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Addl. Commissioner of Income-tax, Karnataka Vs. B.S. Dall Mills - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Referred Case No. 118 of 1976
Judge
Reported in(1981)24CTR(Kar)10; ILR1981KAR935; [1981]131ITR111(KAR); [1981]131ITR111(Karn)
ActsIncome Tax Act, 1922 - Sections 72, 72(3), 77, 77(1), 78, 78(1) and 183
AppellantAddl. Commissioner of Income-tax, Karnataka
RespondentB.S. Dall Mills
Appellant AdvocateS.R. Rajashekhara Murthy, Adv.
Respondent AdvocateK.L. Ratti, Adv.
Excerpt:
.....has increased the revenue or not. admittedly the old sound system was in existence for several years and due to use of the very same sound system for several years, the old system was worn out. if the assessee has provided certain amenities to its customers by replacing the old system with a better sound system, it cannot be said that the assessee has increased its income. instead of repairing the old stereo system, the assessee has installed the dolby stereo system. this has not benefited the assessee in any way with regard to its total income since there is no change in the seating capacity of the theatre or increase in the tariff rate of the ticket. it is a revenue expenditure and not a capital expenditure. - 77 of the act being similar, the same interpretation, with which we..........that the loss suffered by the assessee in the assessment year 1966-67, when it was assessed as an unregistered firm should be carried forward and added to the loss incurred by the assesses-firm in 1967-68, in which year it was assessed as a registered firm and that such resultant increased loss should be divided between the partners 2. whether, on facts the circumstances of the case, and in law the appellate tribunal was right in directing that the loss incurred by the assessee in the assessment year 1966-67 in which year it was assessed as an unregistered firm should be carried forward and set off against the assesses-firm in the assessment year 1967-68 ?' 2. briefly the facts of the case as set out in the statement of case are as follows: the assesses-firm is engaged in the.....
Judgment:

Rama Jois, J.

1. The Income-tax Appellate Tribunal, Hyderabad Bench, has referred the following two questions for the opinion of this court under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'):

'(1) Whether the Appellate Tribunal in law was right in holding that the loss suffered by the assessee in the assessment year 1966-67, when it was assessed as an unregistered firm should be carried forward and added to the loss incurred by the assesses-firm in 1967-68, in which year it was assessed as a registered firm and that such resultant increased loss should be divided between the partners

2. Whether, on facts the circumstances of the case, and in law the Appellate Tribunal was right in directing that the loss incurred by the assessee in the assessment year 1966-67 in which year it was assessed as an unregistered firm should be carried forward and set off against the assesses-firm in the assessment year 1967-68 ?'

2. Briefly the facts of the case as set out in the statement of case are as follows: The assesses-firm is engaged in the manufacture and sale of dales and the trade in pulses. During the assessment year 1966-67, the assesses-firm consisted of five partners. It was assessed as an unregistered year firm. It had incurred a loss of Rs. 51,482. During the assessment year 1967-68, a change had occurred a loss of Rs. 51,482. During the assessment year 1967-68, a change had occurred constitution of firm. The assesses-firm consisted of five partners. It was assessed as an unregistered firm. It had incurred in the constitution of the firm. The assesses-firm consisted of only five partners. It was assessed as a registered in a loss of Rs. 7,200. Out of the loss of Rs. 51,482 incurred during the assessment year 1966-67, the proportionate loss of the continuing partners was worked out in terms of s. 78 of the Act. It was Rs. 23,167. In the assessment order, the ITO did not make any mention about the carry forward of the loss of the assessment year 1966-67. In the appeal preferred before the AAC, the assessee contended that the loss of the firm of Rs. 23,167 during the assessment year 1966-67, when it was an unregistered firm should have been carried forward for the assessment year 1966-67, in terms of sub-s. (1) of s. 77 of the Act. This plea was rejected by the AAC. Aggrieved by the said order, the assessee preferred a second appeal before the Income-tax Appellate Tribunal. The Tribunal accepted the plea of the assessee and held that under sub-s. (1) of s. 77 of the Act there could be no objection to the carry forward of the loss of the earlier year of the assesses-firm to the extent of the share of the continuing partners, to the assessment year 1967-68. Thereafter, at the instance of the revenue, the two questions set out first have been referred for the opinion of this court.

