TMI Blog1962 (9) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... about 9th June, 1946, the assessee remained in India. Thereafter for a short time he went to Hongkong and again returned to Bombay some time in September, 1946. The assessee was, for the first time, assessed in the assessment year 1942-43. In that assessment, i.e., the assessment year 1942-43, the assessee claimed a set-off for the alleged losses incurred by him in respect of the business conducted by the Hongkong branch. This claim, however, was not allowed by the Income-tax Officer. In appeal the Appellate Assistant Commissioner in his order dated July 1, 1948, dealing with this claim of the assessee observed: The loss in the Hongkong branch for the year of account has not been satisfactorily proved and it cannot therefore be considered. For the assessment years 1943-44 to 1946-47 the assessee was assessed as a resident and no dispute as regards the aforesaid loss was raised by the assessee in any of these years. In the assessment year 1947-48 the assessee again claimed that there were losses in the year 1941 and it should be ascertained and set off under the provisions of section 24(2) of the Act against his income for the previous year relating to the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears 1943-44 to 1946-47 he was assessed as a resident. Coming to the relevant assessment year 1947-48, the previous year being the year ending on 31st December, 1946, the assessee resided in India for about 8 months during the said year. On 9th June, he went on a short visit to Hongkong and had returned to Bombay some time in September, 1946. In the relevant accounting year the business in Hongkong had been restarted after it had been temporarily closed during the operation of the war. The Income-tax Officer asked the assessee to produce books of account relating to the Hongkong business. These books, however, were not produced by the assessee and he was, therefore, assessed in respect of that income on an estimate basis. The Income-tax Officer estimated the income from the Hongkong business at ₹ 1 lakh. The amount, however, was further increased by the order of the Appellate Assistant Commissioner but with that amount we are not here concerned. The case then came up before the Tribunal in second appeal, and on this aspect of the case, various contentions were raised by the assessee before the Tribunal. In the first instance it was contended that the income of the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indeed Mr. Iranee went out to Hongkong only for a preliminary survey. We are, therefore, unable to accept the first argument of Mr. Palkhivala. On this aspect of the case at the instance of the assessee the Tribunal has referred the following question to this court: Whether, on the facts and in the circumstances of the case, the income of the assessee from the Hongkong branch should be apportioned either on a time basis or in any other manner for the purpose of inclusion in the total income of the assessee? This question we will number as question No. 2. We will deal with the second question first as arguments were advanced before us by counsel in that order. It would be convenient to read the provisions of section 4, material for purposes of this reference: 4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-... (b) if such person is resident in the taxable territories during such year... (ii) accrue or arise to him without the taxable territories during such year... Provided further that, in the case of a person not ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has made the above observations and the sentence has to be read in that context. Apart from it, according to Mr. Joshi, when the order of the Tribunal is read as a whole, it is clear that the finding recorded by the Tribunal is that during the entire year, the business was controlled in India and in view of this finding, according to Mr. Joshi, the mere absence of the assessee from British India for a period of four months would not entitle the assessee to claim that only 2/3rds income of the Hongkong business should be taxed in India. According to Mr. Joshi, on a true construction of the proviso, it is not necessary that the control of the business should be exercised throughout the year in India. If the business is controlled in India at any point of time in a year, it is sufficient to include the entire income of that business in his total income even though the income accrued to him without the taxable territories. At any rate, according to Mr. Joshi, if the control has been exercised in India for a substantial part of the year, that would be sufficient to entitle the income-tax authorities to claim that the income of the entire year should be included in the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the entire year. In this case, the assessee resided in India for eight months out of twelve months and, therefore, roughly 2/3rds of the income alone should be brought to tax in India. It would be seen that what had been contended before the Tribunal was that because the assessee was in India only for eight months, the Tribunal should hold that the control of the business was in India only for eight months. As already stated, we are unable to accept this contention. In dealing with the question as regards the place of control of the business, the Tribunal has exhaustively dealt with the various pieces of evidence appearing in the correspondence. In paragraph 3 of its order the Tribunal has observed: It is contended that the burden to prove that the business was controlled in India is on the department and the department failed to discharge that burden. A mass of correspondence between the assessee and the proprietor and the manager of the Hongkong business was brought to our notice. Some of the passages contained in the correspondence have been reproduced by the Appellate Assistant Commissioner. A perusal of these clearly show that the business was controlled in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who had gone to Hongkong only for a preliminary survey, the control of the business still remained in India. These being the findings of fact of the Tribunal, in our opinion, the Tribunal was right in holding that the entire income of the Hongkong business was liable to be included in the total income of the assessee. Our answer to the second question, therefore, is in the negative and this brings us to the first question. Mr. Palkhivala raised two contentions before us. In the first instance he contends that in the assessment year 1942-43 the assessee had claimed that the losses suffered by him in his Hongkong business should be set off against his income. That claim of the assessee was rejected by the Income-tax Officer. That tantamounts to determination of the loss at figure zero. The Income-tax Officer, however, did not issue a notice to the assessee that the losses have been determined at figure 0 (zero). The assessee is, therefore, entitled to claim that the quantum of loss be re-determined in the assessment year 1947-48. The Tribunal ought to have allowed an opportunity to the assessee to establish the loss and ought to have allowed the assessee to set off the loss wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Manavala Naidu's case (supra) is distinguishable