1. In compliance with the direction issued by this court in its order dated November 28, 1977, the Income-tax Appellate Tribunal, Allahabad Bench, has referred the following question of law for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in giving the assessee the benefit of set-off of speculation loss computed but not apportioned in the year 1964-65, against the assessee's speculation profit during the assessment year 1972-73 ?'
2. The facts giving rise to this question briefly stated are that the assessee, an individual, enjoyed income from salary, dividend, interest, besides share income from a partnership firm, M/s. Juthalal Mahavir Prasad (hereinafter referred to as 'the firm'). The firm, inter alia, carried on speculation business also and in the previous year relevant to the assessment year 1964-65, it suffered a loss in that business. In that year the assessment of the assessee was completed on August 19, 1968, taking his share of speculation loss from the firm at 'nil' subject to rectification. The assessment of the firm was completed on March 24, 1969, and the total loss was determined at Rs. 2,39,406 which comprised of loss in ready business at Rs. 23,614 and loss in speculation business at Rs. 2,15,792. The loss in ready business was apportioned amongst the three partners of the firm according to their profit-sharing ratio. As for the loss in speculation business it was not so apportioned and a note was made to the following effect by the ITO:
' The above loss will be set off against future speculation losses, if any.'
3. It shall not be out of place to mention at this very stage that the apportionment of the loss in speculation business was made by the ITO under Section 158 of the I.T. Act (hereafter 'the Act') on 31st August, 1974, and the amount which fell to the assessee's share was Rs. 71,931. In the meantime in the previous year relevant to the assessment year 1972-73 the firm earned profit in speculation business and that profit came to Rs. 22,274 in the assessee's share. In his assessment for this year the assessee claimed a set-off of that profit against the speculation loss of the assessment year 1964-65. The claim was repelled . by the ITO on the view that the assessee's assessment for the year concerned, that is, 1964-65, could be revised under Section 155 of the Act within four years of the final assessment made in the case of the firm, that is, by March 23, 1973, and since that section had become barred by time, the assessee's share of speculation loss remained at 'nil' as determined in his assessment for that year and the question of allowing set-off of the same against the speculation profit of the year under consideration did not arise and hence could not be allowed.
4. The assessee appealed and four submissions were made on his behalf before the AAC : Firstly, that under Section 75(1) read with Section 73 of the Act the assessee's share in speculation loss of the firm has to be carried forward and set off and is to be allowed as and when speculation profits are made by the firm ; secondly, it was for the ITO to determine as to whether the loss in any year can be carried forward to the following year and set off against the profits and gains of a subsequent year; thirdly, it was the duty of the ITO to pass a rectification order in the case of the assessee and that for his default the assessee could not suffer, and, lastly, that the assessee had moved an application under Section 155 of the Act on 17th October, 1972, and the same remained undisposed of and further that the order under Section 158 having been passed on 31st August, 1974, the four years' time limit is to be counted from that date. None of these contentions found favour with the AAC and he dismissed the appeal.
5. Being aggrieved, the assessee took up the matter in further appeal before the Appellate Tribunal. The Tribunal took the view that it was the duty of the ITO to apportion the share of loss amongst the partners on his own and that he did by passing an order under Section 158 on 31st August, 1974, and thus the claim of the assessee was not time barred. Now, at the instance of the Commissioner, the question stated above has been referred for the opinion of this court.
