The Commissioner of Income-Tax, Madhya Pradesh vs Seth Khushal Chand Daga

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

Court: supreme-court

Case Number: Civil Appeals Nos. 148 to 150 of 1960

Decision Date: 7 March 1961

Coram: M. Hidayatullah, J.L. Kapur, J.C. Shah

In this matter, the Supreme Court of India delivered its judgment on 7 March 1961. The case was titled The Commissioner of Income‑Tax, Madhya Pradesh versus Seth Khushal Chand Daga. The opinion was authored by Justice M. Hidayatullah and was joined by Justices J. L. Kapur and J. C. Shah. The judgment carries the citations 1961 AIR 1259 and 1962 SCR (1) 186, and it is also referenced in the citator as RF 1975 SC1282 (10). The operative statutory provision involved the Income‑Tax Act, 1922 (XI of 1922), specifically sections 24 and 24(3), concerning the set‑off of loss and the requirement that the amount of loss computed by the Income‑Tax Officer be notified to the assessee by written order.

The headnote of the decision outlines the factual backdrop: for the accounting year 1941, the assessee’s profits derived from his share in an unregistered firm were set off against losses incurred in his individual business. The Income‑Tax Officer determined that the loss to be carried forward amounted to Rs 53,840, but he failed to issue a written order notifying the assessee of this figure, as mandated by section 24(3). The assessee appealed the assessment but did not contest the amount of the loss that had been determined. In the subsequent year 1942‑43, the assessee sought to reopen the issue, claiming that the loss to be carried forward was Rs 2,11,760; this claim was rejected by the Tribunal. The same contention resurfaced in the assessment years 1948‑49 and 1949‑50. The core question before the Court was whether a loss that had been determined and ordered to be carried forward becomes final in the absence of a written notice, thereby precluding any further appeal.

The Court held that the computation of loss under section 24 of the Income‑Tax Act does not attain finality unless the Income‑Tax Officer communicates the amount of loss to the assessee through a written order. Consequently, the assessee retained the right to have the loss re‑determined in later years, even though he had not filed an appeal against the original determination, because the requisite written notice was missing. The Court noted that an appeal cannot be entertained where there is no written order specifying the loss amount. In reaching this conclusion, the Court applied the precedent set in Seth Jamnadas Daga v. The Commissioner of Income‑Tax, [1961] 3 SCR 174, confirming that the statutory requirement of a written notification is essential for the loss computation to become binding and for any appeal to be permissible.

After leaving the partnership, the taxpayer established his own commercial venture and, in that same financial year, derived income from several sources, namely speculative activities, a government allowance received in his capacity as treasurer, income from house property and dividend receipts. He also obtained certain profits attributable to his share in an unregistered firm, and those profits were used to set off losses that he incurred in his individual business; consequently, the Income‑Tax Officer who made the assessment quantified the loss that could be carried forward at the amount of Rs 53,840. The taxpayer filed an appeal against that assessment, but he did not challenge the amount of loss that had been fixed and allowed to be carried forward. In the subsequent assessment year 1942‑43, the taxpayer sought to reopen the issue of the forward loss, contending that the correct amount of loss to be carried forward should have been Rs 2,11,760. The Revenue Department rejected this claim, and the same position was maintained by the Tribunal when the matter was taken on appeal. The taxpayer revived the same contention in the assessments for the years 1948‑49 and 1949‑50, during which he reported profits from his share in the unregistered firm of Rs 1,82,773 and Rs 1,39,922 respectively, and he set off against those profits losses from his individual business of Rs 1,18,913 and Rs 60,589 respectively. He argued that the profits from the unregistered firm could not be used to offset his personal business losses because the tax on those profits had already been paid by the firm and not by him personally. The Department dismissed this argument, but the Tribunal, on appeal, accepted the taxpayer’s position. When the Tribunal was asked to refer the matter, it formulated four questions; two of those related to other aspects of the assessments and are not discussed in this judgment. The two questions that pertained to these appeals were: (1) whether the taxpayer was legally entitled to contest the determination of loss for the assessment year 1941‑42, which had become final after the earlier appeal, in the proceedings for the assessment year 1942‑43 when the loss from 1941‑42 was being carried forward; and (2) whether, given the factual matrix, the Tribunal was correct in holding that the loss suffered by the taxpayer from his personal business, including his share of loss from another firm, could not be set off under Section 24(1) against the taxed share of income earned from the unregistered firm. The High Court answered these questions against the Commissioner, whose order is now before this Court on special leave. The counsel for the Commissioner conceded that the second question had already been decided by this Court in Seth Jamnadas Daga v. The Commissioner of Income Tax, and therefore that portion was not contested further. Regarding the first question, the sole contention raised was that the loss which had been determined and ordered to be carried forward should be considered final because no appeal had been filed against that determination.

In this case, the Court observed that the procedure prescribed by section 24(3) of the Income‑Tax Act had not been complied with, because the Income‑Tax Officer had failed to issue a written order notifying the assessee of the amount of loss calculated for the purpose of that provision. The Court noted that although section 30 allows an appeal when the assessee disputes the loss amount that has been computed and notified under section 24, such an appeal could not be filed when no written notification had been made by the Officer. Consequently, the Court held that the assessee was entitled to have the loss recomputed in a later year. Counsel for the Commissioner submitted that the Revenue was not particularly concerned with the decision, since the assessee had incurred only losses in subsequent years and the redetermination of the brought‑forward losses would not cause any loss to the Revenue. The Court, however, stated that this consideration was irrelevant to the legal issue before it. Accordingly, the Court affirmed that the judgment of the High Court, which had been appealed, was correct in the factual and legal circumstances. The Court therefore dismissed the appeals with costs, ordered that a single hearing fee be recovered, and concluded that the appeals had failed.