Report No. 12
Notes to clause 73
The scheme of section 24 of the existing Act has, in the draft, been altered by a redistribution of its provisions. The existing section deals separately with-
(1) set off in the same year, and
(2) set off in succeeding years.
But an alternative method of arrangement of the provisions would be to deal first with set off of losses, whether in the same year or in succeeding years and then state the exceptions in both cases. This would give to a layman a complete picture of what is to be done with regard to the losses sustained by him. The draft, therefore, places the provisions contained in the existing section 24 in separate sections in the following order-
(i) General provision regarding set off in the same year and set off in the succeeding years;
(ii) special provisions regarding speculation losses;
(iii) special provisions regarding set off of losses under capital gains;
(iv) special provisions for registered firms;
(v) special provisions for unregistered firms assessed as registered firms;
(vi) special provisions for partners of unregistered firms;
(vii) change in constitution of firms; and
(viii) submission of returns in respect of losses.
Sub-clause (1)- As already explained above, the general rule relating to set off whether in the same year or in succeeding years, has been dealt within the beginning.1
1. Draft clause 73.
Sub-clause (1) states the rule relating to set off in the same year (from one head to another). The existing expression "loss of profits or gains" is slightly inappropriate, as it speaks of "loss" of "profits". It has, therefore, been replaced by the words "net result is a loss " The words "subject to the other provisions of this Chapter" have been added in order to make it clear that there are special provisions regarding firms, capital gains, speculation losses etc. which appear in the subsequent clauses.
Set off is allowed, not with reference to the previous year, but with reference to the assessment year. Previous years may be different according to the source of income, but the Income-tax Officer is concerned only with the assessment year for which the loss is to be computed. This is the position for carry forward also. Suitable verbal changes have been made on this point in the draft clauses concerned.
Under the existing law a loss arising under any head is to be set off against income under the head "Capital gains". Now it is well understood that the taxation under the head "Capital gains" is at a lower rate than the taxation under other heads, by the operation of existing section 17(6). The result is, that an assessee is forced to set off a loss against capital gains. He thereby obtains a reduction of his taxable income which does not fetch the same benefit as it would have fetched if the set off had been confined to other heads.
For example, if a loss of Rs. 2,000 under the head "Income from property" is set off against capital gains, then, assuming that the tax on capital gains works out at 10 N.P per rupee, the reduction in tax which the assessee would obtain by such set-off would be Rs. 200. While, if the assessee is to set off the loss only against income other than-capital gains, then, assuming that the rate of tax under other heads is 25 N.P per rupee, the reduction in tax which the assessee would obtain by such set off would be Rs. 500. It would seem that there is no reason for driving the assessee to a course which causes pecuniary loss to him.
It may be noted that in the converse case when a loss is sustained under capital gains, the assessee is not allowed to set off the loss against any other head, vide existing section 24(2A). The position regarding set off against income under the head capital gains has therefore been altered on the lines indicated above. The necessary changes have been made in the draft sub-clause under discussion, and the draft clause corresponding to existing section 24(2A) has been made comprehensive so as to embody the law relating to set off of a loss under other head against capital gains, and vice versa, with the change discussed above.
Sub-clause (2)- Drafting changes have been made on the lines of the changes made in existing section 24(1). See notes to sub-clause (1) above.
The words "had no other head of income" have been replaced in the draft by the words "had no income under any other head", in order to make the intention clear that carry forward of the whole loss is allowed because there is no income against which the loss could be set off in the year in which the loss arose.
Section 24(2), Proviso (a), has been already repealed.
Section 24(2), Provisos (c), (d) and (e), are dealt within succeeding clauses.
Section 24(2), Proviso (f), has been omitted, as its operation was confined to assessment years which have all expired.
Section 24(3) is being transferred to the Chapter on Procedure for Assessment.
Sub-clause (3)- Does not need any comments1.
1. As to the correct interpretation of this provision see now Aluninium Corporation of India v. C.I.T. West Bengal, AIR 19958 Cal 404.
Sub-clause (4)- Carry forward of losses is allowed for a maximum period of eight years now [See the amendment made by the Finance (No. 2) Act, 1957]. Sub-clause (3) embodies this rule. In the existing Act (as amended in 1957), the words "but no loss shall be so carried forward for more than eight years" appear as a part of section 24(2), clause (iii). This causes an ambiguity as to whether the limit of eight years is to be counted with reference to the carry forward referred to in section 24(2)(iii) or whether in counting eight years the year of first carry forward under section 24(2)(ii) is also to be counted. The latter construction is, obviously, what was intended. In order to make this clear the limitation has been placed in a separate sub-clause.
