or relating to legal rights or principle as distinguished from legal procedure'. Accordingly, the right given by Section 24(2B) to carry forward long-term capital loss up to eight years remained unimpaired ; more so, since the repealing Act does not indicate any intention to the contrary. The order of this Tribunal that the loss under the head 'Long-term capital gain' assessed for the year 1959-60 could be carried forward only for four years is thus, apparently, erroneous.

7. On the other hand, the contention of learned counsel for the Revenue is that the assessment order for the assessment year 1959-60 was framed under Section 143(3) of the Act and, therefore, the assessee is not entitled to the benefit under Section 24(2B) of the Act of 1922 and as such Clause (a) of Sub-section (2.) of Section 74 is not applicable.

8. In order to appreciate the controversy, it is necessary to refer to Section 74 of the Act, 1961. Section 74 of the Act, so far as material and relevant to our purpose, reads as follows :

'74(1)(a) Where in respect of any assessment year, the net result of the computation under the head 'Capital gains' is a loss, such loss shall, subject to the other provisions of this Chapter, be dealt with as follows ..

(ii) such portion of the net loss as relates to capital assets 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 year and so on ... (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 first day of April, 1961, or any earlier assessment year which is carried forward in accordance with the provisions of Sub-section (2B) of Section 24 of that Act, shall be dealt with in the assessment year commencing on the first day of April, 1962, or any subsequent assessment year as follows :--...

(ii) in so far as it relates to capital assets, other than short-term capital assets it shall be carried forward and set off in accordance with the provisions of Sub-clause (ii) of Clause (a) of Sub-section (2). (2)(a) No loss referred to in ... Sub-clause (ii) of Clause (b) of that Sub-section (Sub-section (i)) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed under . . . the Indian Income-tax Act, 1922 (11 of 1922).

(b) No loss Referred to in Sub-clause (ii) of Clause (a) of subsection (1) shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed under this Act.'

9. Section 74, as originally enacted, which was substituted by a new section by the Finance (No. 2) Act, 1962, with effect from April 1, 1962, provided as follows :

'(1) Where in respect of any assessment year the net result of the computation under the head 'Capital gains' is a loss to the assessee, such loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and set off against capital gains 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 year and so on :

Provided that where the loss computed in respect of any assessee, not being a company, for any assessment year does not exceed five thousand rupees, it shall not be carried forward under this Sub-section. (2) No loss shall be carried forward under Sub-section (1) for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

10. At this stage, we may usefully refer to the provisions of the 1922 Act.

11. Section 24(1) reads as follows :

'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.'

12. Section 24(2A) reads as follows :

'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,'

13. The relevant part of Section 24(2B) reads thus :

'Where an assessee sustains a loss such as is referred to in Subsection (2A) and the loss cannot be wholly set off in accordance with the provisions of that Sub-section, the portion not so set off shall be carried forward to the following year and set off against capital gains for that year, and if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following year and so on, so however, that no such loss shall be carried forward for more than eight years.'

14. From a comparative study of the relevant provisions of the old Act and the new Act, it would be evident that neither under the old Act, nor under Section 74 of the new Act as originally enacted, was any bifurcation made between short-term capital assets or long-term capital assets and consequential gain or loss flowing therefrom. Under Section 24(2B) of the 1922 Act, a right was given to the assessee to carry forward capital loss for a period of eight years. Thus, under the old Act as well as Section 74 as originally enacted, capital loss could be carried forward for eight years. A change has been effected by the amendment of Section 74 by the Finance (No. 2) Act, 1961, by bringing the concept of long-term and short-term capital loss and also the period during which the unabsorbed capital loss may be carried forward. Unabsorbed short-term capital loss may be carried forward and set off against capital gains for a period up to eight subsequent assessment years, whereas unabsorbed long-term capital loss may be carried forward up to four succeeding assessment years and set off against long-term capital gains only.

15. The contention of the Revenue which weighed with the Tribunal is that, unless the capital loss is computed under Section 24(2B) of the old Act, the assessee is not entitled to have the long-term capital loss carried forward beyond four years in accordance with the provisions of the new Act. The Tribunal was of the view that if the capital loss pertained to the assessment year commencing on the first day of April, 1961, or any other earlier assessment year, the assessee would be permitted to carry forward such loss for a period of eight years if such computation has been made under the old Act. If the contention of the Revenue is accepted, it will create an anomaly.