3. At the outset we must observed that the second question and the last part of the first question relating to apportionment of the loss between the partners do not arise out of the order of the Tribunal. There is no direction in the order of the Tribunal that the loss of the unregistered firm for the year 1966-67 should also be apportioned between the partners. These was also no question of set-off as the firm did not earn any profit for the assessment year 1967-68. Therefore, we confine ourselves only to the first question excluding its later part which relates to the apportionment among the partners.

4. Sri. S. R. Rajasekhara Murthy, learned counsel for the revenue, contended that under sub-s. (1) of s. 77 of the Act, the loss incurred by an unregistered firm during an assessment year could be carried forward only if the status of the firm continues to be that of an unregistered firm during the subsequent assessment year or years, as the case might be. He submitted that the wording of the sub-section is clear and no exception could be taken to the said position and, therefore, the view taken to the contrary by the Tribunal was erroneous.

5. Sub-s (1) of s. 77 of the Act reads as follows:

'77. Losses of unregistered firms or their partners-(1) Where the assessee is an unregistered firm which has not been assessed as registered firm under the provisions of clause (b) of section 183, any loss of the firm shall be set off or carried forward and set off only against the income of the firm.'

6. The wording of the above sub-section is clear and unambiguous. It provides that in cases where the assessee is an unregistered firm and which had not been assessed as a registered firm under s. 183(b) of the Act, any loss which had been incurred by the firm shall be set off or carried forward and set off only against the income of the firm. Two conditions to permit carry forward and set off of loss which are implicit in s. 77(1) are -

(1) The loss of the firm must be during the period when it was assessed as an unregistered firm.

(2) The benefit of set off of loss or carry forward and set off of loss is available only against the income of the firm.

7. The sub-section does not say that such set off or carry forward and set off of loss would be available, if only or so long as the firm is assessed as an 'unregistered firm'. The benefit of set-off of loss or carry forward and set-off of loss incurred by a firm during the year when it was assessed as an unregistered firm, is permitted by the section even if it is assessed as a registered firm during subsequent years. In other words, the firm, which is entitled to the benefit is one and the same, though its status may differ for purposes of assessment in view of the special provisions incorporated in the Act as applicable to a firm assessed as an unregistered firm or as a registered firm, as the case may be. Therefore, there is nothing in the wording of sub-s. (1) of s. 77 of the Act to warrant the construction suggested for the revenue to the effect that once a firm which had been assessed as an unregistered firm in a given year is assessed as a registered firm during any subsequent year, it loses the right to the carry forward of the loss, if any, incurred during the earlier year.

8. The Tribunal in coming to the conclusion that the assesses-firm which had been assessed as an unregistered firm during the assessment year 1966-67, and as a registered firm during the assessment year 1967-68, was entitled to the carry forward of the proportionate losses of the years 1966-67 to 1967-68, had relied on the decision of Kerala High Court in Excel Productions v. CIT : [1967]64ITR65(Ker) . The firm concerned in that case had been assessed as an unregistered firm in the earlier year and as a registered firm in the subsequent year. It had suffered loss in the earlier year, but had secured profits in the later year. The question for consideration was whether the loss of the previous year could be carried forward and set off income earned by the firm as a registered firm during the subsequent year. The Kerala High Court held that under sub-s. (2) of s. 24 of the Indian I.T. Act, 1922, such carry forward and set-off of the loss of the firm during the period when it was unregistered against the profit of the firm in the subsequent year when it was assessed as a registered firm was permissible. The wording of sub-s. (1) of s. 77 of the Act being similar, the same interpretation, with which we respectfully agree, holds good to the said provision also. From the view that carry forward of loss incurred by a firm during the period when it was unregistered against the income earned by it after it got registered if permitted by s. 77(1) of the Act, it follows that a carry forward has to be permitted whether the firm incurs loss or profit in the subsequent year, subject, however, to s. 78(1) in the case of change in the constitution of the firm and sub-s. (3) of s. 72 of the Act which prescribes that no carry forward shall be permitted beyond eight years. In the result, we hold that the view taken by the Tribunal is correct.

9. For the reasons stated, our answer to the first question, as confined by us, is in the affirmative.


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