Carry Forward of Pre-Extension Losses disallowed where losses were not recognised by local law; no set-off under section 24(2).

Carry forward and set-off under section 24(2) is unavailable where the loss arose during a period when the local law did not recognise or compute that loss; the loss must have been capable of set-off under the law in force at the time it arose, otherwise a subsequently extended tax statute cannot treat it as eligible for carry forward. As applied here, losses alleged to have arisen during enemy occupation outside taxable territory had no recognition under any local tax law at the relevant time and therefore furnished no basis for set-off or carry forward under the later-applicable Act.

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Issues: Whether the assessee is entitled to carry forward and set off losses under section 24(2) of the Income-tax Act, 1961 in respect of losses incurred during the enemy occupation period prior to the extension of the Indian Income Tax Act to the assessee's territory.

Analysis: The Court examined whether losses alleged to have arisen during the enemy occupation could be treated as losses within the scope of the Income-tax Act so as to attract the relief of set-off under the statutory scheme. The Court reviewed authorities holding that carry forward under section 24(2) presupposes that the loss is one which could be set off under the law applicable at the time the loss arose and that a loss not recognised by the tax law in force at that time cannot thereafter be recomputed under the subsequently extended Act for the purpose of carry forward. The Court noted that the assessee's income arose outside the taxable territories and that there was no local tax law in force which recognised or computed the losses during the relevant pre-extension years; consequently there was nothing against which set-off under subsection (1) could operate and no basis for carry forward under subsection (2). Comparative authorities were applied to distinguish cases where local law had recognised a loss and where the Income-tax Act merely extended the period or scope of carry forward.

Conclusion: The issue is answered against the assessee; the assessee is not entitled to carry forward and set off the claimed losses under section 24(2) of the Income-tax Act, 1961 (decision in favour of the Revenue).

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