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Petitioner: KESHARDEO SHRINIVAS MORARKA VS Respondent: COMMISSIONER OF INCOME-TAX (CENTRAL), BOMBAYHonorable Justice V. S. DESAIB. A. Palkhivala,G. N. Joshi
1969 P T D 59
1969 P T D 59
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
KESHARDEO SHRINIVAS MORARKA
versus
COMMISSIONER OF INCOME‑TAX (CENTRAL), BOMBAY
Income‑tax Reference No. 31 of 1960, decided on 21st June 1962.
Company----
-----Undistributed profits‑Distribution order‑Provi sions whether ultra vires‑Loss‑Carry forward‑Share of profit in unregistered firm‑Whether reduces loss to be carried forward‑Failure to challenge in appeal computation of loss in assessment order Effect‑Interest‑Penal interest under S. 18‑A(6)‑Appeal whether lies‑Income‑tax Act 1922, Ss. 18‑A(6), 23‑A & 24(2), (3).
Section 23‑A of the Indian Income‑tax Act, 1922, is intra vires the Legislature.
Spencer v. Income‑tax Officer, Madras (1957) 31 I T R 107 and Sardar Baldev Singh v. Commissioner of Income‑tax (1960) 40 I T R 605 (S C) fol.
For the assessment year 1950‑51 the assessee's income from other sources falling under section 12 of the Income‑tax Act amounted to Rs. 16,729. His share of the loss in a registered firm amounted
to Rs. 51,936, his share of the profits in another registered firm was Rs. 2,414 and his share in the profits of an unregistered firm was Rs. 11,860. The Income tax Officer computed the net business loss at Rs. 37,662 and after set‑off against his income from other sources determined the amount of loss to be carried forward at Rs. 20,933. The assessee appealed against the assessment but did not raise any dispute regarding the computation of the loss to be carried forward. In the assessment for the assessment year 1951-52 the assessee claimed that he was entitled to carry forward under section 24(2) of the Income‑tax Act, the sum of Rs. 20,933, increased by Rs. 11,860, which represented his share of the profits of the unregistered firm :
Held, (i) that the assessee was entitled to carry forward the sum of Rs. 20,933 increased by Rs. 11,860. The assessee's loss to be carried forward was not liable to be diminished by the amount of his share of the profits of the, unregistered firm. The assessee's share of the profits of the unregistered firm could be included in his total only for the purpose of determining the rate applicable to his other income and could not be taken to reduce the loss to be carried forward.
(ii) That, in order that the assessee might be precluded from agitating the question computation of loss to be carried forward in the assessment of proceedings for 1951‑52, it must be first established that there was a notification to the assessee under section 24(3). The fact that the Income‑tax Officer determined the loss to be carried forward in the assessment order for the year 1950‑51, that the assessee was served with that order, and that the assessee took an appeal from the assess ment order without challenging the computation of the loss to be carried forward did not suffice to hold that there was a notification of computed loss as required by section 24(3).
Seth Jamnadas Daga v. Commissioner of Income‑tax (1961) 41 I T R 63 (S C) and Commissioner of Income‑tax v. Khushal Chand Daga (1961) 42 I T R 177 (S C) fol.
No appeal lies to the Appellate Assistant Commissioner against the levy of penal interest correctly computed in accor dance with the provisions of section 18‑A(6) of the Income‑tax Act. The decision of the Bombay High Court in Commissioner of Income‑tax v. Jagdish Prasad Ramnath (1955) 27 I T R 192 which so held has not been impliedly overruled by the decision of the Supreme Court in C. A. Abraham v. Income‑tax Officer, Kottayam (1961) 41 I T R 425 (S C) and Commissioner of Income‑tax v. Bhikaji Dadabhai & Co. (1961) 42 I T R 123 (S C).
It is well settled that the expression "assessment" has been used in the Income‑tax Act in different senses at different places. What is the correct connotation of, the expression in a given provision must be determined on an examination of that provision and the fact that the expression has been elsewhere used in a wider connotation will not mean that it is so used in the provision under examination. The absence of a specific provision giving a right of appeal against an order imposing penal interest under section 1 ‑A(6) or 18‑A(8) in the scheme and context of the other provisions of section 30 would clearly indicate that no right of appeal was intended to be given against such order, and such right of appeal is not capable of being incorporated in the provisions of section 30 by pointing out that the expression "liability to be assessed under the Act" used in the said section is capable of in cluding the liability to pay a penalty. It is true that penalty when 'imposed under a taxing statute would be in nature of an additional tax but that does not mean that there is no distinction between tax and penalty. The Indian Income‑tax Act has made distinct provisions for tax and penalty and the distinction has been borne in mind in making provisions for appeals in. section 30 of the Act.