on facts. Mr. Joshi placed reliance on certain observations at page 742 in In the matter of Messrs. Chouthmal Golapchand [1938] 6 ITR 733, and Indore Malwa United Mills Ltd. v. Commissioner of Income-tax [1959] 35 ITR 271 Mr. Joshi further contends that the second contention raised by Mr. Palkhivala was not a contention which was raised before the Tribunal ; on the other hand, the losses which were claimed before the Tribunal were the losses of the year 1941. An argument was also advanced by Mr. Joshi that assuming that there were any losses in the year 1941, those losses could not be claimed in the assessment year 1947-48, the claim being barred by time. Turning to the first contention raised by Mr. Palkhivala, in our view, the decision on which reliance is placed is distinguishable on facts. In that case, Commissioner of Income-tax v. Khushal Chand Daga [1961] 42 ITR 177, in the assessment year 1941-42 the assessee had established that the business had resulted in loss. The Income-tax Officer had also held that the business had resulted in loss and determined the loss at ₹ 53,840 and that loss was carried forward. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sub-section. Where an obligation arises to notify to the assessee by an order in writing the amount of loss and the Income-tax Officer fails to do so, that, according to their Lordships' decision, gives an assessee a right to claim redetermination of the amount of loss. Such, however, is not the case here. In the assessment year 1942-43 the assessee claimed that he had sustained loss, but, as found by the Appellate Assistant Commissioner, he had failed to establish it. That being a finding of fact, it can hardly be said that there was any obligation on the Income-tax Officer to comply with the provisions of subsection (3) of section 24 of the Act. Redetermination of the quantum of loss when loss has been once established cannot be equated with a second opportunity to establish that loss had occurred. What the assessee is claiming here is a second opportunity to establish that he had sustained loss in the year 1941 after having failed to do so in the assessment year 1942-43. In our opinion, the decision of the Supreme Court on which reliance is placed is of little assistance to the assessee. Apart from it, this contention is based on an assumption that it has been found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la, however, at the end of the arguments, stated before us that he himself had argued before the Tribunal and had raised both the contentions. He had argued the case on the footing that the loss was incurred in the year 1941 and also on the footing that the loss was incurred in the year 1946. This question, as already stated, has been referred to us on a direction given by this court under sub-section (2) of section 66 of the Act. In the affidavit in support of the notice of motion, it has been stated that the assessee's Hongkong business had suffered huge losses from 1941 till the end of the war, i.e., till about the end of 1945 and in paragraph 6 of the affidavit it has been averred that the assessee had raised contentions that the profits of the Hongkong firm were not subject to the Indian Income-tax Act and in the alternative claimed to prove the aforesaid losses and that the said losses should be ascertained and set off against the Indian profits. The question on this aspect of the case suggested by the assessee are questions Nos. 6 and 8, which are in the following terms: 6. Whether the Tribunal misdirected itself in law in refusing to carry forward and set off losse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court. At page 728 of the report, it is observed: But the Tribunal apparently also found that it was only in that year that there was a demand made by the military authorities to make good the value of the garments short delivered, that is, garments lost by the assessee. The assessee maintained his accounts on the mercantile basis. Even if the loss had been spread over a number of years, till the loss was ascertained, there could be no possibility of his showing them in his accounts. The Tribunal apparently accepted the case of the assessee that it was only when the military authorities demanded the recovery of ₹ 15,845 in the year of account ending with March 31, 1943, that the loss was ascertained. Thus with reference to that year the position was that, though when precisely each garment or each set of garments was lost could not be fixed with precision, the loss was ascertained only in the year of account and it was only in the year of account that the assessee had to make good the value of the lost garments to the military authorities. It would be seen that the expression ascertained is used in this case in the sense knowledge obtained about the loss by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains. But the losses must be losses incurred in that year. You may not, when setting out to ascertain the profits and gains of one year, deduct a loss which had, in fact, been incurred before the commencement of that year. If you did, you would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains each year is a separate self-contained period of time in regard to which profits earned or losses sustained before its commencement are irrelevant. It is a matter of legal history. Prior to 1939 the unabsorbed losses of earlier years were not allowed to be carried forward for the purpose of being adjusted against the profits of the subsequent years. Such a provision for the first time was introduced some time in the year 1941 by the Amending Act of 1941. It has, therefore, to be seen whether under the provision of law, the assessee could carry forward the losses of the earlier years for being adjusted against the profits of the assessment year 1947-48. The claim made by the assessee before the income-tax authorities as well as the Tribunal and also before us is founded on the provisions of sub-section (2) of section 24 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, which first has entered adjustment under sub-section (1), and it is only when it cannot be adjusted under sub-section (1) that it could be carried forward under the provisions of sub-section (2) of section 24 of the Act. The clause and the loss cannot be wholly set off under sub-section (1) the portion hot so set off shall be carried forward to the following year makes this position abundantly clear. What can be carried forward is a loss which cannot be wholly set off under sub-section (1). The loss that can be set off under sub-section (1) is the loss that enters the computation of aggregate profits of an assessee in his assessment of previous years. Now, on the facts found, the position is that in the year 1941 the income from the business in Hongkong was not subject to the provisions of the Indian Income-tax Act. It was restarted in the relevant account year, i.e., in the year 1946. During the intervening period also there was no question of the income of the Hongkong business being subject to the provisions of the Indian Income-tax Act. That being the position, the losses, even if any, sustained during the period 1941-45 could not have entered the assessment of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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