1. This is a reference under section 66(1) if the Income-tax Act, 1922, at the instance of the Commissioner. The question referred to us, in our opinion, will have to be answered in favour of the revenue having regard to the decision of the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas & Co. We are here concerned with the assessment year 1958-59, the accounting period being from November 3, 1956, to October 23, 1957.
2. Facts giving rise to this reference in brief are. The assessee before us is a partnership concern doing construction work under the name and style of Messrs. Hirani Construction company. The partnership consists of five partners. The assessee-firm will be referred to hereafter as Hirani firm, This firm commenced its business from January 1, 1956. The capital of the firm was Rs. 25,000 to be contributed equally by the five partners. The five partners shared equally in the profit and loss. This firm was registered under the Income-tax Act. Now, there was another concern which was a private limited company doing the same business under the name and style of Messrs. Manoharsingh Sethi and Co. (P.) Ltd. This limited company will be hereafter referred to a Manoharsingh Limited. Manoharsingh Limited had secured a contract from the Government for building a High School and hostel at Arvi. Hirani firm and Manoharsingh entered into a partnership for the contraction of the said High School and hostel. A regular deed of partnership was entered into evidencing the terms and conditions on which Hirani firm and Manoharsingh Limited agreed to do the business. The said deed is of February 26, 1956. The deed, inter alia, provided : 'It is further provided that the company (i.e., Manoharsingh Limited) may take the firm (i.e., Hirani firm) as its partner in other contract works also after having obtained the written consent of the firm, on the terms and conditions as provided in the deed.' This deed has been signed on behalf of Manoharsingh Limited by Manoharsingh who was the managing director of the company. This partnership deed is also signed by all the five partners of Hirani firm. This new entity, namely, the partnership between Manoharsingh Limited and Hirani firm has been, for brevity's sake, referred to in the statement of the case as 'M. H. Entity.' We would also in the course of the judgment refer to this new partnership as M. H. Entity. A new contract also was subsequently obtained by Manoharsingh Limited from the Government for building a Normal School at Chanda. Both the construction works, i.e., building of a High School and hostel at Arvi and building a Normal School at Chanda were done by the partnership M. H. Entity. It appears that the entire capital required for the construction at Chanda was advanced by Hirani firm. The contract relating to the construction of the buildings at Arvi could not be successfully carried out for certain reasons and when the time fixed for the completion of that construction had expired M. H. Entity had to hand over the building in an incomplete stage to the Government and that is said to have resulted in a loss and this appears to have led to the dissolution of the firm. It however was expected that the contract relating to the construction of the Normal School at Chanda would results in good profits. M. H. Entity however resolved to dissolve itself as and from 5th October, 1957, on terms and conditions which have been incorporated in the deed of October 9, 1957. That deed is annexure 'C' to the statement of the case. In this deed of dissolution, Hirani firm has been described as party No. 2 and Manoharsingh Limited as party No. 1.
3. Material recitals and terms of the deed of dissolution may conveniently be reproduced at this stage :
And whereas in the Chanda contract the party No. 2 has invested all the capital including the earnest money and deposits with the Government and that the party No. 1 has not invested any amount in this Chanda contract.
And whereas the Arvi contract has come to an end by lapse of time and the work had been handed over to the Government in an incomplete condition, the non-completion of the work being due to causes beyond the control of the parties.
And whereas there are heavy losses in the Arvi contract.
And whereas the construction work at Chanda is likely to result in substantial profit.
And whereas the parties have decided to sever their connections, and have decided that the partnership between them subsisting under the deed dated February 26, 1956, for carrying out the aforesaid two contracts at Arvi and Chanda be dissolved by mutual consent as from the date hereof on terms and conditions hereinafter appearing :
(2) (i) The actual loss in the Arvi contract cannot be definitely calculated at this stage. However, by mutual consent and for dissolving the partnership amicably, the loss is finally fixed at Rs. 54,000 (Rs. Fifty-four thousand) and the share of the party No. 2 in it is accordingly fixed at Rs. 27,000 (Rs. Twenty-seven thousand only) irrespective of the fact it ultimately the actual loss may be more or less.
