'INCOME' DOES NOT INCLUDE `LOSS' FOR ALL PURPOSES

[DEV KUMAR KOTHARI]

The words 'income' and 'loss'

1. The words income and loss connotes opposite meanings. Most of children studying in class three / four   can say that opposite of `profit' or `income'  is loss or damages. The expression income and its synonymous words have been defined as follows:

Oxford Dictionary:

Income: periodical receipts (usually total annual) from one's business, lands, works, investments etc.

Profit: advantage, benefit, pecuniary gains, excess of returns over outlay.

Gain: increase of possessions etc; profit, advance, improvement, acquisition of wealth, sums acquired by trade etc; emoluments, winnings; increase in amount … 

Black's Law Dictionary:

Income: The return in money from one's business, labor, or capital invested; gains, profits, salary, wages, etc.

From Encyclopaedia Britannica:

income:

1 : a valuable return : gain
2 : the excess of returns over expenditure in a transaction or series of transactions ; esp: the excess of the selling price of goods over their cost.
3 : net income usu. for a given period of time.
4 : the ratio of profit for a given year to the amount of capital invested or to the value of sales
5 : the compensation accruing to entrepreneurs for the assumption of risk in business enterprise as distinguished from wages or rent.
1 : to be of service or advantage : avail
2 : to derive benefit : gain
3 : to make a profit
vt: to be of service to : benefit

loss :

1 :destruction ruin

2  a:  the act of losing possession : deprivation‹~ of sight›

    b: the harm or privation resulting from loss or separation c : an instance of losing

3  a : person or thing or an amount that is lost: as a pl: killed, wounded, or captured soldiers

    b : the power diminution of a circuit or circuit element corresponding to conversion of electrical energy into heat by resistance

4  a : failure to gain, win, obtain, or utilize

   b : an amount by which the cost of something exceeds its selling price

Thus we find that the expression income, profit or gain and loss or damages are opposite words in their application in any sphere or field. Therefore, even for purpose of law relating to tax on income the words profit or gain or income are opposite of loss.

Chargeable income:

In the context of tax on income the word  income or phrase 'chargeable income' or total income  will definitely be positive profit or gains  or sum of profits and gains after deducting permissible losses from positive profits and gains. If the resultant figure after setting off of losses for the year or brought forwarded losses is negative figure that is, incomes are less than admissible losses the negative figure cannot be called negative income. It will be loss which may or may not be carried forward depending on the nature of the loss and required procedure for claim for carry forward of loss.

There cannot be a levy of income tax on loss or negative profits.

Principle that `Profit includes loss' has limited application:

The principle that profit includes loss or that loss is a negative profit has limited application for mathematical computation of total income by taking negative  figures of allowable losses as part of computation of gross total income. If any loss is not eligible for set off it will not form part of gross total income even for purpose of computation of gross total income of assessee. For example, speculation loss can be set off only against speculation profit. Therefore, if there is speculation loss in one business and there is no speculation profit from any other business for the year, the speculation loss shall not at all go into the computation. It will be kept apart for carry forward for set off in future, subject to prescribed conditions.     

The principle decided by the Supreme Court and statutory provision:

 The Supreme Court decided that for computing gross total income and total income, losses cannot be ignored. For that purpose, income includes loss. Thus, loss suffered has to be taken into account as negative incomes for the purpose of computing chargeable income. When income of any other person is required to be clubbed in the income of assessee, the loss will also have to be clubbed. In the case of CIT V J.H.Gotla (1985) 156 ITR 323 (SC) it was held that for the purpose of section 16(3) of the Income-tax Act, 1962 (clubbing  provisions corresponding to section 64 of the 1961 Act) the term income shall include loss. It was not ruled that for all purposes income include loss.

Now the principle found statutory recognition by way of insertion of an explanation to section 64 of the Income-tax Act, 1961 (clubbing provision) as follows:

    

Explanation 2: For the purpose of this section, "income" includes loss.  

 

Thus, it is clear that the principle that income includes loss is limited in its application to section 64 only. This principle cannot be applied to other provisions. If the word income included loss for all purposes, then the definition could have found place in section 2. Furthermore all definitions are generally subject to context and a word defined in definition clause may have some other meaning depending on the context in which it is used in some other provision.

Definition of income:

Definition of  'income' as given in section 2 (24) of the Income-tax Act, 1961 clearly shows that income includes only positive incomes arising in form of  some receipts or profits or gains computed as per relevant provisions of the Act. None of the  clauses can, by any stretch of imagination suggests that income includes loss.

