Anglo-French Textile Co., Ltd vs Commissioner Of Income-Tax, Madras

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 13 of 1952

Decision Date: 22 December 1952

Coram: Mehr Chand Mahajan, Vivian Bose, Natwarlal H. Bhagwati

In the matter titled Anglo-French Textile Co., Ltd versus Commissioner of Income-Tax, Madras, the decision was rendered on 22 December 1952 by the Supreme Court of India. The judgment was authored by Justice Mehr Chand Mahajan, with Justices Vivian Bose and Natwarlal H. Bhagwati forming the bench. The petitioner was Anglo-French Textile Co., Ltd and the respondent was the Commissioner of Income-Tax, Madras. The case was reported in 1953 AIR 105, 1953 SCR 454 and is also cited as C 1954 SC 198 (10,10A), R 1958 SC 269 (14), R 1958 SC 861 (15) and RF 1965 SC 1526 (15). The statutory provisions in issue were sections 24(2) and 34 of the Indian Income-tax Act (XI of 1922). The factual backdrop recorded that the assessee had initially filed a return declaring its income as “nil,” a return that was accepted by the Income-tax Officer. In the following assessment year, the Officer issued a notice under section 34(1)(b) requiring a fresh return. The assessee then filed a return again showing “nil” income, but also claimed a loss of Rs 3,92,357, seeking to have this loss recorded and carried forward under section 24(2). The loss arose from a balance sheet of a single business. The Court held that the assessee was not entitled to have the loss determined and carried forward for two reasons. First, when there is no income under any head, there is nothing against which the loss can be set off in that year under section 24(1); consequently section 24(2) does not become operative. Second, a set-off under section 24(2) is permissible only when the loss arises under one head of income and the profit against which it is to be set off arises under a different head. The Court further considered whether proceedings under section 34, initiated to assess income that had escaped assessment, could reopen the entire assessment.

The appeal before the Supreme Court was designated Civil Appeal No. 13 of 1952 and was taken from the judgment and order dated 18 January 1950 of the High Court of Judicature at Madras, rendered by Justices Satyanarayana Rao and Viswanaths Sastri. Counsel for the appellant was O. T. G. Nambiar, assisted by S. N. Mukherjee. The respondent was represented by M. C. Setalvad, Attorney-General of India, and C. K. Daphtary, Solicitor-General for India, with G. N. Joshi and P. A. Mehta appearing on their behalf. The judgment was delivered on 22 December 1952 by Justice Bose. The Court noted that the question referred to the Madras High Court by the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act was whether, under the facts and circumstances of the case, an assessment made under section 23(1) could be reopened when a subsequent assessment under section 34 was sought to determine income that had escaped the original assessment.

The Court considered the proposition that when an assessment of a company’s income had been recorded as “nil” and subsequent proceedings under section 34 were initiated to assess income that the Income-tax Officer believed had escaped assessment, the company could argue that any loss of profits and gains, including depreciation allowance, incurred in the preceding year should be determined as part of those proceedings. The matter before the Court related to the assessment year 1941-42. The taxpayer in the case was the Anglo-French Textile Company, a corporation incorporated in the United Kingdom. The company owned spinning and weaving mills at Pondicherry in French India, where it manufactured yarn and cloth. The raw materials required for the manufacture, chiefly cotton, were ordinarily purchased in what was then British India through the agency of Best & Company Ltd. of Madras. Most of the finished goods were ordinarily sold in British India, the remainder being sold elsewhere. However, during the year that formed the subject of the litigation the company conducted no business in British India and consequently did not file any return with the Indian income-tax authorities. On 26 April 1941 the Income-tax Officer issued a notice to the company requesting a return. The company replied on 9 June 1941, stating that at all times material to the assessment year it had no business in British India and therefore no profits had arisen, accrued, or been received there, and consequently it was not liable to comply with the provisions of the Indian Income-tax Act. The company further explained that, although it was not liable to make a return, it wished to preserve its right to appeal any order that might be passed, and therefore it submitted, without prejudice, a nil return and asked that the receipt of that nil return be acknowledged. Enclosed with the letter was a standard printed return form on which the only entry was the word “nil”. The company also added a declaration that it was not a resident of British India during the preceding year. On 25 March 1942 the Income-tax Officer issued an Assessment Order, observing that the company had filed a nil return of income because it was not carrying on any business in British India, and that the Officer accepted the return and declared the company not liable to tax for the year 1941-42. Subsequently, on 9 March 1943, the Income-tax Officer sent another notice under section 34(1)(b), stating that in view of definite information now in his possession he had discovered that the company's income assessable to income-tax for the year ending 31 March 1942 had escaped assessment, and that he therefore proposed to assess that income.

