Commissioner Of Income-Tax Kerala vs Helen Rubber Industries Ltd

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 466 of 1960

Decision Date: 16 January 1962

Coram: M. Hidayatullah, Bhuvneshwar P. Sinha, J.L. Kapur, J.C. Shah, J.R. Mudholkar

In the matter titled Commissioner of Income‑Tax, Kerala versus Helen Rubber Industries Ltd., the Supreme Court of India delivered its judgment on 16 January 1962. The judgment was authored by Justice M. Hidayatullah, who was joined by Justices Bhuvneshwar P. Sinha, J. L. Kapur, J. C. Shah and J. R. Mudholkar. The petitioner in the case was the Commissioner of Income‑Tax for the State of Kerala and the respondent was Helen Rubber Industries Ltd. The decision is reported in the 1962 volume of the All India Reporter at page 974 and also appears in the 1962 Supplement to the Supreme Court Reports (Series 2) at page 605. The case is cited in later reports, for example D 1980 SC 251, and concerns the treatment of a loss incurred in the former State of Travancore during the year 1946.

The central issue was whether, under the provisions of the Indian Income‑Tax Act, the assessee was entitled to carry forward the loss for a period of six years, even though at the time the loss arose the applicable law was the Travancore Income‑Tax Act. The statutes involved included the Travancore Income‑Tax Act, 1121 M.E. (Travancore XXIII of 1121 M.E.), specifically section 32, the Indian Income‑Tax Act, 1922 (section 24), the Indian Finance Act, 1950 (section 12) and the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, paragraph 3. The respondent company had been incorporated in the former State of Travancore, and the dispute centered on its right to carry forward the loss of the year 1946 to the assessment year 1951‑52 for the purpose of computing tax on its accounts for that year.

The Income‑Tax Officer held that the loss of 1946 could not be carried forward because, under section 32 of the Travancore Act, the right to carry forward lapsed after two years, and section 24(2) of the Indian Income‑Tax Act was inapplicable in view of paragraph 3 of the 1950 Order. The Court examined the effect of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, which was made under section 12 of the Finance Act, 1950. The Court concluded that the Order was not intended to create a dividing line between years to which the earlier State law would apply and years to which the Indian Income‑Tax Act would apply. Paragraph 3 did not enlarge or curtail the rights; it merely stated that the right was available in the same manner, to the same extent and up to the same assessment year as provided by the State law. Consequently, the applicable law was the Travancore statute, and the loss could be carried forward only for the two‑year period permitted by that law. The decision cited the earlier case of Indore Malwa United Mills Ltd. v. Commissioner of Income‑Tax (1959) 35 I.T.R. 271 as authority.

The case arose on civil appellate jurisdiction as Civil Appeal No. 466 of 1960, an appeal from the Kerala High Court judgment and order dated 31 October 1958 in I.T.R. No. 2 of 1956 (K). Counsel for the appellant were K. N. Rajagopal Sastri and P. D. Menon; the respondent did not appear. The judgment was pronounced on 16 January 1962, with Justice Hidayatullah delivering the opinion of the Court on behalf of the bench.

The appellant, a company located in Coimbatore, has filed a civil appeal against the judgment and order of the High Court of Kerala dated 31 October 1958. In that judgment the High Court answered in favour of the respondent, Helen Rubber Industries Ltd., Kottayam, to the specific question whether, under the Indian Income‑tax Act, the appellant was entitled to carry forward its loss for a period of six years even though the loss had arisen while the Travancore Income‑tax Act was the applicable law. The High Court also granted a certificate under section 66A(2) of the Income‑tax Act. Two questions were referred to the High Court pursuant to an earlier order issued under section 66(2); the present appeal concerns only the question described above and does not address the other matter. Helen Rubber Industries Ltd. is a company incorporated in the former State of Travancore with its registered office at Kottayam. In 1941 the company leased its factory premises to certain tenants for a term of fifteen years, and from that time onward the rent and royalty received from those tenants constituted the company’s sole source of income. A dispute arose and the tenants stopped making payments from June 1946. Litigation followed, and the dispute was eventually settled when the company received a payment of approximately Rs 23,000 as full and final settlement; the details of that dispute and settlement are not material to the present appeal.