Loss are taken in to account as per method of accounting or provisions:

Loss incidental to earning of income may be taken into account either as per the method of accounting or as per provisions of the Act. For example loss suffered in the course of business may be taken in to account while computing income under section 28 read with section 145 of the Act. Loss suffered in one business is  made eligible for setoff against income of other business under section 70 of the Act. Loss suffered under one head may be eligible for set off against income from other head as per section 71 of the act.

Other losses are kept apart:

We find that losses under any head of income may found place in computing income under different heads of income and while setting off loss of one head against income falling under some other head of income.  Such set off's of losses are limited to the extent of income. Any loss which is not so set off is kept apart and do not go into computation of Gross Total Income (GTI). For example let us take a simple example:

Assessee has income from A unit                                         Rs.100

Assessee has loss from B unit of Rs.200

Out of loss of B unit only Rs.100 is set off u/s 70               (Rs.100)

Balance business income                                                           Nil

Assessee has income from other sources                              Rs.20

The assessee is entitled to set off Rs.20/- from loss of

B unit to the extent of Rs.20 u/s 71                                      (Rs.20) 

Balance income from other sources                                             Nil

Gross total income                                                                    Nil

Deduction under chapter VIA (eligible Rs.5) but allowable     Nil

Total income                                                                              Nil    

Balance business loss of B unit to be carried forward u/s 72 is Rs. 200 - (100 + 20) = 80.

Suppose in the above example business of two units were the one and same business the computation would be as follows:

Loss from units A and B  Rs.100/-                                           -

Income from  other sources                                                     20

Set off business loss to the extent of                                     (20)

GTI  and TI                                                                             Nil

Balance business loss to be Carried forward Rs.80

In the above cases it would be wrong to say that total income is loss of Rs.80. The correct legal position is that total income is nil, it may therefore be not necessary to file a return of income, unless one is required to be file as per proviso to section 139.

If the assessee want that his loss be carried forward then a return is to be filed for claiming carry forward of loss under section 139(3) within time allowed under section 139(1) to meet the conditions laid down in section 80 for carry forward of the loss.

The above example clearly shows that the loss is kept apart, it is taken into computation only as per method of accounting and specific provisions of the Act. The scheme of computation and form of return of income also suggests that loss does not form part of total income , loss is taken only for the purpose of set off to the extent permissible. If loss is in excess of permissible set off, the excess is not taken into computation but kept apart to be carried forward or lapse.

In case the loss is not eligible for set off it will not at all go into the computation of GTI. In case loss is not eligible for carry forward or further carry forward, it will lapse. Therefore, it can be said that loss does not form part of total income.

General application of the principle 'income includes loss' is wrong:

It would be wrong to say that income includes loss is a general rule  as it will be  totally absurd and result into anomalous results. If loss of Rs.100 is a negative income and profit of Rs.100 is positive income the out come may be of two types:    

Either tax loss of Rs.(100)  the same way as profit of Rs. 100 says Rs.35 as income tax.

                                        Or

     The revenue may have to pay the assessee Rs.35  because the income is negative Rs.100 so tax will also be negative Rs.35 that is revenue should pay Rs.35/- that is negative tax collection.

Let us take other case an individual has suffered loss of Rs.65000/-, he is not liable to tax and therefore he is not liable to file return of income. If the loss of Rs.65000/- is called to be negative income, he will be required to file the return.

 

Thus, it is clear that income includes loss cannot be applied as general rule , it applies only  in the context of clubbing provisions of section 64. Even for set off of loss the rule has no application because set off is permitted by specific provisions and not by the general rule that income included loss.   

Use of rule under some other provisions:

It appears that the rule has been applied in some cases as a general rule in the context of some other provisions. For example, while applying explanation to section 73 of the Act, one has to find out whether company's gross total income consists mainly of income which is chargeable under specified heads namely income from house property, capital gains and other sources (earlier interest on securities also). Thus ,one  needs to look at positive figures of income, which go in to computation of gross total income. Because only positive figures goes in to the computation of chargeable income - gross total income and total income.

Suppose a company has income chargeable under the head other sources Rs.200 and company has loss of Rs.500 in share trading. The computation will be as follows:

Loss in share trading   Rs.500                                         -

Income chargeable as from other sources                  Rs.200

Loss in share trading set off  u/s 71                            Rs.200

 

Balance gross total income                                            Nil

In the above case chargeable income is Rs.200. Loss of Rs.500 cannot be called an 'income' much less 'income which is chargeable'. Thus, in view of the author loss in share trading cannot be deemed as speculation loss as per explanation below the section 73 because 'income which is chargeable' is only from other sources.