The Income-tax Officer issued a notice under section 34(1)(b) requiring the assessee to file a return showing total income and worldwide assessable income for the year ending 31 March 1942. In response, the assessee again filed the same nil return together with a statement indicating a loss of Rs 3,92,357 on its total worldwide income, filing this on 31 May 1944. The officer made an order dated 2 June 1944, holding that the company was a non-resident and that no sales had been made in British India during the year. He further observed that because the net result of the worldwide business was a loss, there could be no profits attributable to operations in British India under sections 42(1) and 42(3) concerning cotton purchases. Consequently, the officer accepted the nil return and declared that no assessment was payable for the year 1941-42. He also stated that, being a non-resident, the loss could not be carried forward under section 24(2) because that provision did not apply to non-residents. The assessee objected to this portion of the order, contending that having accepted its statement of loss, the officer was bound to record the loss and allow it to be carried forward. The objection gave rise to appeals before the Appellate Assistant Commissioner of Income-tax, then before the Income-tax Appellate Tribunal, and ultimately to a reference before the High Court. The assessee now appears before this Court, having failed to obtain relief at the lower levels. Its principal argument relies on section 34(1), which allows the officer, upon issuing a notice, to assess, reassess, recompute loss or depreciation allowance. The provision further states that the Act’s provisions shall apply as if the notice were issued under sub-section (2) of section 22. The assessee argues that this clause brings section 24(2) into operation, thereby permitting the loss to be recorded and carried forward. The Court notes that it need not decide whether the assessee’s preliminary contention is correct, because even assuming it is, the relief sought cannot be granted. There is no provision in the Act that obliges the assessor to record a loss unless the loss is to be set off or carried forward. Section 24(1) permits a loss to be set off against any income, profit or gain of the same year. Section 24(2) allows the remaining balance of a loss, if not fully set off, to be carried forward to the next year, subject to its own conditions. No other statutory provision empowers a taxpayer to have a loss recorded merely because it has been accepted by the officer. Under sub-section (2), a loss may be carried forward only when the loss cannot be wholly set off under subsection (1), and only the un-set-off portion may be carried forward. Thus, the Court is unable to find any statutory basis for granting the assessee’s request to have the loss recorded and carried forward.

In this case, the Court explained that when an assessee incurs a loss of profit or gain in any year under any head referred to in section 6, the loss may be set off against income, profit or gain arising under any other head in the same year. Consequently, before any set-off can be considered, two conditions must exist: first, a loss must be recorded under one or more of the heads listed in section 6; second, there must be income, profit or gain recorded under a different head. The Court observed that if no income is shown under any head, there is nothing against which the loss can be set off in that year, and therefore subsection (2) cannot be invoked. Furthermore, the Court clarified that a set-off under section 24 (1) is permissible only when the loss originates under one head and the profit against which it is to be set off arises under a different head. When both the loss and the profit belong to the same head, the loss may still be deducted, but such deduction is governed by section 10 rather than by section 24 (1). The Court referred to the Privy Council’s decision in R. Arunachalam Chettiar v. Commissioner of Income-Tax, Madras for support of this principle. In the present matter, the loss was computed by balancing the profit and loss account of a single business, so no issue of different heads arose. Accordingly, the Court held that the assessee’s argument failed because, without a permissible set-off under subsection (1), the loss could not be carried forward under subsection (2), rendering any determination of the loss irrelevant. The High Court had proceeded on the basis that, once proceedings are initiated under section 34, the assessee is not entitled to reopen the entire assessment, as the further proceedings are limited to assessing the portion of income that escaped earlier assessment. The Court stated that it need not express an opinion on that position, because the matter before it was limited to the specific facts of the case. Those facts were (1) that no return had ever been filed showing any income, profit or gain; (2) that proceedings under section 34 were later commenced; and (3) that during those proceedings the assessee sought to have a particular loss determined and recorded. The Court concluded that, for the reasons already explained, the loss could not be determined or recorded, and therefore the High Court’s negative answer was correct. Consequently, the Court dismissed the appeal and ordered that the appellant pay the costs of the proceedings incurred. The agents for the parties were listed as P. H. Mukherji for the appellant and G. H. Rajadhyaksha for the respondent respectively.