16. Take for example, a case where the assessment for the assessment year 1959-60, was made under the old Act and a capital loss was computed, the assessee would be entitled to have such loss carried forward for subsequent eight assessment years, but in another case where the assessee filed a return for the assessment year 1959-60 after the coming into force of the new Act and the assessment is made and capital loss is computed under the new Act, the right to carry forward the capital loss would be restricted to four subsequent assessment years. This cannot be the intention of Parliament. It is immaterial whether the assessment was made under the new Act or the old Act. The question has to be determined with reference to the assessment year for which such loss was determined. In our view, having regard to the intention of Parliament, if any capital loss is determined for the assessment year 1961-62 or any earlier assessment year, whether under the Indian Income-tax Act, 1922, or under the Income-tax Act, 1961, the assessee is entitled to have the capital loss carried forward for subsequent eight assessment years, In other words, the benefit of carry forward for eight years would be allowed if the loss arises under the 1922 Act, i.e., for the assessment year 1961-62, or any earlier assessment year and for four years if it arises under the 1961 Act, i.e., to say, for the assessment year 1962-63 and subsequent assessment years. The 1961 Act is prospective in operation and has not taken away the right of the assessee in respect of the loss suffered prior to the commencement of the 1961 Act. It is not procedural as has been contended by learned counsel for the Revenue. It is a substantive provision which governs the rights and obligations of an assessee in respect of the loss suffered prior to the assessment year 1962-63. Under the 1922 Act, no distinction was made between short-term capital loss and long-term capital loss. This bifurcation has been made under the new Act which will substantively affect the liability of the assessee.

17. It is now well-settled that the law to be applicable to the assessment is the law as it stands in the year of assessment which will govern the rights and obligations of an assessee. If that be the position, in that event, the right to carry forward the loss as determined in the assessment for the assessment year 1959-60 must necessarily be according to the law as it stood on the 1st day of April, 1959. In other words, the provisions contained in Section 24(2B) of the Act of 1922 will govern such right. This right cannot be taken away, nor has it been taken away by the new Act. In our view, if the right to carry forward the long-term capital loss for a period of eight years conferred under Section 24(2B) of the Act 1922 has not been taken away by the Act of 1961 where the loss was computed under the provisions of the Act of 1922, such right even in respect of the assessment year commencing on the 1st day of April, 1961, or any earlier assessment year cannot be taken away simply because the assessment has been made and the loss has been computed under the provisions of the 1961 Act. If the capital loss pertains to any year prior to the assessment year 1962-63, irrespective of the provision of the Act under which such computation has been made, such loss must be allowed to be carried forward for eight years. This will be evident from the speech made by the Finance Minister and Deputy Prime Minister in Parliament in introducing the Finance (No. 2) Bill, 1962. A contention was raised whether it is permissible to take into account, as an external aid of interpretation, the speech made by the Finance Minister in Parliament in introducing the Bill. It is no doubt true that it is not permissible to make the speech of the Finance Minister to construe the clear language of the statute. The speech cannot be used to defeat or detract from a meaning which clearly emerges from a consideration of the enacting words actually used. It is equally true that any statement made by an individual albeit a Minister of the intention and objects of the Act cannot cut down the generality of the words used in the statute. The words of a statute themselves do best declare the intention of the law given, Farwell, L. J, stated the position in this regard thus :

'The mischief sought to be cured by the Act and the aim and object of the Act must be sought in the Act itself. Although it may, perhaps, be legitimate to call history in aid to shew what facts existed to bring about a statute, the inferences to be drawn therefrom are exceedingly slight.' (R v. West Riding of Yorkshire County Council [1906] 2 KB 676.

18. The Supreme Court, however, in K.P. Varghese v. ITO : [1981]131ITR597(SC) observed as follows (p. 608) :

'Now, it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. This is in accord with the recent trend in juristic thought not only in Western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In fact there are at least three decisions of this court, one in Loka Shikshana Trust v. CIT : [1975]101ITR234(SC) , the other in Indian Chamber of Commerce v. CIT : [1975]101ITR796(SC) and the third in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association : [1980]121ITR1(SC) , where the speech made by the Finance Minister while introducing the exclusionary clause in Section 2, Clause (15), of the Act was relied upon by the court for the purpose of ascertaining what was the reason for introducing that clause'.

