JAGANMOHAN REDDY J. - These two referred cases raise a common question of law and have been consequently heard together at the request of the learned advocates for the parties. Both these cases have been referred under section 66(1) of the Indian Income-tax Act. In Case No. 7 of 1960 the question referred is whether the assessees share of loss of Rs. 17,853 relating to the joint venture business in Sailu branch was rightly allowed, though it related to an unregistered partnership. In Case No. 1 of 1960, the question is whether the assessees share of loss in the firm of Messrs. Vivekananda Textiles, which firm was not assessed to tax and which was also not registered for the assessment year 1951-52, can be taken into consideration for the purpose of determining the assessees net income from several sources falling under the head 'Profits and gains of business, profession or vocation' (i.e., section 10 of the Act) and also, if necessary, for the purpose of set off permissible under section 24(1) of the Act against his income falling under other heads.
The facts in the first case (viz., No. 7 of 1960) are : The assessee is a Hindu undivided family and for the assessment year 1357 F. it claimed a set-off Rs. 17,853 on account of loss in a joint venture at Sailu where it derives income from business in groundnut oil and also in speculation. The Income-tax Officer held that the loss in the joint venture at Sailu was not proved and hence disallowed the same. On appeal, the Appellate Assistant Commissioner observed that the joint venture was an unregistered partnership and hence the share of loss from that business could not be allowed in the assessment of the partner. Against this order the assessee appealed to the Tribunal which allowed the claim of the assessee, holding that the books of account disclosed the loss and that in income-tax cases joint ventures need not be taken to be the business of a different firm. They, therefore, allowed the loss of Rs. 17,853.
In the second case (No. 1 of 1960), the assessee derived income from several sources, such as personal business in mica, business carried on in several partnerships wherein he is a partner and from shares in companies. For the assessment year, 1951-52, the previous year for which ended on March 31, 1951, the assessee was also a partner in a firm known as the Vivekananda Textiles, Nellore, which firm was not borne on the list of the Income-tax Officer. The firm also did not make a voluntary return as required under section 22(1) nor any notice under section 22(2) was served upon it. As a consequence the results of its business assessable for the year 1951-52 remained unascertainable and undetermined. The firm was also not assessed for the said assessment year. The assessee however, claimed that the said firm sustained loss and his share of loss therein alleged to be Rs. 21,005 should be taken into consideration in determining the net income and also that it should be set off against his income from other sources in accordance with the provisions of section 24(1). The Income-tax Officer did not take this loss into account and on appeal the Appellate Assistant Commissioner also rejected the assessees contention; but the Tribunal allowed it.
The short question in both these cases is where the assessee has several sources of income and has also a share in an unregistered partnership which has not been assessed, whether the loss incurred in that unregistered partnership can be set off from the income from other sources.
Under the scheme of the Income-tax Act, an assessee is assessable in respect of business carried on by him, as also in respect of his share of profits of a firm, whether it is registered or unregistered, in accordance with the several provision of the Act. The ascertainment of such profits has to be made after such deduction of expenses or losses which are to be allowed under the provisions of the Act where there is no prohibition against such set-off, provided that deduction is proper and necessary. The charge of income-tax is on the total income, profits and gains, from whatever source derived, of 'every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or partners of the firm or members of the other association individually.' The total income for the purposes of the Act is computed after making deductions, allowances or set-offs, as provided under the Act. It is thus clear that losses incurred in business will be set-off against profits and gains from any other source under the same head and the levy of the tax is on the balance of profits after deducting such losses. The relevant provision of the Act that are applicable for the references under consideration are sections 16(1)(b), 23(5) and 24(1). These may be read as under :
'16. (1) In computing the total income of an assessee -......
(b) when the assessee is a partner of a firm, then, whether the firm had made a profits 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 carried forward and set off in accordance with the provisions of section 24.'
'23. (5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be -
(a) in the case of a registered firm, -
(i) the income-tax payable by the firm itself shall be determined; and
(ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined :
Provided that if such share of any partner is a loss it shall be set off against his other income or carried for ward and set off in accordance with the provisions of section 24.'
'24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year :
Provided that in computing the profits and gains chargeable under the head Profits and gains of business, profession or vocation, any loss sustained is speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions :
Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23, any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm; and where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm and they alone shall be entitled to have the amount of the loss of the loss set off under this section....
Provided that for the purposes of this section, -
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member;
shall not be deemed to be a speculative transaction.'
