1. This is a reference under section 66 (1) of the Indian Income-tax Act, 1922, to be hereinafter referred to as the 'Act', at the instance of the Commissioner of Income-tax. The question of law referred for the opinion of this court is :
'Whether, having regard to clause (e) of the proviso to section 24 (2), the assessee, an unregistered firm, was entitled to carry forward the whole of the loss including the share of the loss of the two retiring partners ?'
2. The question of law arising for decision in this case, we were told, is not covered by any decision either of the Supreme Court or any of the High Courts.
3. The assessee is an unregistered firm by name 'The Bharat Engineering and Construction Company, Udipi'. It carries on business as engineering contractors. The firm in question was constituted as per the partnership deed dated 25th September, 1950. During the assessment years 1956-57, 1957-58 and 1958-59, it incurred losses. The losses so incurred amounted to Rs. 1,41,180. But, during the assessment year 1959-60, it earned Rs. 25,103 as profits. It claimed that it should be permitted to set of its earlier losses towards the profits earned during the assessment year 1959-60. But, even before the commencement of the assessment year 1959-60, there had been a change in the constitution of the firm, two of its partners having left the firm earlier, Originally, the firm had four partners, namely, (i) U. Srinivasa Rao, (ii) Rosario Mathew Andrade, (iii) P. Sripati Acharya, and (iv) N. V. Shanbogue. U. Srinivasa Rao and Rosario Mathew Andrade retired from the partnership on April 3, 1958, and April 4, 1958, respectively.
4. One further fact needs to be noted that during the assessment year 1956-57, the assesses firm was registered under section 26A of the 'Act' and assessed as such but during all the other assessment years it was assessed in the status of an 'unregistered firm.'
5. The question before the Income-tax Officer was, whether in determining the loss to be carried over by the firm, he should exclude the share of loss of the partners that had retired or whether the firm was entitled to carry forward the entire loss incurred by it during the previous years. The Income-tax Officer held that, in view of section 24 (2) (c) read with section 26 (1) of the 'Act', the firm is not entitled to set off so much of the loss proportionate to the share of the retired partners computed in accordance with law. Dealing with that aspect this is what the Income-tax Officer observed :
'Since the unabsorbed loss of Rs. 1,41,168 (correct figure is Rs. 1,41,180) has to be carried forward and set off, there will be no taxable income for 1959-60. During the year of account, there was a change in the constitution of the firm in that two of the partners, Sri U. Srinivasa Rao and Rosario Mathew Andrade, were released on April 3, 1958, and April 4, 1958. Therefore, the share of profits of each partner will be computed proportionately in accordance with the proviso to section 26 (1) for the purpose of setting off the unabsorbed loss of previous years under section 24 (2). In accordance with clause (e) of the proviso to section 24 (2), so much of the loss proportionate to clause (e) of the proviso to section 24 (2), so much of the loss proportionate to the share of the retired partners cannot be carried forward and set off against the profits of the subsequent years.
6. Aggrieved by the order of the Income-tax Officer, the assessee went up in appeal to the Appellate Assistant Commissioner. That Officer differing entitled to carry forward the entire loss despite the fact that there was change in its constitution. He took the view that in the case of an unregistered firm, the assessee is the firm and not its partners and, therefore, the change in its constitution is immaterial for the purpose of assessment. He was of the opinion that clause (c) of this proviso to section 24 (2) governs the provisions contained in clause (a) of the said proviso. He further thought that from the scheme of the 'Act', the assessee, who is an unregistered firm, is entitled to claim set off in respect of the entire loss incurred by it during the previous years. The view taken by the Appellate Assistant Commissioner was affirmed by the Income-tax Appellate Tribunal. We have now to see whether that is the correct view of the law.
Section 24 deals with set off of loss in computing the aggregate income of an assessee. Sub-section (1) of that section is not relevant for our present purpose as that deals with set off of loss or profits or gains in any year under any of the heads mentioned in section 6 against the assessee's income, profits by section 24 (2), which provides that, where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year. But, that right is subject to the provisions contained in the proviso. We are not now concerned with clauses (i) to (iii) of section 24 (2). Nor are we concerned with any of the clauses in the proviso, excepting clauses (c) and (e). Clause (c) to the extent material for our present purpose says :
'Nothing herein contained shall entitle any assessee,...... being a partner in an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23... to have carried forward and set off against his sown income any loss sustained by the firm.'
7. From this clause, it follows that an assessee who is a partner in an unregistered firm, excepting in a case where the firm has been assessed under section 23 (5) (b), is not entitled to carry forward and set off against his own income any loss sustained by the firm. Quite clearly that clause does not deal with cases where the carry-forward and set-off of loss is claimed by the firm itself. It is plain from the language of that it has nothing to do with the question of law that is before us.