(ii) Party No. 2 has invested in all a sum of Rs. 60,693 (Rs. sixty thousand, six hundred and ninety-three) far for the Arvi contract Deducting their share of loss of Rs. 27,000 from the total investment of Rs. 60,693 of party No. 2 in the Arvi contract, the party No. 2 is entitled to receive Rs. 33,693 (Rs. thirty-three thousand, six hundred and ninety-three only) out of its investments in the Arvi work. ...
(iv) Party No. 1 have now to pay to the party No. 2, the sum of Rs. 33,693 as mentioned in paragraph 2(ii) above, which shall not be paid in cash, but it shall be adjusted in the manner herinafter provided :
(3) (i) It is not possible at this stage to determine the exact profits of the entire Chanda work, but by mutual consent and for dissolving the partnership amicably the party No. 2 has agreed to give to party No. 1 Rs. 35,000 (Rs. thirty-five thousand only) as their share in the profits of the Chanda work irrespective of the fact whether actually any profit is ultimately made or not by party No. 2.
(ii) Instead of paying this amount in cash to party No. 1 it is hereby adjusted against the amount of Rs. 33,693 receivable by party No. 2 from party No. 1 for Arvi work as per paragraph 2(iv) above, and the balance of Rs. 1,307 (Rs. one thousand, three hundred and seven only) is hereby paid in cash to party No. 1 by party No. 2 and a receipt for the same has been obtained.
(iii) In consideration of this payment of Rs. 35,000 by adjustment as aforesaid, the party No. 1 hereby relinquishes all their rights and interest to or in the Chanda work including all deposits so far made or to be made in future, all outstanding all other assets of the Chanda work, all future bills and other recoveries from the Government in favour of party No. 2.'
4. The combined effect of these relevant provisions is that the partnership between five partners of Hirani Firm and Manoharsingh Limited was dissolved as and from October 5, 1957, and for the purpose of its dissolution it had been amicably agreed to make accounts of the two works, viz, Arvi and Chanda works, on ad hoc basis. Losses said to have been sustained in the Arvi contract were fixed at Rs. 54,000, the share of losses sustained therein by Hirani Firm being Rs. 27,000 and the share of losses sustained by Manoharsingh Limited being Rs. 27,000. Similarly, on the ad hoc basis the share of profits of Manoharsingh Limited was fixed at Rs. 35,000 in the Chanda work which still had to be completed. The share of the loss of the partnership of Manoharsingh Limited was deducted from the amount advanced by them towards the construction of the Arvi contract and the share of the estimated profit of Manoharsingh Limited in Chanda work was paid to Manoharsingh Limited by Hirani Firms by way of adjustment against the balance in the said deposit and further paying in cash the remaining amount of Rs. 11,307. As and from October 5, 1957, the partners in the Hirani Firm got exclusive right, title and interest in the contract of construction of the Normal School building at Chanda.
5. We may now turn to the assessment proceedings of Hirani Firm and the assessment proceedings of M. H. Entity. We have already said that the business of M. H. Entity commenced on February 26, 1956, and continued till 5th or 9th October, 1957. The periods of work of M. H. Entity are three assessment years 1956-57, 1957-58 and 1958-59. Though we are here concerned only with the assessment year 1958-59, it is necessary to state in brief the history relating to the assessment of earlier years also. We will first deal with assessment proceeding relating to M. H. Entity. This M. H. Entity had been assessee for all the three years in the status of an unregistered firm. For the assessment year 1956-57, it was assessee to a total income of Rs. 3,100.80 nP. In the assessment year 1957-58, the business resulted in a loss amounting to Rs. 30,183 and the department accepted this loss. As there was a loss there was no demand for tax. In the assessment year 1958-59, it appears that no return was voluntarily filed. The Income-tax Officer therefore issued a notice under section 22(2) and it was served on M. H. Entity on July 4, 1958. As no return was filed even after this notice for a considerable time, further notice under section 22(4) was issued by the Income-tax Officer on January 6,1959, and the date fixed was January 20,1959. Manoharsingh sent a letter to the Income-tax Officer intimating dissolution of the firm and requesting that the papers be filed. The Income-tax Officer however directed him to file a return. On January 28, 1959, a return was filed by Manoharsingh in the name of Manoharsingh Sethi and Co. Limited with Hirani Construction Co. In the return neither any profit nor any loss was shown. But instead a note was appended to the return stating therein the details as to the dissolution of this firm and on the basis of these detail it was stated that M. H. Entity, an unregistered firm, had no assets and liabilities left and no business is left for filing any return. It was therefore requested that the papers be filed. This note was signed by Manoharsingh. On January 30, 1959, Manoharsingh appeared before the Income-tax Officer and the case was fixed for final hearing on February 4,1959. On that date, for the reasons stated by the Income-tax Officer, he made the following order.
