Control of Business Abroad determines full inclusion of foreign branch income; prior-year losses not set off absent established carry forward.

Where evidence established that a foreign branch was controlled from India during the relevant previous year, the entire branch income for that year is includible in the assessee's total income under the proviso to section 4(1); the tribunal's factual finding that control remained in India precludes apportionment on a time basis. Separately, losses sustained in earlier years cannot be set off in a later year unless those losses were validly established and entered into assessment so as to be carried forward under the statutory loss carry forward regime; absence of an established or notified carried forward loss defeats the claim to set off in the later assessment year.

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Issues: (i) Whether the income of the assessee from the Hongkong branch should be apportioned on a time basis or otherwise for inclusion in the assessee's total income under the proviso to section 4(1) of the Act; (ii) Whether the Tribunal erred in law in rejecting the assessee's claim to set off alleged losses of 1941 (and alternatively losses of the war period 1941-45) against the income of the assessment year 1947-48 under section 24 of the Act.

Issue (i): Whether the Hongkong branch income must be apportioned for the year because control of the business was exercised partly in India and partly outside India.

Analysis: The proviso to section 4(1) excludes income accruing without the taxable territories from total income of a person not ordinarily resident unless it is derived from a business controlled in India. The Tribunal examined correspondence and other evidence and found as a factual matter that the Hongkong business was controlled in India during the relevant previous year. The Tribunal rejected the contention that mere temporary absence of the proprietor for part of the year effected a transfer of control outside India, observing that control is a question of fact to be established by direct or circumstantial evidence. The Court accepted the Tribunal's factual finding that control remained in India throughout the year and that there was no authority to dissect a single year's income on time-basis where the business was found to be controlled in India.

Conclusion: The income of the Hongkong branch is includible in full in the assessee's total income; the apportionment/time-basis argument is rejected. Decision adverse to the assessee.

Issue (ii): Whether the Tribunal erred in refusing to permit the assessee to set off alleged losses of 1941 (or losses suffered during 1941-45 but ascertained in 1946) against the income of assessment year 1947-48.

Analysis: Section 24(1) permits set-off of losses in the year in which they are sustained; section 24(2) allows carry forward only of losses which have entered the computation under sub-section (1) and which cannot be wholly set off, subject to temporal limits. A recorded rejection of a claim to establish loss does not create an obligation under section 24(3) unless a loss has in fact been established and directed to be carried forward. The cited authority permitting redetermination where the officer failed to notify a carried-forward loss is distinguishable because here no loss was established or so notified. Losses sustained in earlier years cannot be treated as losses of a later year merely because the assessee subsequently ascertained their quantum; each year is a separate accounting period and carry forward operates only where losses have been properly entered and carried forward under the statute. On the facts the Tribunal was not required to allow relitigation or carry forward of the alleged earlier losses to 1947-48.

Conclusion: The Tribunal rightly rejected the assessee's claim to set off the alleged losses; the claim is dismissed. Decision adverse to the assessee.

Final Conclusion: The references are answered against the assessee: the Hongkong branch income is includible in full in the assessee's total income and the claim to set off or carry forward alleged earlier losses is rejected.

Ratio Decidendi: Where a foreign branch's business is found on the evidence to have been controlled in India during the previous year, the entire income of that branch for the year is includible under the proviso to section 4(1); and losses of earlier years cannot be set off or carried forward under section 24 unless those losses had been validly established and entered into assessment and thus became subject to the statutory carry forward regime.

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