Notes to clause 74
Speculation losses have been dealt with separately in this clause.
Sub-clause (1)- The expression "speculation business" has been substituted for the expression "business consisting of speculative transactions etc.", since the draft clause relating to chargeability of income under the head "Profits and gains of business etc."1 makes use of the expression "speculation business".
1. Draft clause 28, Explanation 2.
Sub-clause (1) relates to the very previous year in which the loss was incurred and is based on the first proviso to existing section 24(1).
Sub-clauses (2) and (3) and (4)-The carry forward and set off of speculation losses has been dealt with here. The clause has been made self-contained, for the sake of convenience, though this has necessitated a slight amount of repetition.1
1. See also notes to draft clause 73(a).
Notes to clause 75
The changes made are verbal and do not need any comments. Notes to the main clause dealing with set off1 explain the drafting changes made in the existing section 24(2), and the draft clause under discussion has also been framed keeping in view those changes.
1. Clause 73(1).
As already explained in the notes to that clause, the position regarding set off against capital gains has been dealt with comprehensively in this clause.
Notes to clause 76
Sub-clause (1)- does not need any detailed comments.
Sub-clause (2)- The prohibition against carry forward by a registered firm, contained in existing section 24(2), proviso (c), earlier half, has been embodied in this clause with a few drafting changes, explained below.
The existing provision refers to the loss of a registered firm "which has been apportioned". These words are misleading; in the case of a registered firm apportionment is compulsory and universal, and no question of confining the provision to a loss which "has been" apportioned can arise. The language has, therefore, been slightly altered, and the words in question omitted.
AS a matter of fact, it is not necessary to have any provision at all to the effect that a registered firm cannot carry forward its losses. The reason is, that when the loss of A is apportioned between B and C, it no longer subsists as the loss of A, and the question of its carry forward by A should not arise. The proviso is, however, useful by way of clarification, particularly in view of the peculiar nature of the provisions for assessment of firms and partners in the Act, and has, therefore been retained.
The prohibition is presumably applicable to the carry forward and set off of losses under capital gains also, and the draft has been framed on this assumption.
Notes to clause 77
Existing section 24(2), proviso (d), says that when an unregistered firm is assessed under existing section 23(5)(b), its losses shall "also be carried forward and set off under this section as if it were a registered firm". This is not an accurate way of stating the position. A registered firm is never allowed to carry forward its loss [see existing section 24, sub-section (2), proviso (c), earlier half], and therefore, to say that the loss may be "carried forward as if it were a registered firm" is meaningless. The language has, therefore, been altered.
Notes to clause 78
The second proviso to existing section 24(1) consists of two parts, the earlier part dealing with unregistered firms and the latter part dealing with registered firms.
This clause deals with unregistered firms, while registered firms have been already dealt with1.
1. Draft clause 76.
Sub-clause (1)- The existing provision, for unregistered firms, says that the loss of the firm shall be set off only against that income of the firm and not against the income of any of the partners. When analysed, this gives the following propositions:-
(1) The loss of the firm shall be set off only against the income of the firm. This proposition has been separately dealt within the draft, though it follows from the principal provision in the draft1 i.e., any assessee is entitled to have loss under one head set off against the income under any other head. That provision applies to unregistered firms, just as it applies to the other assessees.
1. Draft clause 73(1).
(2) The loss shall not be set off against the income of "any of the partners".
What is really meant is that where an assessee is a partner in an unregistered firm and his share is a loss, the loss cannot be set off against his other income. Draft sub-clause 2(a) embodies this proposition.
Sub-clause (2)- As to para (a), see notes above. As to para (b), minor changes have been made.
Strictly speaking, this provision is also unnecessary. The main provision in section 24(2) applies to all assessees, including unregistered firms. Therefore, any loss incurred by the firm is to be carried forward in computing the firm's income. The question of its carry forward in a partner's income cannot arise. The provision is, however, useful by way of clarification, as it emphasises the proposition that a partner in an unregistered firm cannot claim a separate set off and that all that is allowed is the collective set off available to the firm as a whole.
Notes to clause 79
This clause does not need any detailed comments, except that the draft makes it clear that the limitation imposed by the existing section applies the respect of set off under existing sections 24(1) and 24(2A) as well as under section 24(2) and section 24(2B).
Notes to clause 80
A part of existing section 22, sub-section (2A), has been incorporated in this clause, since it is germane to the set off of losses.
The limitation should apply not only to carry forward under existing section 24, subsection (2), but also to carry forward under existing section 24, sub-section (2B). This has been made clear in the draft.