6. Sections 70 to 79 of the Act deal with set-off or carry-forward and set-off. Except in cases of loss in a speculation business, a loss in respect of a capital asset other than short-term capital asset and a loss incurred in any gambling activity, if the net result in respect of any source under any head is a loss, that loss may be set off under Section 70 against income from another source under the same head. If after setting off the loss against income under the same head the result is still a loss, such loss may be set off under Section 71 against income of the same year under any other head. If the loss cannot be set off under Section 71 because of the absence or inadequacy of the income of the same year under any other head it may be carried forward and set off against the profits of a subsequent year as provided under Section 72. Then comes Section 73 which provides for losses of speculation business. Unlike other losses a loss in speculation business cannot be set off under Section 70 against any Income under the same head, nor can it be set off under Section 71 against income under any other head. It can be set off only against profits, if any, of another speculation business. In case loss computed in respect of speculation business for any assessment year has not been set off under Sub-section (1), then so much of the loss as is not so set off or the whole loss, where the assessee had no income from any other speculation business, shall be carried forward to the following assessment year and set off only against the profit of any speculation business carried on in that year. Section 74 deals with the loss under the head ' Capital gains ' and Section 74A with loss from certain specified source falling under the head ' Income from other sources ' and it is not necessary for the present purpose to refer to the same. Then we come to Section 75 which deals with losses of registered firms. Sub-section (1) thereof reads :
'75. (1) Where the assessee is a registered firm, any loss which cannot be set off against any other income of the firm, shall be apportioned between the partners of the firm, and they alone shall be entitled to have the amount of the loss set off and carried forward for set off under Sections 70, 71, 12, 73, 74 and 74A. '
7. It would be seen that in the case of a registered firm in the event of its suffering some loss, such loss should be set off in computing the firm's total income against its income of the same year under the same head or any other head, subject to the provisions of Sections 70 to 74A. In case any loss cannot be so set off, it should be apportioned amongst the partners and each partner may set off his share of the loss against his income of the same year under the same head or any other head. If even by such set-off the loss remained unabsorbed, the partner may further carry forward and set off his share of the loss against his income in a subsequent year. The right to carry forward has been given to the partner only and not to a firm and the reason is that the loss of a firm is apportioned amongst the individual partners.
8. Sections 76 to 79 are not necessary for the present purpose. Reference should be, made to Section 80, which says that, unless loss has been determined in pursuance of a return filed under Section 139, it cannot be carried forward and set off in a subsequent year.
9. We may now read the procedure for assessment which is contained in Chap. XIV comprising of Sections 139 to 158. Sections 139, 139A and 140 provide for return of income, permanent account numbers and who is required to file the return. Sections 140A and 141, now deleted and substituted by Section 141A provide for self-assessment and provisional assessment. As for enquiry before assessment and for the actual assessment the provisions are contained in Sections 142 to 145, Then come the provisions of Sections 147 to 153 which deal with proceedings for reassessment.
10. Section 153 lays down time limit for completion of assessment and reassessment and Section 154 provides for the rectification of a mistake apparent from the record. As for other amendments provision is made in Section 155, and Sub-section (1) thereof, which is relevant for our purpose, deals with amendment of a completed assessment of the partner of a firm, as a result of assessment, reassessment or further proceedings by way of appeal, reference, rectification or revision. Such amendment may be done within four years from the date of the final order, in the case of the firm as laid down in Sub-section (7) of Section 154. Section 156 provides for the service of a notice of demand and then come Sections 157 and 158 which would be of particular relevance to the present controversy. These sections read as under :
'157. When, in the course of the assessment of the total income of any assessee, it is established that a loss has taken place which the assessee is entitled to have carried forward and set off under the provisions' of subsection (1) of Section 72, Sub-section (2) of Section 73, Sub-section (1) of Section 74 or Sub-section (3) of Section 74A, the Income-tax Officer shall notify to the assessee by an order in writing the amount of the loss as computed by him for the purposes of Sub-section (1) of Section 72, Sub-section (2) of Section 73, Sub-section (1) of Section 74 or Sub-section (3) of Section 74A.'
' 158. Whenever a registered firm is assessed, or an unregistered firm is assessed under the provisions of Clause (b) of Section 183, the Income-tax Officer shall notify to the firm by an order in writing the amount of its total income assessed and the apportionment thereof between the several partners.'
11. The purpose behind Section 157 is to obviate any dispute in future regarding the quantum of the loss and the assessee, if he so desires, may appeal against the amount of loss determined by the ITO. Similarly, in the case of an assessment made in the case of a registered firm or unregistered firm assessed under Section 183(b), the apportionment of the total income assessed between the several partners is required to enable the partners to appeal against the order determining the amount of the firm's total income or the apportionment thereof between the several partners as laid down in Section 247.