'Case ends N.A. File after passing the assessment order.'
6. Turning to the assessment proceedings of Hirani Firm, the assessee before us, Hirani Firm has been assessee in the status of an unregistered firm in the years 1956-57 and the total income determined was Rs. 1,569. As it was below the taxable income, no tax was levied. In the year 1957-58, Hirani Firm was granted registration and in the assessment proceedings it was found that this firm had incurred a loss in this year and this loss was determined at Rs. 1,365. In the third assessment year, Hirani Firm has also been assessee as a registered firm. Hirani Firm in this year returned profits from the Chanda contract. As against the earned profits from the Chanda contract, Hirani Firm claimed that the loss to the extent of Rs. 27,000 sustained by it under the dissolution deed for the Arvi contract should be adjusted. The Income-tax Officer disallowed its claim. The order of the Income-tax Officer was affirmed in appeal by the Appellate Assistant Commissioner. The assessee, Hirani Firm, appealed to the Tribunal and the contention raised before the Tribunal by it was that it should be entitled to a set-off of the loss of Rs. 27,000 determined as its share of loss in the partnership against its share of other income. Following the decision of this court in Jadavji Narsidas & Co. v. Commissioner of Income-tax the Tribunal accepted this contention raised by Hirani Firm in part. The Tribunal, however, did not accept the assessee's contention that the loss of the assessee-firm in the Arvi contract amounted to Rs. 27,000. According to the Tribunal, the amount of the share of loss of the assessee firm in the Arvi contract had not been determined as such at Rs. 27,000. It therefore directed the Income-tax Officer to determine the quantum of loss and take the loss into account in determining the income of the assessee-firm. The material part of the order of the Tribunal is as follows :
'The assessee's claim before us is that he should be entitled to a set-off of the loss of Rs. 27,000 determined as his share of loss in the partnership against his share of other business. Reliance is placed upon the ruling of the Bombay High Court in the case of Jadavji Narsidas & Co. v. Commissioner of Income-tax. In the case before their Lordships the assessee was a registered firm. In the year under consideration a sum of Rs. 1,05.641 was claimed by the assessee as a loss arising to it in a joint venture with one D. The partnership between the assessee and D was an unregistered firm and was not assessee as a firm. Their Lordship held that there was neither any principle nor any provision of law which barred an assessee, whether an individual or firm, from claiming a set-off in respect of his share or its share of loss in an unregistered firm simply on the ground that the latter has not been brought to tax. It was accordingly held that the assessee was entitled to claim a set-off of his share of loss from an unregistered firm against his other income even though the latter has not been brought to tax.
The facts of the case in appeal before us are entirely on all fours with those of the ruling cited above. Here too, for the assessment year 1958-59, which is in appeal before us, the unregistered firm consisting of the assessee and the limited company has not been assessee as a firm. Following the above ruling which is binding on us, for the purpose of this appeal, we must hold that the assessee is entitled to a set-off of his share of loss in the partnership with the limited company against his other income. As for quantum, we find that the loss of Rs. 27.000 has only been taken on an ad hoc basis, the actual figure of loss being not known. The assessee shall be allowed a set-off for only his share of loss which he satisfied the Income-tax Officer was suffered by him in the year under consideration. The Income-tax Officer will determine the assessee's share of loss and allow it accordingly.'