The company’s accounting year follows the calendar year. Prior to the extension of the Indian Income‑tax Act, the Travancore Income‑tax Act, 1121 M.E. (Act XXIII of 1121 M.E.), was in force in Travancore. That Act came into force on the first day of Chingom 1122 M.E., which corresponds to 17 August 1946. Under the Travancore Act the assessment year ended on the last day of Karkadakom, i.e., 16 August 1947. Consequently, for the accounting year 1 January 1946 to 31 December 1946, the applicable assessment year was 1123 M.E., spanning 17 August 1947 to 16 August 1948. The company reported losses for the accounting years 1946, 1947 and 1948. The loss for the year ending 31 December 1946, assessed in 1123 M.E., amounted to Rs 4 031 10/‑; the loss for the year ending 31 December 1947, assessed in 1124 M.E., was Rs 6 605 1/‑; and the loss for the year ending 31 December 1948, assessed in 1125 M.E., was Rs 2 604 13/‑. The aggregate of these losses was Rs 13 241 9/‑. The operative dispute is whether the loss of the year 1946 may be carried forward under the Travancore Act, read with section 24(2) of the Indian Income‑tax Act and the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, to the assessment year 1951‑52, which corresponds to the company’s accounting year 1950. The Income‑tax Officer held that the loss of 1946 could not be carried forward because it had expired after two years under section 32 of the Travancore Act, and that section 24(2) was not applicable in view of paragraph 3 of the 1950 Order. The officer’s order was confirmed by the Appellate Assistant Commissioner and the Appellate Tribunal. The present appeal challenges the correctness of the High Court’s earlier decision on this point.

The Income‑tax Officer held that the loss could not be carried forward to the assessment year because it had expired after two years under section 32 of the Travancore Act, and because section 24(2) was inapplicable in view of paragraph three of the Removal of Difficulties Order. That finding of the Officer was affirmed on appeal by the Appellate Assistant Commissioner and subsequently by the Appellate Tribunal. The Tribunal was asked to state the factual case, but it declined to do so; nevertheless the High Court required a statement of the case under section 66(2) of the relevant statute and then decided the matter in favour of the assessee company. The sole issue that was raised before this Court was whether the High Court’s answer was correct. The assessee company did not have any counsel present at the hearing before this Court. By virtue of section 3 of the Indian Finance Act, 1950, the Indian Income‑tax Act was extended to the State of Travancore‑Cochin. Section 13(1) of that Finance Act provided that, if immediately before the first day of April 1950 there existed in any Part B State a law relating to income‑tax, that law would cease to have effect except for the purposes of levying, assessing and collecting income‑tax, and that the provision would apply to any period not covered by the previous year for assessment under the Indian Income‑tax Act, 1922, for the year ending on 31 March 1951 and for any later year. By this provision a clear separation was created between the operation of the earlier local law and the operation of the Indian Income‑tax Act. Consequently, the assessment for the year 1951‑52 was made against the assessee company under the Indian Income‑tax Act.

Section 24(2) of the Indian Income‑tax Act, as it stood before its amendment by the Finance Act, 1955, stated: “Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940, under the head ‘Profits and gains of business, profession or vocation’ and the loss cannot be wholly set off under sub‑section (1), the portion not so set off shall be carried forward to the following year, and so on, but no loss shall be so carried forward for more than six years, and a loss arising in the previous years for the assessment for the years ending on the 31st day of March 1940, the 31st day of March 1941, the 31st day of March 1942, the 31st day of March 1943, and the 31st day of March 1944 respectively shall be carried forward only for one, two, three, four and five years respectively.” The loss in question did not correspond to any of the years listed in the latter part of the quoted provision; therefore that special limitation did not apply to the assessee company’s loss. The company contended that the earlier portion of the provision, which permits a loss to be carried forward for up to six years, should apply to its loss.

The loss that the assessee company claimed could be carried forward for six years could not be sustained when the Court examined the relevant statutory provisions. The Court observed that this claim could not be upheld in light of section 32 of the Travancore Act, taken together with the Removal of Difficulties Order issued in 1950. Section 32 of the Travancore Act was essentially a copy of section 24(2) of the Indian Income‑Tax Act, the only alteration being a change of the dates mentioned, which was necessary because the Travancore Act became operative on the first day of Chingom, 1122 M.E. (that is, 17 August 1946). The Court explained that wherever the Indian provision spoke of “31st March”, the Travancore version substituted the expression “the last day of Karkadakom” (16 August), and instead of the Gregorian years 1940, 1941, 1942, 1943 and 1944 it inserted the corresponding Malayalam years 1122 (covering 17‑8‑1946 to 16‑8‑1947), 1123 (17‑8‑1947 to 16‑8‑1948), 1124 (17‑8‑1948 to 16‑8‑1949), 1125 (17‑8‑1949 to 16‑8‑1950) and 1126 (17‑8‑1950 to 16‑8‑1951). Apart from these date substitutions, the two sections were identical, and therefore the modified section 24(2) of the Indian Income‑Tax Act could be read as section 32 of the Travancore Act. The Court noted that the simultaneous existence of these two provisions in the respective statutes was likely to create confusion as to which law should prevail. Consequently, section 12 of the Indian Finance Act, 1950 empowered the Central Government to issue an order to remove any such difficulty. Pursuant to that power, the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 was promulgated. Paragraph 3 of that order provided that: “Carry‑forward and set‑off of previous losses—where in any previous year prior to the previous year for the assessment for the year ending on the 31st day of March 1950, an assessee has sustained a loss of profits or gains in any business, profession or vocation carried on by him, and such loss would, had the State law continued to be in force, have been set off against the profits and gains, if any, from the same business chargeable to tax in the said year of assessment or in any year subsequent thereto, such loss would be so set off in the same manner, to the same extent, and up to the same year of assessment as it would have been set off had the State law continued to be in force.” The Court emphasized the importance of the words that follow—“in the same manner, to the same extent, and up to the same year of assessment, as it would have been set off had the State law continued to be in force.” These words indicate that, for any loss incurred in a year preceding the year immediately before the assessment year ending 31 March 1950, the law that governed the loss was the law that was in force in the Part B State, namely the Travancore Act. The Court then turned to the facts of the present case and said that it would now indicate which earlier years would be subject to the Travancore Act. The previous year relevant to the assessee company, for the assessment year ending 31 March 1950, was the calendar year 1 January 1949 to 31 December 1949, and the Indian Income‑Tax Act applied to that year. However, the application of the Travancore Act by paragraph 3 of the order was limited only to the year before 1 January 1949 and to any earlier years. Accordingly, the year 1 January 1946 to 31 December 1946 fell clearly within the scope of the Travancore Act, and there was no doubt that the Travancore Act governed the loss incurred in that calendar year. The Travancore Act, inter alia, provided that a loss arising in the previous year for the assessment year ending on the last day of Karkadakom 1123 could be carried forward for two years. The assessment year for Malayalam year 1123 covered the period 17 August 1947 to 16 August 1948, and the previous year for the assessee company relative to that assessment year was 1 January 1946 to 31 December 1946. Therefore, the loss of the calendar year 1946 could be carried forward to the calendar years 1947 and 1948.

