Territorial application of income tax: losses arising when territory was part of the taxing jurisdiction remain deductible for that previous year.

The article addresses the territorial scope of the Income-tax Act for assessment: the Act applies to total income of the previous year, and the territorial description must be read with reference to the territory as it existed during that previous year. Because the loss was sustained in Burma during 1936-37 while Burma formed part of British India, the loss falls within the Act's scope for that previous year and is therefore deductible in the 1937-38 assessment; the prior disallowance was legally incorrect.

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Issues: Whether the loss of Rs. 8,663 incurred by the assessee in Burma in the previous year 1936-37 is allowable as a deduction in the assessment year 1937-38 where Burma ceased to be part of British India on 1 April 1937.

Analysis: Section 3 charges income-tax on the total income of the previous year and Section 4(1) applies the Act to income "accruing or arising or received in British India". The Act must be read as operating on the income of the previous year for the purposes of assessment; the territorial description "British India" in Section 4(1) is to be applied with reference to the territorial extent as it was during the previous year when the income or loss arose. The Income-tax Act is a permanent enactment and is not to be treated as reenacted annually for the purpose of altering the territorial scope applicable to the previous year. Where the loss was sustained while Burma was part of British India, the loss is within the scope of the Act for that previous year.

Conclusion: The decision of the Assistant Commissioner to disallow the deduction is incorrect in law; the loss incurred in Burma in 1936-37 is allowable as a deduction in assessment year 1937-38 in favour of the assessee.

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