MUHAMMAD ZAHOORUL HAQ, J. --The following question has been referred to us for the assessm ent year 1968-69 by the Commissioner of Income-tax:- "Whether on the facts and in the circumstances of the case the Income --tax Appellate Tribunal was right in holding that Free Reserves could not be adjusted against business loss of the assessee for the year in question?"
2. The assessee is a private limited company which bad suffered a business loss. It had also Free Reserves as defined under section 2(6-BB) of the Income-tax Act. The original assessment for the relevant year was completed on 7-4-1970 but later on notice was issued under section 35 of the I. T.
Act for rectifying the mistake committed by the Income-tax Officer. Consequently the business loss of the assesses of Rs. 3,04,300 was adjusted against Free Reserves of Rs. 12,21,275 and taxable Free Reserves were taxed at 10 %.
3. The assessee appealed to the Appellate Tribunal and the Appellate Tribunal cancelled the order of I: T. O. Under section 35 of I. T. Act dated 14-9-1970, by its order dated 30-6-1972, and held that Free Reserves are not mentioned as income in any of the heads of income under section 6, and therefore, a loss declared under any item of income mentioned under section 6 can be set off only against the items of income mentioned under section 6 and not against any other income.
4. Mr. Salahuddin, learned counsel for the C. I. T. Has submitted that under section 2(6-BB) "Free Reserves" have been defined to be those Free Reserves as are by the C. B. R. And section 2(6-C) has defined 'Income' as including the amount by which its free reserves exceed the paid-up ordinary share capital of the company as on the last day of the previous year. 1n this case admittedly the reserves were more than 12,21,276 compared to the share capital, and therefore they could be rightly treated as free reserves and hence counsel argued, they were to be deemed to the income under sec--tion 2(6-C) of I. T. Act, 1922. Counsel further contended that the Appellate Tribunal was not justified in upsetting the order of the I. T. O. Because section 24 of the I. T. Act allowed the I. T. O.
To set off loss under one head of section 6 against the income of profits or gains of any other head under section 6 for that year.
5. Gul Pir Bux, Advocate appearing for the respondent contended that the I. T. O. Had committed the fundamental mistake of not carrying forward the depreciation allowance after having adjusted the same against the income which had been declared. He submitted that in fact the original order of I. T. O. Shows that there was no loss in business because a sum of about seven sacs has been computed as the income from business and it was only after adjusting the depreciation of Rs.
10,22,721 that a business loss of Rs. 3,30,716 was arrived at. Learned counsel relied upon section 10(2)
(vi) proviso (b) which requires the unadjusted depreciation allowance is to be carried over to the next year.
6. We are afraid that we cannot sustain this objection of Mr. Gul Pir Bux against the order of the I. T.
O. As the same was never raised before the 'A Appellate Tribunal and is completely a new point which is sought to be urged before us and for which the C. I. T. Had no notice and hence the same cannot) be entertained.
7. Mr. Salahuddin submitted that the Income-tax Appellate Tribunal was not justified in not treating free reserves as income under section 6 because clause (v) of section 6 mentions income from other sources and since tree reserves is an income under section 2(6-C) as noted earlier, therefore, free reserves are an income under section 6 and could be set off against the loss. This submission of the learned counsel appears to be prima facie correct and justified and to this extent the order of the Appellate Tribunal does appear to be in need of consideration. However, we reserve our opinion in this regard for an appropriate occasion as we find that the ultimate order of the Appellate Tribunal could be sustained on the interpretation of sec--tion 24 of I. T. Act which was urged by Mr. Gul Pir Bux, but which had escaped the notice of the Tribunal, as such, although the Appellate Tribunal bad relied upon the same section 24 read with section 6 for its order.
8. Mr. Gul Pir Bux contended that the I. T. O. Had no justification to set off the business loss against the fictional income received from the free reserves for the same year unless the assesses agreed to such set off under section 24(1).