For the assessment year that ended on the thirty‑first day of March 1950, the relevant period for the assessee Company was the calendar year from 1 January 1949 to 31 December 1949, and the Indian Income‑Tax Act was the governing statute for that year. The order’s paragraph 3 limited the application of the Travancore Act to the previous year that ended before 1 January 1949 and to any earlier previous years. The specific previous year that is under consideration is the calendar year from 1 January 1946 to 31 December 1946, which indisputably falls within the range of years to which the Travancore Act continues to apply, leaving no ambiguity or dispute. Consequently, the matters arising from that year are governed by the Travancore Act. The Travancore Act, inter alia, provided that a loss incurred in a previous year for the assessment year ending on the last day of Karkadakom 1123 could be carried forward for a period of two years. The assessment year for Karkadakom 1123 (M.E.) spanned from 17 August 1947 to 16 August 1948, and the previous year related to that assessment was the calendar year from 1 January 1946 to 31 December 1946.

The loss that arose in the calendar year 1946 could therefore be carried forward to the calendar years 1947 and 1948, and it could be utilized up to the assessment year 1125, which covered the period from 17 August 1949 to 16 August 1950. The subsequent assessment year from 1 April 1951 to 31 March 1952 corresponded to the assessee Company’s account year of 1 January 1950 to 31 December 1950, which lies beyond the two‑year carry‑forward period, irrespective of whether the calculation is based on the account year or the assessment year. The High Court’s view that the Removal of Difficulties Order 1950 was intended to enlarge the rights of newly‑covered assessees under the Indian Income‑Tax law was therefore misplaced. The purpose of that Order was to draw a clear dividing line between those earlier years to which the former State law applied and those later years to which the Indian Income‑Tax Act would apply; it neither expanded nor reduced the rights of the assessee. As Justice Chagla explained in Indore Malwa United Mills Ltd. v. Commissioner of Income Tax, the only right preserved for an assessee is the right contained in clause 3 of the Removal of Difficulties Order 1950, which ensures that if the State’s law allowed loss carry‑forward, that right continues under the Indian Income‑Tax Act. Paragraph 3 of the Order expressly states that the right is available in the same manner, to the same extent, and up to the same assessment year as provided by the State law, here the Travancore Act. Because, in the present case, the loss could be carried forward for only two years and those two years fall before the commencement of the Indian Income‑Tax Act’s application, the Indian Act does not apply. Accordingly, the appeal succeeds and is allowed, and the assessee Company is ordered to pay the costs of the appeal incurred in the High Court.

In this case the Court observed that it did not issue any order concerning the award of costs to either party in the proceedings before it. The judgment therefore contained no direction that either the appellant or the respondent should be required to pay the costs of the litigation in this Court. The Court further stated that the appeal was allowed. By allowing the appeal the Court indicated that the relief or remedy that had been sought by the appellant was granted and that the decision of the lower tribunal or authority was set aside or modified in accordance with the appellant’s claim. No other orders were included in the judgment. Consequently there was no cost liability imposed by this judgment and the parties were not required to make any payment to the other side concerning the expenses of the appeal. The Court explicitly refrained from granting any costs, thereby leaving the matter of costs to be borne by the parties as per usual practice. The absence of a costs order is consistent with the Court’s discretion to either award costs or to leave the parties to meet their own expenses, and in this instance the Court exercised its discretion by not making any such award. Accordingly the final operative part of the judgment consisted solely of the declaration that no costs order was made by this Court and that the appeal was allowed.