Commissioner of Income‑tax v. Jagdish Prasnd Ramnath (1955) 27 I T R 192 applied.
C. A. Abraham v: Income‑tax Officer, Kottayam (1961) 41 ITR 425 (SC) and Commissioner of Income‑tax v Bhikaji Dadubhai & Co. (1961) 42 I T R 123 (S C) considered.
STATEMENT OF CASE
By these applications, which are consolidated for the sake of convenience, Shri Keshardeo Shrinivas Morarka and Dwarka das Shrinivas the assessee, require the Appellate Tribunal to refer to the High Court some questions, said to be of law, and which are said to arise out of its orders under section 33(4) made on September 4, 1457, in I. T. A. Nos, 5995 of 1956‑57 and 5996 of 1956‑57. Inasmuch as, in our opinion, a question of law does arise, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income‑tax Act, 1922.
2. These matters arise out of the assessments made upon Shri Keshardeo Shrinivas Morarka and Dwarkadas Shrinivas Morarka, partners of the firm known as Messrs Dwarkadas Keshardeo Morarka. The appeals giving rise to these matters were heard together and were disposed of by the Tribunal by two separate orders, the main order being in I. T. A. No. 5995 of 1956‑57. As the facts in the two cases are not different in any material respects the facts only in the case of Keshardeo Shrinivas Morarka set out.
3. The assessee, Sri Keshardeo Shrinivas Morarka, is a partner in a registered firm known as Messrs Dwarkadas Keshardeo Morarka. For the assessment year 1950‑51 the assessee's total income was determined at a loss of Rs. 20,933. This was arrived at as follows :
Rs. (i) Income under `other sources' (section 12) including dividend, liable to be taxed 16,729 (ii) Share from an unregistered firm, Messrs Morarka & Co., to be included for rate purposes as the firm itself was assessed to tax 11,860 (iii) Share from Messrs Bajranglal & Co. (to be taxed) 2,414 (iv) Share from the registered firm of Messrs Dwarkadas Keshardeo Morarka (loss) 51,936
The net result of items (ii), (iii) and (iv) was a loss of Rs. 37,662 determined under section 10. Against the income of Rs. 16,729 directly liable to be assessed in the hands of the assessee and falling under section 12, the Income‑tax Officer set off the said loss of Rs. 37,662 to the extent of Rs. 16,729 and deter mined the total loss at Rs. 20,933. That loss was from business (i.e., under section 10). He ordered that "it shall be carried forward to the following year in accordance with the provisions of section 24(2)". Since the said income of Rs. 16,729 included certain dividend income, the assessee became entitled to a refund of Rs. 6,127‑12‑0 on account of credit given' to him under section 18(5) read with section 16(2) of the Act. The assessee's contention before the Tribunal was that, since no tax was‑ payable by him on Rs. 11,860, the Income‑tax Officer should have not set off the loss of Rs. 51,936 to the extent of Rs. 11,860 and should have. determined the loss to be carried forward at Rs. 20,933 plus Rs. 11,860. For reasons given by the Tribunal in paragraph 6 of its order, a copy of which is marked Annexure "A" and forms part of the case, it rejected the assessee's contention and held that the Income‑tax Officer correctly determined the loss to be carried forward at Rs. 20,933.
4. The assessee, Shri Keshardeo, is a shareholder of M/s. Rajputana Textile Agencies Ltd. In the case of that company, an order under section 23‑A was made on March 30, 1950. The assessee's share in the deemed distribution of dividend made under that section was found to be Rs. 85,220. In making the assessment, the Income‑tax Officer had included the said sum of Rs. 85,220 in the assessee's total income. On this point the assessee raised two contentions before the Tribunal, viz.
(a) that as he himself did not receive the said dividend income of Rs. 85,220 he should not be assessed on it ; and
(b) that section 23‑A itself, and consequently the order under that section together with the assessment made upon the assessee shareholder, were ultra vires the Legislature as that section offend ed Article 14 of the Constitution.