8. This takes us to clause (e) of the proviso to sub-section (2) of section 24, which in our opinion is the only relevant provision for our present purpose. That clause, excluding portions which are not relevant for our present purpose, reads :
'Where a change has occurred in the constitution of a firm, nothing in this section shall be deemed to entitle the firm to have set off so much of the loss proportionate to the share of a retired or deceased partner computed in accordance with the provisions of clause (b) of sub-section (1) of section 16 as exceeds his share of profits, if any, of the previous year in the firm....'
9. Clause (b) of sub-section (1) of section 16 is referred to in the above clause only for the purpose of computation of the share of loss of the partners who have retired and for no other purpose.
Clause (b) of sub-section (1) of section 16 says :
'In computing the total income of an assessee, when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year :
Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24.'
10. The provision quoted above does not deal with the question of carry-forward or set-off of the loss of a firm. It deals with the case of an assessee who is a partner in a firm and not that of the firm as such.
11. The only other section to which reference may be made is section 26 (1), which says :
'Where, at the time of making an assessment under section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment :
Provided that the when the tax assessed upon a partner cannot be recovered from him it shall be recovered from the firm as constituted at the time of making the assessment :
12. For the reasons mentioned above, we see no basis for the conclusion of the Tribunal that clause (c) of the proviso controls clause (e) thereof. We are of the opinion that the two clauses operate on different fields. While clause (e) deals with carry-forward and set-off of loss by a firm, registered or unregistered, in the constitution of which there has been a change, clause (c) deals with the questions of set-off of loss by a registered firm when its loss had been apportioned between its partners under the proviso to section 24 (1) as well as the set-off by the partners of an unregistered firm which has not been assessed under the provisions of sustained by the firm. The two clauses are independent of one another. One has nothing to do with the other. Hence, the view taken by the Tribunal appears to us to be wrong. In our opinion, as mentioned earlier, the case before us is entirely governed by clause (e).
13. The fact that, in the case of an unregistered firm, the firm is the assessee and not its partners, does not bear on the point under consideration. If any provision in the 'Act' regulates the assessment of any particular class of assessees, there is no point in going to the scheme of the 'Act'. The scheme of the 'Act' may become relevant where the concerned provision is ambiguous. But, in this case, despite the fact that clause (e) is not well-drafted, we find no difficulty in ascertaining its scope. Even though under the 'Act' an unregistered firm is assessable as such but, as could be seen from section 26 (1), in the matter of assessment, it is the firm as constituted at the time of making the assessment, it is assessed. In other words, if it is found that a change has occurred in the constitution of the firm, assessment will have to be made on the firm as constituted at the time of making the assessment and not on the firm that was in existence earlier. From this it follows, for the purpose of assessment, every change in the constitution of a firm brings into existence a new firm.
14. We are unable to accept the contention of Mr. S. P. Bhat, the learned counsel for the assessee, that the expression 'firm' found in clause (e) of the proviso to section 24 (2) means a registered firm. Throughout the 'Act', distinction is made between registered firm and unregistered firms. The 'Act' uses three distinct expressions, namely, 'firm', 'registered firm' and 'unregistered firm'. Whenever the word 'firm' is used, it is intended to include both registered as well as unregistered firms. In section 24 (2) itself we find the words 'firm', 'registered firm' and 'unregistered firm.' To accept the contention of Mr. Bhat is to ignore one of the well-accepted canons of construction. Even otherwise, from the language of the provision, it is clear that the expression 'firm' found in clauses (e) includes both registered and unregistered firms.
15. We think the following passage in The Law and Practice of Income-tax by Kanga and Palkhivala (fourth edition, at page 607) correctly sets out the legal position :
'The broad principle underlying sub-section (2) is that the right of carry-forward and set-off of losses is available only to the person who has suffered the loss and to no one else. Clause (e) of the proviso is the necessary corollary to this principle.
Section 26 (1) provides that where a change has occurred in the constitution of a firm, the assessment should be made on the firm as constituted at the time of making the assessment, but for the purpose of inclusion in the total incomes of the partners the firm's profits should be apportioned between the partners who in the previous year were entitled to receive the same. The effect of clause (e) of the proviso to section 24 (2), as far as can be gathered from its clumsy language, is that a firm is not entitled to carry forward and set off against its own profits of a subsequent year so much of its loss as is proportionate to the share of a retired or deceased partner, nor is any partner entitled to carry forward and set off against his own profits any other partner's share of the loss.'
16. For the reasons mentioned above, our answer to the question referred to us is that having regard to clause (e) of the proviso to section 24 (2), the assessee, an unregistered firm, was not entitled to carry forward the whole of the loss including the share of the loss of the two partners who had retired.
17. The assessee to pay the costs of this reference. Advocate's fee Rs. 250.