Income-tax---

----Loss---Heads of income---Set-off of loss ---Assessee has no option not to set off business loss against income under any other head of the same year except capital gains---Indian Income Tax Act, 1961, Ss.70, 71 & 72.

Section 70 of the Income Tax Act, 1961, talks of set-off of loss from one source against the income from another source under the same head of income. Section 71 talks of set-off of loss from one head against income from another head. On a careful reading of section 71, it is apparent, that the assessee has no option not to set off business loss against income under any other head other than the income under the head "Capital gains". The expression "be entitled to" in section 71 does not mean that the assessee has an option in the matter of set off of business loss against income under any other head. The expression simply enables the assessee to set off business loss against income under any other head. But for that expression, the assessee would not be entitled to set off loss under another head in the same year.

Heldaccordingly, that the assessee, a sterling company, which had suffered a loss, was not entitled to claim that its business loss should not be set off against its dividend income of the same year, but it should be carried forward to be set off against business profits of subsequent years, so that its dividend income for that year could be taxed at a concessional rate.

Dr. V. Balasubramanium with P.S. Jetley for the Commissioner.

JUDGMENT

U.T. SHAH, J: --The issue involved in this reference is whether the assessee has a choice in respect of setting off of business loss against income from other heads of the same year?

The assessee is a sterling company with a branch in India. The assessment year is 1967-68 and the relevant previous year is the calendar year 1966. The Indian branch had suffered business loss during the previous year. As per the profit and loss account, the loss suffered by the Indian branch was Rs.39,87,929. The Income Tax Officer computed the loss from business at Rs.7,14,759. The assessee had also earned considerable income by way of dividend (Rs.21,79,245). The dividend income was taxable at a concessions] rate and, therefore, the assessee claimed before the Income Tax Officer that its business loss should be carried forward to be set off against business profits in the subsequent year(s) and its dividend income for the year under consideration should be taxed at the concessional rate: The Income Tax Officer rejected the assessee's claim as, in his opinion, section 71(1) of the Income Tax Act, 1961 (for short, "the Act"), required that the loss suffered under one head of income must be set off against the income under other head(s) and only the balance should be carried forward to subsequent year(s) if the loss suffered is under the head "Business".

In appeal before the Appellate Assistant Commissioner of Income-tax the assessee submitted that the Income Tax Officer was not justified in setting off the business loss against the income from other sources and it was not correct on his part to deny the assessee the option given under section 71(1) of the Act of not setting off business loss against income under any other head and for claiming the carry forward of business loss under section 72(1) of the Act to be set off against the business profits -in the subsequent year(s). According to the assessee, the words "be entitled to" appearing in section 71(1) indicate that an option is given to the assessee regarding setting off of business loss against income from other heads of the same year. The Appellate Assistant Commissioner, however, did not agree with the interpretation put forward by the assessee on the provisions of section 71(1) of the Act. Referring to sections 70, 71 and 72 of the Act, the Appellate Assistant Commissioner was of the view that no option was given to the assessee regarding the set off of business loss against income under any other head except under the head "Capital gains". Giving certain instances contained in the Act, the Appellate Assistant Commissioner further observed that wherever an option is: given to the assessee, the Legislature itself has stipulated the same in the sections, as for example, in sections 3(2) and 48 of the Act. Further, the Appellate Assistant Commissioner was of the view that the words "entitled to" appearing in section 71(1) of the Act bestowed upon the assessee only a concession in the matter of set-off of income for the purpose of reducing the tax, larger tax burden that would have arisen, if it was merely provided that the loss under one head should be set off against the income under the same head and in the absence of any such income under the same head, this loss would have no meaning for purpose of determining the tax liability (sic). In this view of the matter, he upheld the action of the Income Tax Officer.

Being aggrieved by the order of the Appellate Assistant Commissioner, the assessee went up in appeal before the Income Tax Appellate Tribunal (for short, "the Tribunal") and reiterated the submissions, which were made before the income-tax authorities. Referring to certain decisions mentioned in its order under reference, the Tribunal accepted the assessee's contentions as under:

"Though it has not been said in so many words in any one of the cases referred to above, the underlying ratio in those decisions appears to be that the assessee is entitled to avail of the full benefit of the set off position in the matter of its liability to tax and in case it is found that the set-off of losses will practically mean no relief or very little relief in the tax liability, it should be open to the assessee to say that it does not want to set off its losses against an item of income which is not taxable or is taxable at lower rates so that in the next year the loss is set off against income which is fully taxable in the manner in which the income from the source, the loss of which was required to be set off was taxable.