19. We may, therefore, refer to the speech of the Finance Minister, The Finance Minister, in introducing the Finance (No. 2) Bill, 1962, stated thus :

'Under Section 24(2B) of the Indian Income-tax Act, 1922, corresponding to Section 74 of the 1961 Act, losses in respect of capital assets could be carried forward for eight years. Losses which have been or will be assessed upto the assessment year 1961-62 have acquired this right and I do not propose to deprive them of it. They may be allowed to be carried forward for the remaining period, as losses on short-term assets or other than short-term assets, as the case may be. Provision has already been included in respect of old short-term tosses in Clause 7 of the Finance Bill. I am giving notice of an amendment to bring in this long-term losses also. On further consideration, I think it will be equitable to allow future losses in respect of long-term capital assets also to be carried forward. The eight-year period is, however, too long, in the present conditions, and I propose to allow them to be carried forward for a period of four years only. The revised draft of Clause 7 of which notice is being given covers this also. The loss of revenue on account of these changes will be nominal and has been estimated at Rs. 10 lakhs.' .

20. It will be evident from the said speech that the right which has accrued to an assessee up to the assessment year 1961-62 was not intended to be disturbed by the provisions of the new Act. The Memo Explaining the Provisions of the Finance (No. 2) Bill of 1962, inter alia, stated as follows :

'Losses of years prior to 1962-63 ; Such portion of the losses under the head 'Capital gains' relating to the assessment years prior to 1962-63 as could not be fully set off in the assessment year 1961-62 and were to be carried forward under the provisions of the 1922 Act should be dealt with as follows : The loss should be broken up into short-term capital losses and long-term capital losses. The portion which relates to short-term capital assets shall be carried forward and set off only against short-term capital gains for the assessment year 1962-63 or a subsequent assessment year. The portion which relates to long-term capital assets, shall be carried forward and set off only against long-term capital gains for the assessment year 1962-63 or a subsequent year. In both the cases, the loss shall not be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed under the 1922 Act.'

21. Thus, the capital loss pertaining to the assessment year commencing on the 1st day of April, 1961, or in an earlier assessment year could be carried forward up to a period of eight years in accordance with the provisions of Section 24(2B) of the Act of 1922, whether or not the computation of such loss was made under the provisions of the 1922 Act. The Tribunal in support of its reasoning relied on Clauses (a) and (b) of Sub-section (1) of Section 297 of the Act of 1961. According to Clause (a), where a return of income has been filed before the commencement of the Act of 1961 for any assessment year, the proceedings for that assessment should be taken under the Act of 1922. According to Clause (b), where the return of income has been filed after the commencement of the Act of 1961 for the assessment year ending on March 31, 1962, or any earlier year, the assessment should be made in accordance with the procedure specified in the Act of 1961. Thus, if any assessee has failed to file a return of income before the commencement of the Act of 1961 relating to the assessment year 1961-62 or for any earlier assessment year, the assessment is required to be made under the Act of 1961. According to the Tribunal, since, in the instant case, admittedly, the return was filed late and the assessment was framed under Section 143(3) of the Act of 1961, it cannot be said that the capital loss was computed in accordance with the provisions of Section 24(2B) of the Act of 1922, It was computed in accordance with the provisions of the Act of 1961.

22. We are, however, unable to accept the reasoning of the Tribunal. Under Section 297(1)(b), where, for any assessment year up to the assessment year 1961-62, the return of income has been filed after April 1, 1962, the assessment for that year shall be in accordance with the procedure specified in the 1961 Act. It is clear that the provision which will be applicable to the return of income filed after the commencement of the 1961 Act, is the procedural part of the Act and not those parts of the Act which relate to. the liability of the assessee.

23. There is no provision in the Income-tax Act, 1961, which affects the right of the assessee to carry forward a loss arising under the head 'Capital gains' under Section 24(2B) of the Indian Income-tax Act, 1922. The computation of such loss, as we have said, whether under the Act of 1922 or the Act of 1961 is immaterial, as computation mainly pertains to the procedural part of the statute.

24. For the reasons aforesaid, the question in this reference is answered in the negative and in favour of the assessee.

25. There will be no-order as to costs.

Bhagabati Prasad Banerjee, J.

I agree.