From the above provisions it may be observed that there is no difference in the computation of taxable income between a registered firm and an unregistered firm. While the income of a firm is computed as a unit, irrespective of whether the firm is registered or unregistered, sub-section (5) of section 23 draws a distinction between these two only after the total income of the firm has been computed or assessed under one of the earlier sub-sections. Once the income of the firm is computed, the registration has a material bearing on the question of determination of the tax payable and the demand for the tax. Prior to the amendments made under the Finance Act of 1956, where the firm was unregistered the demand or levy was made on the firm itself, but where it was registered the firm itself did not pay the tax and the tax was not determined because that was included and determined as part of the income of the partner along with his other income. In other words if the firm was registered the tax would be collected from the partners individually, while if it was unregistered the tax would be collected from the firm itself. After the amendment of 1956, the only difference is that the rates applicable to income from a registered firm have been reduced and in respect of an unregistered firm assessed as a unit, the rates of tax applicable may be higher than those which would be applicable to the total income of a partner inclusive of his share of the firms profits. The partners, however, is not entitled to any refund of the tax paid by the firm at the higher rates. One salient feature of an unregistered firm is that the tax it pays is in discharge of its own liability and not on behalf of its partners, as it is assessed as a distinct entity. But in so far as the assessment of a partner of an unregistered firm is concerned, where the firm has made profits the Income-tax Officer may in his discretion before completing the assessment of the individual partner exercise his option under section 23(3)(b) and proceed to determine the sum payable by the firm itself as if it were a registered firm, though in fact it is not registered, where it appears to him that it would bring a greater amount of revenue by way of tax and super-tax. But where it has made losses, the assessee can claim to have his share of the loss set off in his individual assessment against his other income from business. In this case also the Income-tax Officer, before completing the assessment of the individual partner, may decide to treat the unregistered firm as if it were registered and the amount of the share of the loss of the individual partner in such cases would be set off against his other income from business, or he may determine the amount of loss incurred by the unregistered firm without treating it as a registered firm, and under the latter part of the second proviso to section 24, the loss can be set off only against the income, profits and gains of the unregistered firm and not against the income, profits and gains of the individual partner. A question, however, would arise as to what the position is where an unregistered firm has made a loss and the Income- tax Officer has chosen not to assess it. The contention of the learned advocate for the department, Sri Kondaiah, is that a partner cannot claim to have share of the loss set off in an unregistered firm which has not been assessed. But he is unable to refer us to any provision under the Act for this proposition nor can he meet the contention that where such a firm has made profits the taxing authority has the right to add the share of the profits of such individual, who is a partner of the unregistered firm, to his or its income even though the unregistered firm has not been assessed to tax, and on the same parity of reasoning, his share of the loss also in such firm should be set off against his other income. In Seth Jamnadas Daga v. Commissioner of Income-tax, their Lordship of the Supreme Court negatived the argument that a partners share of the profits in an unregistered firm should be ignored entirely in ascertaining his total income and held, agreeing with High Court of Bombay, that although the assessees share of the profits of such unregistered firm was exempt from tax, it had to be included in his total income for the purpose of ascertaining the rate applicable to his other income. At page 634 Hidayatullah J. observed :
'The decision of the Tribunal was not based upon any specific provision of the Income-tax Act but upon a party of reasoning by which a specific provision about loss was held to apply the other way round also. The High Court correctly pointed out that all that section 14, sub-section (2), did was to save the profits of an unregistered firm from liability to tax in the hands of the partners. It did not affect the computation of the total income to determine the rate applicable under section 3, in the light of section 16(1)(a). Indeed, section 16(1)(a) clearly provided that any sum exempt under section 14(2) was to be included in computing the total income of an assessee and, in view of this specific provision, the converse of the second proviso to section 24(1) which we have quoted above, hardly applied. To this extent, the order of the Tribunal was incorrect. The error was pointed out by the High Court and the question thus raised was properly decided.'
In J.C. Thakkar v. Commissioner of Income-tax the Bombay High Court repelled the contention that until an unregistered firm was first assessed to tax the profits of that firm could not be taken into account in computing the profits of the partner of such a firm. It held that it was not a condition precedent to the bringing of the share of a partner in the profits of an unregistered firm in his total income simply on the ground that the unregistered firm had not been first assessed to tax. The position would be much the same where an unregistered firm has made losses and has not been assessed by the income-tax authorities. A direct case on the point fell for determination in the Bombay High Court in Jadavji Narsidas and Co. v. Commissioner of Income-tax. After referring to the several provisions of the Income-tax Act, to which we have already referred, Desai J. observed at page 277 :
'But what we are concerned with here is as to what is to happen if the Income-tax Officer does not determine the losses of the unregistered firm. The point before us is as to the right of a partner to claim a set-off in respect of his share of losses in an unregistered firm which has not been assessed and losses of which should have been assessed. It is not difficult to see that if the law requires that under no circumstances any set-off can be claimed by an individual partner unless the unregistered firm was brought to tax, we must give effect to the same. But the question is : Is there any such requirement of the Income-tax law We have already referred to sections 23 and 24 and my add that there is no provision of law which requires an unregistered firm to have its losses assessed. Of course, if the unregistered firm does not have its losses determined, does not file a return and get its losses determined, it would not have the benefit of carrying forward those losses. But that is a different matter. In the absence of any express provision in the income-tax law and on general principles we do not see why a partner in an unregistered firm should not be permitted to claim a set-off in respect of his share of loss in an unregistered firm against the profits of his other business simply because the department does not choose to determine the losses of the unregistered firm.'
With these observations we respectfully agree. In our view, the Income-tax Officer cannot, by his own act or omission, put the assessee at a disadvantage, unless a discretion is given to his under the law to do so, with a view to depriving the assessee of any advantage which he may derive in claiming the set- off. No such discretion has been provided under the Act.
In this view, our answer to the question in both the references is in the affirmative. These references are accordingly ordered with costs in R.C. No. 1 of 1960.
Question answered in the affirmative.