WARNER LAMBERT CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference made at the instance of the assessee, the Tribunal has referred four questions of law to this Court for opinion. The first three questions pertain to asst. year 1971 72 and the fourth question to asst. year 1972 73. The questions are as follows :

(2.) THE assessee is a company. For the asst. year 1971 72, assessment of the income of the assessee was made under S. 143(3) of the IT Act 1961 ("the Act") by the ITO on 27th Nov., 1973 whereby the total income of the assessee was determined at Rs. 1,58,467. This figure was arrived at by reducing from the gross dividend of Rs. 4,65,000 the permissible deductions under ss. 80K and 80L of the Act and to this was added, inter alia, technical assistance fees of Rs. 1,56,777 on accrual basis. While arriving at the business income 'from technical assistance fees', the ITO did not allow any deduction for expenditure claimed to have been incurred for earning the said technical fees. On appeal by the assessee, the AAC directed the ITO to grant deduction on the business expenditure claimed by the assessee. The ITO gave effect to this order of the AAC on 20th Sept., 1975 and arrived at the business loss of Rs. 3,04,734. However, while doing so, the ITO did not set off this business loss against the gross dividend income. He calculated the income from other sources at nil figure by reducing from gross dividend and interest deductions under ss. 80K and 80L of the Act and held that the business loss of Rs. 3,04,734 was carried forward to the subsequent year for set off.

(3.) ,65,000 and income from other sources was calculated at Rs. 4,222 being the interest income only. To this was added gross technical fees amounting to Rs. 1,49,847 thereby bringing the total income to Rs. 1,54,069. To give effect to the order of the AAC, the ITO passed an order on 26th Oct., 1974 allowing expenses of Rs. 60,147 against the gross technical fees as a result of which the business income was determined by him at Rs. 93,922. Against this, he set off the brought forward loss from asst. year 1971 72 and arrived at the total income of Rs. 4,222 consisting of interest income taxed under other sources. He indicated in his order that the balance of loss of Rs. 2,15,034 which could not be set off this year was being carried forward to the subsequent year for set off. 4. The CIT called for the records of the case and on perusal of the same, he was of the opinion that the orders of the ITO giving effect to the orders of the AAC were erroneous and prejudicial to the interest of the Revenue because the ITO, while giving effect to the order, committed a mistake of law. According to the CIT, for the asst. year 1971 72, the ITO should have first set off the business loss against the gross income from other sources and then he should have reduced the balance to nil by giving relief to the extent permissible under ss. 80K and 80L. As a consequence, in his opinion, no business loss was available for being carried forward to the subsequent year and no question could, therefore, arise of setting off any business loss in the subsequent year. He issued a show cause notice to the assessee and on consideration of the cause shown, rejected the assessee's claim, that the order passed by the ITO was correct in law. The assessee's contention before the CIT was that the assessee was entitled under S. 71 to claim set off of the loss in the year in which it occurred or in the subsequent year or partly in one year and partly in the other year according to his choice. The CIT did not approve this contention of the assessee and by his revisional order for the asst. year 1971 72 held that because of the definition of "gross total income" as contained in S. 80B(5) of the Act, neither gross total income nor total income could be varied depending on the assessee's choice as claimed by the assessee. According to the CIT business loss has to be set off first against the gross dividend income and the deduction under ss. 80K and 80L could be made then only from the balance so as to reduce it to 'nil' figure. He, therefore, directed the ITO to do the calculation accordingly. He also passed a consequential order for the asst. yr. 1972 73 directing the ITO to withdraw the set off of the business loss wrongly brought forward and set off by him.