For reasons given by the Tribunal in paragraph 7 of its order (Annexure-A), it rejected both the contentions. In reject ing the second of these two contentions, it relied upon the Madras. High Court judgment in C. W. Spencer v. Income‑tax Officer, Madras ((1957) 31 I T R 107).
5. After completing the assessment, the Income‑tax Officer proceeded to compute the interest payable by the assessee under section 18 A(6). The assessee took a ground of appeal before the Appellate Assistant Commissioner "against the levy of penal interest on the petitioner". The Appellate Assistant Commis sioner rejected that contention holding that no appeal lay to him on that point. Naturally, therefore, the contention of the assessee before the Tribunal was that the Appellate Assistant Commis sioner erred in holding that no appeal lay "against levy of penal interest". It was admitted before the Tribunal that the computation of interest was exactly in accordance with the provisions‑ of sec tion 18‑A(6). Hence relying upon the judgment of the Bombay High Court in the case of Commissioner of Income‑tax v. Jagdish Prasad Ramnath ((1955) 27 I T R 192) the Tribunal rejected the assessee's conten tion. Alternatively, the assessee also submitted before the Tribunal that, in determining the quantum of penal interest to be charged, the Income‑tax Officer should have taken into consideration, on the grounds of equity, the following two factors :
(i) that the total income determined for the assessment year 1951‑52 was very much higher by reason of section 23‑A dividend of Rs. 85,220 ; and
(ii) that in computing the interest payable under seo tf6n 18‑A(6), the Income‑tax Officer did not take into considera tion the fact that the assessee was entitled to get back a sum of Rs. 6,127 as a result of the assessment made upon the assessee for the assessment year 1950‑51 (and not the assessment year 1951‑52).
The Tribunal did not find any substance in these submissions made on the ground of equity.
6. On these facts, the assessee requires the Tribunal to refer to the High Court the following four questions :
(1) Whether, on the facts and circumstances of the case, the correct loss to be carried forward was Rs. 20,933 plus Rs. 11,860 and not Rs. 20,933 ?
(2) Whether the Tribunal was right in holding that sec tion 23‑A of the Indian Income‑tax Act was not ultra vires the Legislature?
(3) Whether it was rightly held that, on the facts and circum stances of the case, no appeal lay against the levy of penal interest of Rs. 7,923?
(4) Whether in levying penal interest the sum of Rs. 6,127 available with the department for refund to the assessee should not have been taken into account in determining the tat in respect of which the penal interest could be levied?"
7. In our opinion, on the facts stated above, the following questions of law arise
"(1) Whether the amount of loss to be carried forward under section 24(2). for the assessment year 1950‑51 is the sprit of Rs. 20,933 or that sum increased by the sum of Rs. 11,860 ?
(2) Whether section 23‑A of the Income‑tax Act, 1922, is ultra vires the Legislature ?
(3) Whether any appeal lies to the Appellate Assistant Commissioner against levy of penal interest correctly computed in accordance with the provisions of section 18‑A(6) ?"
8. In our opinion, the equitable considerations urged by the assessee in regard to the quantum of the said penal interest and the Tribunal's finding thereon do not give rise to any question of law. Hence we refer to the High Court only the three questions as set out in paragraph 7 above.
9. Parties agree that all material facts have been correctly stated. The assessee, however, requires that question No. 4 in paragraph 6 hereinabove should also be referred. For reasons set out in paragraph 8 we decline to refer the said question.
B. A. Palkhivala with N. A. Palkhivala for the Assessee.
G. N. Joshi with R. J. Joshi for the Commissioner.
JUDGMENT
V. S. DESAI, J.‑In this reference under section 66(1) of the Income‑tax Act, 1922, at the instance of the assessee, relating to his assessment for the year 1951‑52, the following three questions are referred to this Court by the Income‑tax Appellate Tribunal :
"(1) Whether the amount of loss to be carried forward under section 24(2) for the assessment year 1950‑51 is the sum 6f Rs. 20,933 or that sum increased by the sum of Rs. 11,860 ?
(2) Whether section 23 A of the Income‑tax Act, 1922, is ultra vires the Legislature .?
(3) Whether any appeal lies to the Appellate Assistant Commissioner against levy of penal interest correctly computed in accordance with the provisions of section 18‑A(6)?"
