Income‑tax

‑‑‑‑Business loss‑‑‑Capital or revenue loss‑‑‑Amount deposited in a company could not be recovered as company was wound up‑‑‑‑No transfer of capital asset as contemplated in S.2(47)‑‑‑Loss not arising from transfer of capital asset within meaning of S.45‑‑‑Loss cannot be set off against capital gain‑‑ Indian Income Tax Act, 1961, Ss.2(47) & 45.

The assessee made a deposit of Rs.20,000 in the assessment year 1972‑73 in a company that was later wound up and the assessee was unable to recover the deposit. For the assessment year 1975‑76, the assessee claimed that the capital loss incurred in 1972‑73 be adjusted against the capital gains for the assessment year 1975‑76. The Income‑tax Officer rejected the claim on the ground that it was not capital loss. The Appellate Assistant Commissioner confirmed the view of the Income‑tax Officer. On a revision petition the Commissioner of Income‑tax held that the capital loss for 1972‑73 would be carried forward in accordance with law. The Tribunal allowed the appeal preferred by the assessee. On a reference:

Held, (i) that there was no transfer of capital assets as contemplated in section 2(47) of the Income Tax Act, 1961, and when there was no transfer, the loss could not be said to have arisen by the transfer of a capital asset within the meaning of section 45 of the Income‑tax Act.

(ii) That the Commissioner had determined the loss and allowed the loss to be carried forward to the subsequent years according to law. But the Commissioner had not stated that the loss had accrued in the computation of loss under section 45 of the Act. The claim of the assessee before the income‑tax authorities was that it was a bad debt and since it was not a capital loss which arose in the computation of loss under section 45 of the Act, it was impermissible for the assessee to carry forward the loss and set off the same against the capital gains of the subsequent years.

CIT v. East India Charitable Trust (1994) 206 ITR 152 (Cal.) and Vania Silk Mills (P.) Ltd. v. CIT (1991) 191 ITR 647 (SC) fol.

Natarajan (C.A.) v. CIT (1973) 92 ITR 347 (Mad.) ref.

C.V. Rajan for the Commissioner. R. Janakiraman for the Assessee.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑There are three questions of law which are referred to us at the instance of the Revenue for our consideration and the questions read as under:

"(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to set off Rs.20,000 being the loss sustained in the assessment year 1972‑73 against the long‑term capital gains relating to the assessment year 1975‑76?

(2)Whether the Appellate Tribunal's view that the loss sustained by the assessee in the assessment year 1972‑73 was a loss under the head 'Capital gains' and that there was a transfer within the meaning of section 2(47) of the Act is sustainable in law?

(3)Whether, on the facts and in the circumstances of the case and having regard to the provision of section 74 of the Income ‑tax Act, the assessee was entitled to set off the loss of Rs.20,000 of the assessment year 1972‑73 alleged to be a loss under the head 'Capital gains' (short‑term) against the long‑term capital gains relating to the assessment year 1975‑76?"

The assessment year involved is 1975‑76. The assessee claimed that as against the capital gains that arose in the year 1975‑76, a loss of Rs.20,000 said to have been incurred by the assessee in an earlier year should be set off as capital loss. The Income‑tax Officer rejected the claim of the assessee on the ground that the loss was not a capital loss and it was not capable of being carried forward to set off against the capital gains for the assessment year 1975‑76. The. Appellate Assistant Commissioner confirmed the view of the Income‑tax Officer. The Tribunal, however, allowed the appeal preferred by the assessee.

The loss, which the assessee claimed that he is entitled to‑ carry forward, arose in the following manner: The assesses had deposited a sum of Rs.20,000 in a company called Gannon Dunkerly Limited and the company was wound, up and the assessee was not able to recover the deposit. The assesses made a claim that amount should be allowed as a bad debt for an earlier assessment year 1972-73 and the income-tax Officer rejected the claim assesses, which was upheld by the Appellate Assistant Commissioner. The assessee filed a revision to the Commissioner of Income‑tax under section 264 of the income Tax Act, 1961. The Commissioner also dismissed the revision petition. Subsequently, however, the earlier order passed by the Commissioner of Income‑tax was modified by his order, dated November 29, 1978, wherein he held that the capital loss for the assessment year 1972,73 would be carried forward to subsequent years in accordance with the law. Accordingly, the assessee claimed that the loss which arose in the assessment year 1972‑73 should be carried forward and set off against the capital gains for the assessment year 1975‑76.

Mr. C.V. Rajan, learned counsel for the Revenue, submitted that the loss was not a capital loss within the meaning of section 45 of the Act and when it is not a capital loss, the assessee cannot claim the benefit of carry forward of the loss. His further submission was that the order of the Commissioner also did not entitle him to carry forward the alleged loss.

Mr. Janakiraman, learned counsel for the assessee, on 4ie other hand, submitted that the logs incurred by the assessee was a capital loss and further, when the Commissioner has held that the capital loss for the assessment year 1972‑73 can be carried forward and set off in subsequent assessment years, the assessee is entitled to set off of the said loss.

