Carry forward of business loss is a substantive right, and loss years must be examined even without formal assessment.

A voluntary return showing loss was not a valid return under section 22(1) of the Income-tax Act, 1922, because that provision contemplated a return of taxable income and did not permit a voluntary loss return outside its scheme. Section 22(3) only extended the time for a return already required under section 22(1) or 22(2), and did not create a separate right to file a loss return. By contrast, the right to carry forward and set off business loss under section 24(2) was a substantive statutory right, so the Income-tax Officer had to examine and determine earlier years' losses on a proper claim even if formal assessments for those years could not be made; however, no formal assessment for those years was required.

---

---

Issues: (i) Whether a voluntary return showing loss could be treated as a valid return under the Income-tax Act, 1922. (ii) Whether, for the purpose of carry forward and set-off of losses under section 24(2), the Income-tax Officer was bound to investigate the losses of the earlier years and determine them, though no formal assessments for those years could be made.

Issue (i): Whether a voluntary return showing loss could be treated as a valid return under the Income-tax Act, 1922.

Analysis: A return under section 22(1), as it then stood, was required only where the total income exceeded the non-taxable limit, and contemplated a return of taxable income. A person who had suffered loss had neither a duty nor a right to file a voluntary return under that provision merely to report the loss. Section 22(3) did not enlarge that right; it only enabled a person who was already under a duty to furnish a return under section 22(1) or section 22(2) to file it later, before assessment was completed. The provision did not authorise a voluntary return of loss outside the scheme of section 22(1).

Conclusion: A voluntary return showing loss was not a valid return under section 22(1), and no assessment could be made on that basis.

Issue (ii): Whether, for the purpose of carry forward and set-off of losses under section 24(2), the Income-tax Officer was bound to investigate the losses of the earlier years and determine them, though no formal assessments for those years could be made.

Analysis: The right under section 24(2) to carry forward business loss was treated as a substantive statutory right, not confined to cases where a formal assessment had already been made for the loss year. The expressions "assessee" and "previous year" in that context were used in a broader sense, so that the provision would not be defeated by a narrow literal reading. Section 24(3) also contemplated that, in the course of assessing an assessee, the loss entitled to be set off under the section should be ascertained and notified. Accordingly, even though the returns for the earlier years could not be assessed as such, the Income-tax Officer was required, on a proper claim being made, to examine whether losses had in fact been sustained in those years and whether they were legally capable of carry forward and set-off under section 24(2).

Conclusion: The Income-tax Officer was bound to investigate and determine the carried-forward losses for the relevant earlier years for the purpose of section 24(2), but was not bound to make formal assessments for those years.

Final Conclusion: The reference was answered in favour of the assessee in part: the earlier loss claim had to be examined for carry forward and set-off purposes, but the appellate direction to make formal assessments for the earlier years was not sustainable.

Ratio Decidendi: Where a statute grants an unrestricted right to carry forward business losses, that right cannot be defeated by the absence of a formal assessment for the loss year, and the assessing authority must investigate the loss for set-off purposes whenever the claim is properly raised.

---