So far as question No. 2 is concerned, the challenge which it lets up against the vires of the provisions of section 23‑A of the Income‑tax Act, 1922, is set at rest by the decision of the Madras High Court in C. W. Spencer v. Income‑tax Officer, Madras ((1957) 31 I T R 107) and the decision of the Supreme Court in Sardar Baldev Singh v. Commissioner of Income‑tax ((1960) 40 I T R 605) (see observations at page 614). In view of these decisions, the said question has to be answered in the negative, and we answer it accordingly.
The facts necessary to be stated in considering question No. 1 are as follows : In the‑ assessment year 1950‑51, the assessee total income was determined at a loss of Rs. 20,933 by the Income‑tax Officer. During that assessment year, the assessee had an income of Rs. 16,729 including the dividend income which fell under section 12 as income from other sources. From an unregistered firm, in which the assessee was a partner, he had received as his share of the profit, an amount of Rs. 11,860. He had also received an amount of Rs. 2,414 as the share of his profit from a registered firm in which he was a partner and in another registered firm, in which he and his brother were partner, he had sustained a loss of Rs. 51,936. 'The Income‑tax Office calculated the net result of the profit and loss of the business income of the assessee and determined it at Rs. 37,662 as the total business loss of the assessee. He set off this total loss against the income of Rs. 16,729, which was the assessee's income from other sources directly liable to be assessed in his hand, and thus found Rs. 20,933 as the amount of loss to be carried forward. In the assessment order, which he passed, he ordered : "It (the said determined loss of Rs. 20,933) shall be carried forward to the following year in accordance with the provisions of section 24(2)." In the assessment for the assessment year 1951‑52, the assessee contended that the amount of lose which he was entitled to carry forward under section 24(2) was not Rs. 20,933 but the said amount increased by an amount of Rs. 11,860. The contention of the assessee was that the Income‑tax Officer had erred in determining the amount of loss to be carried forward at Rs. 20,933 because, in arriving at that figure, he had set off the loss sustained by the assessee in the business of the registered firm of himself and his brother against his share of profit in the unregistered firm, which he was not entitled to do. According to the assessee, the unregistered firm having been taxed, no tax was liable to be paid by the assessee in respect of the share of profit which he had received from the unregistered firm, and the only purpose for which the said share of profit could be taken into consideration in his assessment was for the purpose of arriv ing at the total income for determining the rate at which the tax was to be paid. Setting off of the loss against the profits could only be against those profits or income which were liable to be taxed in the hands of the assessee. This contention of the assessee was negatived by the Tribunal, and the Tribunal held that the Income‑tax Officer had correctly determined the loss to be carried forward at Rs. 20,933. Mr. B. A. Palkhivala, learned counsel appearing for the assessee, has argued that the view taken by the Tribunal is not sustainable in view of the decisions of the Supreme Court in Seth Jamnadas Daga v. Commissioner of Income tax ((1961)41 I T R 630) and Commissioner of Income‑tax v. Khushal Chand Daga ((1961) 42 I T R 177). The contention of Mr. Palkhivala is correct and must be upheld. In Seth Jamnadas Daga v. Commissioner of Income tax, it has been held by the Supreme Court that the assessee would be entitled to carry forward his share of the loss in the registered firm to the succeeding year under section 24(2). It is clear from this decision that the said loss is not liable to be diminished by the amount of the profit from the unregistered firm which the assessee might have received in the said year. The profit from the unregistered firm, which is exempt from tax in the bands of the assessee, although it has to be included to ascertain his total income, in order to determine the rate applicable to .his other income, cannot be taken to reduce the loss to be carried forward. The decision in Commissioner of Income‑tax v. Khushal Chand Daga is also to the same effect.
Mr. Joshi, learned counsel for the revenue, has argued that although in view of the Supreme Court decision referred to above, the view taken by the Tribunal would not be sustained, it is possible for him to argue that the conclusion of the Tribunal that the amount of loss which the assessee was entitled to carry forward in the assessment year 1951‑52 could be only Rs. 20,933 is correct. Mr. Joshi's argument is that the amount of loss which the assessee was entitled to carry forward hi the following year was determined by the Income‑tax Officer in the assessee's assess ment of the assessment year 1950‑51. By his assessment order, he had notified to the assessee in writing the amount of the loss as computed by him under section 24(3) of the Income‑tax Act. This order has been made appealable under section 30 of the Act. According to Mr. Joshi, the assessee had appealed from the assessment order passed by the Income‑tax Officer for the assess ment year 1950‑51, but had made no challenge in that appeal as against the computation by the Income‑tax Officer of the loss to be carried forward. The said computation, therefore, at Rs. 20,933 was final and could not thereafter be agitated by the assessee in the assessment of the following year. In the assessment of the following year i.e. of the assessment year 1951‑52, the Income- tax Officer, therefore, was right in taking the loss to be carried forward in that year at Rs. 20,933.