7. The Commissioner, on an application made under section 66(1) of the Income-tax Act, appealed to the Tribunal, and the Tribunal has referred to us the following two questions after reframing them :
'(1) Whether for the purpose of the second porviso to section 24(1), the M.H. Entity can be properly held to be 'unregistered firm' which has not been assessee under the provisions of clause (b) of sub-section (5) of section 23 for the assessment year 1958-59
(2) Whether, having regard to the order made on February 4, 1959, annexure 'D' in the case of M.H. Entity for the assessment year 1958-59, it was open to the Tribunal to direct the Income-tax Officer to determine the assessee's share of loss in the Arvi contract and allow it accordingly ?'
8. Mr. Joshi, learned counsel for the revenue, in the first instance contends that the first question is not one arising out of the order of the Tribunal. In fact, none of the parties had raised such a contention, nor had the commissioner in his application under section 66(1) asked that such a question should be raised. Mr. Ashgarali, learned counsel for the assessee, also agrees that question No. 1 is not one arising out of the order of the Tribunal. It therefore need not be answered
9. As regards question No. 2, the argument of Mr. Joshi is that the Tribunal erred in holding that the M.H. Entity was not assessee in the assessment year 1958-59, and assuming that the facts of the present case were identical with those in Jadavji's case, the decision in that case would not govern this case. In the alternative, Mr. Joshi contended that at any rate the decision in Jadavji's case on this aspect has been reversed by their Lordship of the Supreme Court and therefore the question is required to be answered in favour of the revenue.
10. It is indeed true that in the case of Jadavji the unregistered firm was not assessee and in the present case before us the unregistered firm M.H. Entity has assessee. The M.H. Entity not having been assessee under section 23(5)(b), the fact whether it is assessee or not makes no difference so far as the application of the ratio of Jadavji's case to the present case is concerned. At the time the Tribunal decided the case, the decision had not been reversed on this aspect of the case by the Supreme Court. The Tribunal, therefore, had not committed any error in deciding the case in accordance with the said decision. However, Mr. Joshi is right that the decision of this court does not now stand as it has been reversed on this aspect of the case by their Lordships of the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas & Co. The facts in this case were that the assessee was a registered firm. It dealt in speculation in a joint venture with one D, an individual. There was a partnership deed in regard to that venture but it was not registered under section 26A of the Income-tax Act, 1922. The assessee-firm claimed in the relevant year deduction of Rs. 1,05,641, being half the share of loss in the joint venture. This claim of assessee had been disallowed by the Tribunal. By reason of the answer given by this High Court in reference, the said claim of the assessee stood allowed. In appeal taken by the Commissioner to the Supreme Court, their Lordships reversed the decision of this court. Delivering the majority judgment, their Lordships held :
'The loss of Rs. 1,05.641 could not be set off against the income of the assessee firm on the ground that the losses of the unregistered firm could only be set off against the income of that unregistered firm and it made no difference that the department had not assessee the unregistered firm or taken action under section 23(5)(b).'
11. It may also be observed that in the course of the judgment their Lordships have pointed out that the assessee-firm in its capacity as firm had no locus standi as a partner in the joint venture. The partners in the joint venture were the individual, D, and the partners of the assessee-firm. At page 47, their Lordships in the majority judgment, observed :
'To begin with, the assessee-firm as a firm could not enter into a partnership with Damji. Damaji could be admitted into the assessee-firm or the members of the assessee firm could enter into a partnership with Damji in their individual capacity. The assessee-firm however could not do so as a firm. This has held by this court in Dulichand Laxminarayan v. Commissioner of Income-tax. There was thus a partnership between Damji and the four members of the assessee-firm acting for themselves and indeed the deed which has been produced in this case shows as much. In the affairs of the unregistered firm, the assessee-firm had no locus standi.'
12. It is no these grounds that the appeal has been allowed. Mr. Ashgarali, learned counsel for the assessee, frankly concedes that, in view of the decision of the Supreme Court, the answer to the second question will have to be in favour of the Commissioner.
13. In the result, it is not necessary to answer the first question. Our answer to the second question is in the negative.
14. In the circumstances, the assessee shall pay half the costs to the Commissioner.