9. Mr. Salahuddin submitted that in (1960) 39 I T R 131 (137) M. P.
It was observed as under:- "It is no doubt true that section 24(1) is for the benefit of the assessee and that the assessee has unqualified -right under subsection (2) to carry forward the loss of the previous years for being set off against the profits of a subsequent year. But at the same time subsection (3) of section 24 casts a duty on the Income-tax Officer to crystallize and compute the balance of loss which the assessee is entitled to have set off under section 24 against the profits of a subsequent year. It cannot, therefore, be maintained that in the present case the Depart--ment could not minimise the business loss of the assessee by setting it off against the dividend income."
10. Learned counsel also relied upon Miss Asia v. Income-tax Appellate Tribunal etc. PLD1979 SC 949 where the Appellate Tribunal of Income-tax has opined that section 24 of I. T. Act does not give a complete discretion to the assesses to have his loss set off or carried forward.
We are afraid that interpretation upon section 24 put by the Madhya Pardesh High Court or the Appellate Tribunal is not warranted by the clear language of section 24. Section 24(I) and section 24(2) which are relevant are in the following terms:- "24. Set off loss in computing aggregate income PLD1979 SC 949 Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, be shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year:------.."
"(2) Where any assessee sustains a loss or 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 the business, profession or vocation" and the loss cannot be wholly set off under subsection (1) so much of the loss as a not so not off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward to the following year, and
(i) Where the loss was sustained by him in a business consisting of speculative transaction, it shall be set off only against the profits and gains, if any, of the business in speculative transactions carried on by him in that year;
(ii) where the loss was sustained by him in any other business, profession or vocation it shall be set off against the profits and gains, if any, of such business, profession or vocation if such business, profession or vocation continued to be carried on him in that year; and if the loss, in either case, cannot be wholly so set off, the amount of the loss not set off, shall be carried forward to the next year and so on but no loss shall be carried forward for more than six years."
11. The perusal of section 24 makes it clear that it is the entitlement of the assesses to have his loss of profits or gains in any year under any item mentioned in section 6 to be set off against his income, profits or gains under any other head in that year. The words used are "shall be entitled" and they seem to be giving to assessee an absolute right of having the loss set off against any other item under section 6. But if he does not avail of that entitlement or right, then be loses the general right of getting the loss set off against all the items mentioned in section 6 for the next or succeeding year and thereafter be has the limited right given under section 24(2 of Income-tax Act of getting his loss set off under income from the same head and from no other bead. We cannot allow aright given under subsection (1) of section 24 to be converted into a liability. In the present case the f reserves have been taxed and, therefore, the effect of setting off the ions against the free reserves is that the assessee gets a benefit of only 10% of the tax whereas if it had been allowed to carry on the loss to the next year then it could have not a set off against this loss towards an income from business or profession which would have been otherwise taxable at 50 %. The net result, therefore, is that the assesses has in the total effect suffered the loss of saving 40 % of his future tax. We are afraid that the same is against the spirit as well as the clear words of section 24 of the Income-tax Act.
11 Mr. Salahuddin wanted to use subsection (3) of section 24 as the right and privilege of the Income-tax Officer to set off the loss against any profits but we fail to understand as to how this could be done. Sub--section (3) is in the following terms:- "(3) When, in the course of the assessment of the total income of any assesses, it is established that a loss of profits or gains has taken place which he is entitled to have set off under the provisions of this section, the Income-tax Officer shall notify to the assesses by order in writing the amount of the loss as computed by him for the purpose of this section."
13. This subsection merely entitles the Income-tax Officer to notify the loss as computed by him but this computation in itself is to be made subject to the entitlement of the assessee as contained in subsections (1) and (2) of section 24 and, therefore, subsection (2) of section 24 cannot be used as curtailing the right and entitlement of the assesses as given in subsection (1) of section 24 of the Inc.1me-tax Act. In fact the computation of loss under section 24(3) and its notice to the assesses appear to be aimed to allow the assessee to make his choice under subsection (1) or (2) of section 24 itself and, therefore, subsection (3) of section 24 does not override the provisions of section 24(1) and (2) but it is rather subservient and ancillary to them.
14. We cannot lose sight of the fact that the revenue laws are to be interpreted in a manner beneficial to the assessee and not otherwise. Consequently we are of the view that the ultimate order of the Appellate Tribunal could be sustained on the above-discussed interpretation of section 24(1) and (2) of Income-tax Act, 1922, and the reference is, therefore, answered in the affirmative.