Now, it must be stated in the first place that the contention urged by Mr. Joshi has not been dealt with by the Tribunal in its order. Mr. Palkhivala has urged that the contention does not arise on the Tribunal's order and, since it has not been agitated before the Tribunal, Mr. Joshi is not entitled to urge it on this reference. Mr. Joshi says that the Tribunal having decided in his favour on a different ground has not dealt with this conten tion, but that does not mean that it had not been raised before the Tribunal. Mr. Joshi says that, as a matter of fact, in oppo sing the assessee's application for reference on this question, the department had urged before the Tribunal that the said question does not arise inasmuch as the assessee, not having appealed from the order under section 24(3), was not entitled to agitate the computation of the loss to be carried forward in the assessment proceedings for tine assessment year 1951‑52. Neither in the statement of the case nor in the appellate decision of the Tribunal is there any indication that the contention, the ` form in which it is sought to be raised by Mr. Joshi before us, was raised before the Tribunal. Since the order of the Tribunal or the statement of the case did not make any reference to this contention or deal with the same, it will not be possible for us to entertain it on the present reference. It is a contention, which, in our opinion, requires certain facts to be established, which we do not find so established on the record before us. In order that the assessee may be precluded from agitating the question of computation of the loss to be carried forward in the present assessment proceedings by reason of his not having appealed from the order notified to him under section 24(3), it must first be established that there was, in fact, such a notification. Mr. Joshi says that there was such a notification, because there was an order‑made in the assessment of the previous year and the said assessment order was also communicated to the assessee. Mr. Joshi in this connection has referred to the statement of the case, wherein the Tribunal has stated that in the assessment for the year 1950‑51; the Income‑tax Officer ordered that the loss computed by him, shall be carried forward to the following year in accordance with the, provisions of section 24(2). It may be that such was the ord6f endorsed on the assessment order made by the Income‑tax Officer in the assessment year 1950‑51. It may also be that the assessee may have been served with the assessment order for the:' year 1050‑51 and it may also be, as Mr': Joshi says, that the assessee may have taken an appeal from the said assessment order without challenging the loss to be carried forward as computed by the Income tax Officer. These facts, however, will not suffice to hold that them was a notification of computed loss as required by subsection (3) of section 24, in view of the decision of the Supreme Court in Commissioner of Income‑tax v. Kushal. Chand Daga. A contention similar to the one raised by Mr. Joshi before us was raised in that case also. In negativing that contention, their Lordships have observed as follows :
"As regards the first question, the only contention raised was that the loss which had been determined and ordered to be carried forward must be deemed to have become final, because no appeal was filed against that determination. But it appears that the procedure laid down by section 24(3) under which the Income‑tax Officer has to notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of that section was not followed. No doubt, under section 30 an appeal lies, if the assessee objects to the amount of loss computed and notified under section 24; but inasmuch as the Income‑tax Officer had not notified the loss computed by him by order in writing, an appeal could not be take on that point."
It appears from the facts stated in that case that the assessee had appealed from the assessment order, in which the loss to be carried forward in the following year had been determined, but had not questioned the said computation in that appeal, and had agitated the question of the loss to be carried forward during the assessment proceedings for the following year. The facts, therefore, which are on record are not sufficient to hold that there has been a notification to the assessee of the computed loss under section 24(3). In our opinion, therefore, the contention which has been raised by Mr. Joshi cannot be entertained and the answer to question No. 1, therefore, will be that the amount of loss to be carried forward under section 24(2) for the assessment year 1950‑51 is the sum of Rs. 20,933 increased by the stem of Rs. 11,860.
Question No. 3 is also, in our opinion, concluded by the decision of this Court in Commissioner of Income‑tax v. Jagdish Prasad Ramnath ((1955) 27 I T R 192), although Mr. Palkhivala has tried to urge that the said decision is not a binding authority in view of the. Supreme Court decisions in C. A. Abraham v. Income‑tax Officer, Kottayam ((1961) 41 I T R 425) and Commissioner of Income‑tax v. Bhikaji Dadabhai, & Co. ((1961) 42 I T R 123). The facts necessary to be stated in connection with that question are these : The Income‑tax Officer had…
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