Year of determining eligibility of carry forward of losses

March 24,2017
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Anish Thacker (Partner, Ernst & Young LLP)

Introduction

After a long hiatus, Tax Nostalgia is back for a second inning. It is said that the old order changeth and giveth way to the new, but it needs to equally be kept in mind that precedent plays a very important role in understanding and interpreting law. Tax Nostalgia is therefore back to acquaint professionals with precedent which will help them interpret law applicable to their day to day practice.

In this article, we will touch upon a principle that is very commonly to be applied. Does the determination of carry forward and set off of loss have to be made in the year in which the loss is incurred or the year in which the loss is to be set off? The natural or logical answer that one may be tempted to give off the cuff would be that it is the former year i.e. the year in which the loss was incurred. What the Hon’ble Supreme Court of India has said in a decision of a three judge bench (K. Subba Rao, J.C. Shah and S.M. Sekre, JJ) delivered on 5th November 1956 is however quite illuminating.

Facts of the case

The facts in the case of CIT V. Manmohan Das [(1966) 59 ITR 699] / [TS-5-SC-1965], which we are looking at in this article are that Lala Manmohan Das, the taxpayer, was appointed treasurer of the Allahabad Bank Ltd. vide an agreement dated 2nd January 1931. The decision deals with the provisions of carry forward and set off of losses under the Indian Tax Act 1922 where the provisions were pari materia to those of Income Tax Act 1961 (the act or the present act). In the previous year corresponding to the Assessment Year 1950-51, the taxpayer, in performing his duties as treasurer, suffered a net loss of Rs. 38,027. For the Assessment Year 1951-52 the taxpayer earned a profit of Rs. 34,445(after claiming a loss of Rs. 20,000 arising from misappropriation of funds by an assistant cashier). The Income Tax Officer (ITO) refused to allow the loss suffered in the previous year corresponding to the Assessment Year 1950-51 against the profits earned by the taxpayer in the subsequent year. The order of the Appeal was confirmed by the Appellant Assistant Commissioner, the first appellant authority at that time. (The reason for denial of the carry forward of the loss was a dispute between the parties as to the head of income under which the income of the taxpayer was to be taxed i.e. ‘salary’ or ‘business income’.)

The Tribunal held that the income of the taxpayer was income arising from the pursuit of a profession or vocation and thus taxable under ‘business income’.

The tax department preferred an appeal to the Allahabad High Court where the question of law that was raised whether the taxpayer could claim a set off of the losses suffered by him in the preceding year (Assessment Year 1950-51) against him profits in the year under consideration (Assessment Year 1951-52) having failed to prefer an appeal against the refusal by the Assessing Officer making the assessment for the Assessment Year 1950-51 to allow the taxpayer to carry forward the loss under Section 24(2) of the 1922 Act.

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