However, some high courts have held that the loss is a negative income and  if the figure of negative income is higher than the figure of positive income the  deeming provision under explanation to section 73 will apply  and the share trading loss, will be deemed as speculative loss  ( unless the company is one whose business is banking granting of loans and advances etc. - the other exception of deeming provision). The Calcutta high court in the case of Eastern Aviation & Industries Ltd V CIT (1994) 208 ITR 1023 took the view that in the case of assessee income from other sources was Rs.3,87,603/- and loss in share trading and share speculation was Rs.21,11,54/- and Rs.7,95,447/-respectively . The negative income from business was much more than the positive income from other sources, therefore the share trading loss was also deemed to be speculative loss and the same was not allowed to be set off against income from other sources.

With respect, the author feels that the expression 'income which is chargeable' as used in the explanation to section 73 was not properly high lighted  by the counsels who appeared before the Calcutta high court and the rule that 'income includes loss' was applied in a very general way by the high court.

Therefore, the author feels that the judgment of Calcutta high court needs to be reconsidered in light of above discussions.   

Chapter III items- whether income will include loss:

Under Chapter III certain receipts, gains or incomes are exempted from inclusion in taxable income. The reasons behind such exemptions are:

(a) Constitutional provisions e.g. agricultural income,

(b) Rational underlying the provisions of the Act- e.g.- share in income of partner of firm which has been assessed, share in income of AOP, BOI, etc. which has been assessed .. etc.

(c) Fiscal policy decision - allowing certain exemptions to achieve certain socio economic purposes, to attract particular type of investment in specified areas or fields, to compensate for lower rate of interest allowed on certain government securities… etc.

(d) Capital receipts- certain items are specifically exempted because they are of capital nature.

Thus, it can be said that exemptions are granted with a view to achieve certain purpose and to make the law constitutionally valid. For example suppose agricultural income is not exempted under section 10, still no tax could  be levied on it by the Central Government, because under the provisions of the Indian Constitution  taxes on agricultural income is under the authority of state governments. Therefore agricultural loss shall also be subject matter of state.

Similarly certain capital receipts have been specifically excluded, even otherwise they would not be taxable being capital receipt. Some receipts or gains, which are of income character, have been exempted to achieve socioeconomic purpose and policy of the government. It is pertinent that income of such institutions, which was exempted earlier, has been later on made taxable for the reason that such institutions need not more incentive by way of tax exemption and now they are capable to pay tax.

The heading of the chapter III reads: "Incomes which do not form part of total income" and the opening words of the chapter reads as follows:

S. 10. Incomes not included in total income.

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included:

          XXXXX       

The  heading of the chapter,  heading of section and the opening wordings used in section makes  it abundantly clear that what is to be excluded from inclusion in total income is certain incomes specified in the chapter. The exclusion is meaningful only for the purpose when a tax liability is attracted. In case of loss there is no tax liability, and therefore, the provisions will not be applicable.

There is no provision like explanation to section 64 to the effect that for the purpose of chapter III income includes loss. Therefore, it is clear that exclusion from total income is applicable only for incomes that is positive income and not to losses.

As discussed earlier 'losses', do not form part of gross total income and the total income. Losses may be set off, if permitted under specific provisions. Thus, by that logic also it can be said that various exemptions prescribed in the chapter III are only for incomes and  merely because an incentive is given by way of exemption it cannot be said that loss of that nature shall not be computed and shall not be eligible for set off against other taxable income.

There is nothing to show that any losses accruing from similar sources cannot be allowed to be set off. In fact restriction wherever intended, have been specifically prescribed  in the chapter III itself. For example sub section (6) of sections 10A,  sub-section (6) of section 10B, sub-section (4) of section 10C, clearly lay down limitation about set off and carry forward of losses covered in those sections.

Thus it can be said that what is to be excluded from forming part of total income are certain incomes which are referred to in the Chapter III. Losses accruing from similar sources cannot be called  'income' and therefore, they may be eligible for set off against income falling within the head or other heads of income, if such set off is not specifically denied by any provision under chapter III or any other provision of the Income -tax Act.

Chapter III grants exemption of certain incomes and not to any head of income:

 It is pertinent to note that the chapter III confers exemption of certain receipts or incomes and not to any head of income. For example certain incomes falling under chapter are of the nature of income from business or profession ( section 10A,10B, 10C etc.) some items  may be related with the head income from business or profession,  income from salary ,income from capital gains or income from other sources depending on the nature of vocation or activity carried by the assessee. Therefore, it is possible and permissible to compute loss relatable to any specific category falling under chapter III and set it off against other taxable income falling under the same head or other head if not specifically prohibited.