We are, however, unable to accept both the contentions urged on behalf of learned counsel for the assesses. The facts clearly show that the assessee during the course of assessment proceedings for the assessment year 1972‑73 claimed deduction as a bad debt of the unrealised deposit amount deposited with a company which was subsequently wound up, and the loss was held to be not a business loss as the assessee was not carrying on money lending business. The Commissioner held that though the loss was not a business loss, it could be only regarded as a capital loss and the assessee claims that the capital loss should be carried forward and set off against the capital gain. Section 72 of the Act gives a right to carry forward the loss of an earlier year provided the loss arose under the head "Capital gains". The loss in our opinion, is not a loss which arose in the computation of the loss under the head "Capital gains". It was merely a capital loss but it did not arise by the transfer of a capital asset which is a precondition for the loss to be treated as a capital loss under section 45 of the Act.

The apex Court in Vania Silk Mills (P.) Ltd. v. CIT (1991) 191 ITR 647, held that the capital gains tax would be attracted only by transfer .of capital assets and not by extinguishment of rights, howsoever, brought about, and whatever the mode by which the transfer was brought about, the existence of the asset during the course of transfer was a pre‑condition and unless the asset existed in fact, there could not be a transfer of it. Applying the principles laid down by the apex Court to the facts of the case, it is apparent that there was no transfer of capital assets as contemplated in section 2(47) of the Act and when there is no transfer, the loss, even assuming that there was a loss to the assessee, cannot be said to have arisen by the transfer of a capital asset within the meaning of section 45 of the Act. The order of the Appellate Tribunal holding that the loss arose within the meaning of section 2(47) of the Act is unsustainable in view of the decision of the Supreme Court in the case of Vania Silk Mills (P.) Ltd. (1991) 191 ITR 647.

In so far as the second reason that is given by the Appellate Tribunal that the Commissioner had determined the loss and allowed the loss to be carried forward to subsequent years is concerned it is not sustainable in law. The Commissioner has said that the loss would be carried forward to subsequent years according to law. The Commissioner, however, in his order has not stated that the loss had accrued in the computation of loss under section 45 of the Act: The Commissioner, as we have already seen, has stated that the loss can be carried forward, according to law to the subsequent year which means that if the statute permits, the loss claimed by the assessee can be carried forward. We have seen that the claim of the assessee before the income‑tax Authorities was that it was a bad debt and we have also held that it was not a capital loss which arose in the computation of loss under section 45 of the Act, and once we come to the conclusion that it is not a capital loss which can be carried forward, it is impermissible for the assessee to carry forward the capital loss and set off the same against the capital gains for the subsequent assessment year. The order of the Commissioner would not clothe the assesses with any right to carry forward the loss, as the Commissioner has guarded himself by stating that the loss can be carried forward according to law, and when the statute does not permit the carry forward of loss, it is impermissible for the assessee to fall back upon the order of the Commissioner of Income‑tax and to claim that the loss should be carried forward. It cannot be predicated that the Commissioner had permitted the carry forward of loss de hors the express statutory provision of carry forward of the loss.

It was held by this Court in C.A. Natarajan v. CIT (1973) 92 ITR 347, that the act of writing off of the loss in the books of the assessee might suggest the opinion of the assessee that he was not able to recover the money from the debtor, but that would not amount to a relinquishment of debt, and this Court held that it is not as if every capital loss sustained by the assessee could be claimed and set off against the capital gains and the primary condition for such carry forward and set off is that there should be a sale, exchange, relinquishment or transfer of a capital asset before the assessee could claim loss under the transaction. Since the conditions prescribed under section 2(47) of the Act are not satisfied, the assessee is not entitled to claim the benefit of carry forward of the loss.

The Calcutta High Court in CIT v. East India Charitable Trust (1994) 206 ITR 152, also has held that the loss should arise on the transfer of capital assets and unless the loss arose on the extinguishment of the assessee's right in capital assets, it cannot be regarded as a loss arising on the transfer of capital assets. We are, therefore, of the opinion that the assessee's inability to recover the deposit from the company did not amount to transfer of capital assets by the assessee and by mere write off, of the amount, there is no transfer involved in the transaction. As held by the Calcutta High Court, it is purely a case of disappearance of the asset and it is not a case of the assessee transferring his right in favour of a third party whereby the right of the assessee over the asset is extinguished. We are, therefore, of the opinion that the order of the Commissioner did not clothe the assessee with the right to claim that the loss, stated to be a capital loss, be carried forward to the subsequent assessment year. Consequently, we are of the opinion that the Tribunal was not correct in holding that the assessee had incurred the long term capital loss when the assessee wrote off its unrealised deposit from a wound up company and the Tribunal was. also not correct in holding that the assessee suffered a loss under the head "Capital gains" to enable him to carry forward the same to the subsequent assessment years.

Therefore, our answer to all the questions of law referred to us at the instance of the Revenue is in the negative in favour of the Revenue and against the assessee. The Revenue is entitled to costs of a sum of Rs.750.

M.B.A./347/FCReference answered.