Considering the provisions of section 71 and section 72 in this background, we find that the assessee's submissions herein are well?-founded. Section 70(1) has used the phrase `shall be entitled'. As we understand, the words `shall be entitled to' would and can only mean `shall have a right to' which is certainly not equivalent to `must get it'. Apart from this plain meaning for the language, we find that the phraseology used in section 72(1), viz., `and such loss cannot be or is not wholly set off assumes importance. In our opinion, the Appellate Assistant Commissioner has committed an error in not putting the word `wholly' against both `cannot be and is not'. It is applicable to both. We agree with Shri Dastur that the phrase can reasonably refer to only one situation where the loss cannot be set off either because there are no profits or is not set off because the assessee has not exercised his right to the set off. Having regard to the above discussion, we accept the assessee's submissions and hold that it was open to the assessee not to claim set-off of its business loss against its dividend income which is charged at a lower rate of tax and pay tax on the dividend income in the year under appeal and claim the set-off of business loss against the business profits in the subsequent year."

Having been dissatisfied with the order of the Tribunal, the Revenue applied for a reference under section 256(1) of the Act and the Tribunal has referred the following question for our opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that it was open to the assessee not to claim a set-off of its business loss of the year in question against its dividend income of the same year but to claim a carry-forward of the said loss in order that it might be set off against the business income of the subsequent year or years?"

Learned counsel for the Revenue, Dr. Balasubramanium, took us through the order of the Appellate Assistant Commissioner and contended that the Tribunal was not justified in accepting the assessee?s submissions in the manner it did. In this connection, he also referred to sections 70 to 72 of the Act with a view to urge that no option whatsoever is given to the assessee in the matter of setting off of business loss against income from other heads other than income under the head "Capital gains". He, therefore, urged that we should reverse the decision of the Tribunal.

With a view to appreciate the submissions made on behalf of the Revenue, it would be necessary to refer to sections 70, 71 and 72 of the Act. It may be mentioned that these sections appear in Chapter VI, which deals with "Aggregation of income and set off or carry-forward of losses".

"Section 70: --(1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income other than "Capital gains" is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

(2)(i) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

(ii) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset other than a short term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short term capital asset."

"Section 71: -- (1) Where in respect of any assessment year 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.

(2) Where in respect of any assessment year the net result of the computation under any head of income other than `Capital gains' is a loss and the assessee has income assessable under the head `Capital gains', such loss may, subject to the provisions of this Chapter, be set off against the income, if any, of the assessee assessable for that assessment year under any other head including income from capital gains relating to short-term capital assets as well as other capital assets or, if the assessee so desires, shall be set off only against his income, if any, assessable under any head of income other than `Capital gains'.

Section 72: -- (1) Where for any assessment year, the net result of the computation under the head `Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head `Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under subsection (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and--

(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year:

Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year, and..."

It would appear from the above that section 70 talks of set-off of loss from one source against the income from another source under the same head of income. There is no d7fficulty in understanding the provisions of this section. Section 71 talks of set-off of loss from one head against income from another head. As noted above, it is the assessee's contention that it has an option not to set off business loss against income under other head. On the contrary, the Revenue's contention is that there is no option of any sort as contended on behalf of the assessee, in the matter of set-off of loss under one head against income under other head of the same year. It is only in the case of setting off of loss against the income under the head `Capital gains' that an option is given to the assessee in view of the expression if the assessee so desired used in subsection (2) of section 71 of the Act. On a careful reading of section 71 of the Act, it is very much apparent that the assessee has no option of exercising setting off of business loss against income under any other head other than the income under the head `Capital gains'. In our opinion, the Tribunal has wrongly construed the expression "be entitled to' used in section 71 to mean that the assessee had an option in the matter of set off of business loss against the income under any other head. In our considered view, that expression simply enables the assessee to set off business loss against income under any other head and, but for that expression, the assessee would not be entitled to set off loss under another head in the same year.

For all these reasons, we are of the view that the Tribunal was not justified in accepting the assessee's contention regarding the carry-forward of business loss. In this view of the matter, we answer the question referred to us in the negative and in favour of the Revenue.

No order as to costs.

M.BA./31/T.F.???????????????????????????????????????????????????????????? Order accordingly.