Old provisions Vis a Vis new provisions:

12. There is a judgment of the Supreme Court in the context of old provision of Income-tax Act, 1922. In the case CIT V Harprasad & Co. P. Ltd  (1975) 99 ITR 118 (SC) = [2008 -TMI - 6439 - SUPREME Court] the assessee sought to carry forward loss under the head `capital gains' for the assessment year 1955-56. In that year, any income falling under the head  `capital gains' was not at all taxable, even in subsequent year  any income falling under the head 'capital gains" were not taxable.

The rational and reasoning was that there must be purpose of computing the loss. The purpose can be to set off the loss or carry forward the loss. If due to head itself being tax free there is no need to compute the loss as it will neither be set off nor carried forward for set off in future, because in subsequent year also the head 'capital gain' was exempt.

In view of these reasoning  it was also held :

(a) That the concept of carry forward of loss does not stand in VACUO.

(b) It involves the notion of set-off.

(c) Its sole purpose is to set off the loss against the profits ( of the year ) or of a subsequent year.

(d) It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits or gains, if any of the subsequent year.

(e) Set-off implies that the tax is exigible and the assessee wants to adjust the loss against profits to reduce the tax demand.

(f) That if such  set-off is not permissible or possible owing to the income or profit if the subsequent year being from a non-taxable source, there would be no point in allowing loss to be "carried forward".

(g) Conversely, if the loss arising in the previous year was under the head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source.

However, in the Income-tax act, 1961 any head of income is not exempt. Exemption is of certain types of income, which may fall in one, or the other head of income. The assessee may have taxable income from other type of source falling under any head.  Restrictions, which the legislatures wanted to place on set-off or carry forward and set-off have been specifically provided by way of specific provisions in the Act. Therefore, unless there is a specific prohibition for set off or  carry forward and set off in future, loss will have to be computed and it can be set-off  in the same year or can be carried forward and set off in future. 

Example:

Suppose some  income falling under the head 'capital gain' is exempt under chapter III  e.g. income on transfer of a capital asset being a unit of Unit Scheme,1964 under section 10(34).  If the assessee makes profit or gain  on transfer of units it will be exempt. However, for that purpose also the assessee will have to give a computation and prove that the income has accrued but it is exempt, for that purpose the Assessing Officer may ask for evidence to prove the date of acquisition, cost of acquisition, calculation of inflated cost of acquisition and sale price of unit to satisfy himself that the assessee has correctly computed exempted income and has not overstated the same. Now suppose an assessee suffers loss of profit on sale of Units, he can claim the loss to be set off against his other capital gains, and can also seek carry forward and set-off in future. This is so because:

(a) the head 'capital gains', is not an exempted head of income,

(b) there is no specific  bar on set off or carry forward of such loss, and

(c) the expression `any income', as used in section 10(34) covers only positive income and loss is not covered by the same for the reason that income does not include loss for this purpose and also because exemption is for reducing liability to tax. In case of loss, there is no taxable income and therefore, the provisions of exemption are not at all applicable to the case of loss .

Exemption is a benefit or relief from tax and it cannot be construed to deny benefit of set off of loss:

Exemptions conferred under chapter III are relief or benefits conferred from taxation of certain incomes, which would other wise, are taxable. Most of sub-sections of section 10 refer to such items where chances of negative income are minimal because many receipts are exempted. Some cases are covered by different statutes for example sub-section (1) grants exemption for agricultural income. In case of agricultural loss the State Government will tackle the matter because taxes on agricultural income is a state subject. Furthermore, in the context of the provisions of the Act, agricultural income does not fall in to any specified heads of income. 

Therefore, the benefit granted by way of exemption cannot be so construed that if the assessee has suffered loss from similar source he will be deemed to have suffered such loss, which cannot be set off against income falling under any head of income which is chargeable. If that be the legislative intention, specific provisions denying such benefit  are required.

Use of word 'income':

We find use of words like 'income' or gross total income' or 'total income' in various provisions of the Act. In charging sections or the computation provisions the word loss, is not considered as equal to income in any provisions. For computing chargeable income relevant positive incomes are to be taken, in case of loss from any source or under any head of income, the loss is setoff as per specific provisions.

Particularly  it can be said that in provisions like those found in Explanation 3 to section 73, S. 115J, 115JA, 115JB .. the use of word income or total income is only to cover positive income and in case of loss, the matter will be different. In case of loss the provision may not be applicable because the expression income does not and cannot include loss in an exemption provision as well as a charging provision.