Carry forward of losses must follow the law in force, and unappealed issues do not merge in appellate orders.

The right to carry forward and set off losses is a substantive statutory right and must be exercised only under the law in force for the relevant period; an allowance made in disregard of the unamended provision and the Removal of Difficulties Order disclosed a patent mistake and was rightly rectified under section 35. The doctrine of merger applies only to matters actually carried in appeal: where the Revenue did not challenge that direction before the Tribunal, it did not merge in the appellate order, so the Appellate Assistant Commissioner retained jurisdiction to rectify it. The challenge to rectification therefore failed.

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Issues: (i) Whether the allowance of carry forward and set off of losses incurred in a Native State against income in taxable territories, contrary to the unamended law and the Removal of Difficulties Order, was a mistake apparent from the record capable of rectification under section 35; (ii) Whether the Appellate Assistant Commissioner retained jurisdiction to rectify his earlier order after the assessee's appeal to the Tribunal.

Issue (i): Whether the allowance of carry forward and set off of losses incurred in a Native State against income in taxable territories, contrary to the unamended law and the Removal of Difficulties Order, was a mistake apparent from the record capable of rectification under section 35.

Analysis: The right to carry forward losses is a substantive statutory right and can be claimed only within the limits of the law in force for the relevant accounting period. The amended provision of section 24(2) of the Indian Income-tax Act, 1922, introduced by the 1953 amendment, could not govern losses of earlier years when it was not in force. The original allowance of carry forward and set off, made in disregard of the unamended section 24(2) and clause 3 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, therefore disclosed a patent mistake.

Conclusion: The error was a mistake apparent from the record and was rightly rectified under section 35.

Issue (ii): Whether the Appellate Assistant Commissioner retained jurisdiction to rectify his earlier order after the assessee's appeal to the Tribunal.

Analysis: The doctrine of merger applies only to matters actually within the subject-matter of appeal before the appellate forum. An order not brought before the Tribunal by appeal or cross-objection does not merge in the Tribunal's decision. Since the revenue had not challenged the carry forward direction before the Tribunal, that part of the Appellate Assistant Commissioner's order was never adjudicated upon in appeal and was outside the Tribunal's jurisdiction. The power to rectify that part of the order therefore remained unaffected.

Conclusion: The Appellate Assistant Commissioner had jurisdiction to rectify the order, and the plea of merger failed.

Final Conclusion: The challenge to the rectification order was rejected because the carry forward allowance was contrary to the governing law and the earlier direction had not merged in the appellate order of the Tribunal.

Ratio Decidendi: A statutory right to carry forward losses can be exercised only in accordance with the law in force for the relevant period, and an appellate order merges only in respect of matters actually within the subject-matter of the appeal before the appellate forum.

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