12. In the background of these legal provisions we may now proceed to examine the contentions made before us. On behalf of the revenue it was submitted by Sri R.K. Gulati, advocate, that the question which arises in the present reference is as to whether set-off of a speculation loss in a subsequent year can be allowed when in the case of the partner loss was computed at nil subject to rectification after the firm's assessment and after the firm's assessment had been made such rectification was not made and at the time of the making of the claim such rectification had become barred by time? On the facts of the present case, according to the learned counsel, rectification under Section 155 having become barred by time when the claim was made, the claim of set-off could not have been allowed. On the other hand, on b3half of the assessee, Sri V. B. Upadhya urged before us that after completing the assessment of the firm for the year concerned, that is, 1964-65, it was the duty of the ITO to apportion the speculation loss determined in that assessment of the firm amongst the partners of the firm and the ITO not having done so, the department cannot be allowed to take advantage of that default, and further the assessee's right to carry forward such loss for a period of 8 years cannot be curbed by reference to the period of 4 years providing rectification of the assessment of the partner under Section 155(1). Another submission made was that unless an order of apportionment had been passed under Section 158, an order under Section 155(1) could not have been passed and since the order under Section 158 was passed on 31st August, 1974, the claim of the assessee was still well within time.
13. After carefully considering the rival submissions, we are inclined to agree with the view taken by the Appellate Tribunal. We do not propose to enter into the question as to whether the partner's right to carry forward the loss for 8 years can be curbed by reference to the provision of limitation of four years within which an order under Section 155 is required to be made. The position is that the various provisions relating to procedure for assessment, to which we have referred above, have, in our opinion, to be read as a whole. In the case of a firm the total income assessed is to be apportioned amongst the several partners and it is only when such apportionment has been made that a completed assessment of a partner of a firm can be amended under Sub-sections (1) and (2) of Section 155. The period for such amendment, as laid down by Sub-section (1), is 4 years, ' being reckoned from the date of the final order passed in the case of the firm '. According to Sri Gulati in the case of a firm the final order will be taken to have been passed when the process of assessment has been completed and that process comes to an end when an order is passed under Section 143(3) of the Act. According to Sri Gulati the purpose of Section 158 is only intimation of the final order. It is correct that the purpose of Section 158 is intimation of the assessment of a firm as would appear from the heading of the section. The section itself requires that after making an assessment in the case of a registered firm or an unregistered firm, if assessed under Section 183(b), the ITO shall notify to the firm the amount of its total income assessed and the apportionment thereof between the several partners. The section thus requires intimation to the firm both of the total income assessed and the apportionment thereof between the several partners and the purpose is evident and it is to enable the partners to appeal against the determination of the total income or the apportionment thereof. In our opinion, therefore, the process of assessment in the case of a registered firm or an unregistered firm, if assessed under Section 183(b), becomes complete only when the total income is determined and is apportioned between the several partners. An order under Section 155(1) can be passed only when the assessment is so completed in the firm's case. Section 157 becomes relevant in the context that, in the instant case, in the case of the firm there was a speculation loss determined. The firm's assessment could have been complete only when such loss was apportioned amongst the partners. On the apportionment of such loss an amendment was to be made in the completed assessments of the partners and then the partners became entitled to carry forward and set off such loss.
14. In CIT v. Khushal Chand Daga : 42ITR177(SC) one of the questions which came up before the Supreme Court was as to whether the assessee, who was a partner in a firm, could raise a question with regard to the determination of loss for the assessment year 1941-42 as finally determined in appeal, in the course of proceedings for the assessment year 1942-43 when the loss brought forward from 1941-42 was being set off? The contention raised by the department to repel that claim of the assessee was that the loss which had been determined and ordered to be carried forward must be deemed to have become final because no appeal was filed against that determination. That submission was repelled on the view that the ITO had not notified the loss 'computed by him by order in writing and an appeal could net be taken on that point'. The assessee was thus held entitled to have the loss re-determined in a subsequent year. This decision may not have a direct bearing on the present case, but certainly it would enable us to appreciate the purpose of the intimation of loss under Section 157 or the intimation of assessment of the firm under Section 158.
15. Section 35(5) of the 1922 Act contained a provision corresponding to Section 155 of the Act and that sub-section also contained the expression 'final order'. The import of this expression came up for consideration before the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : 98ITR255(Guj) . The view taken was that the final order for the purpose of Section 35(5) means the order which makes the final assessment on the assessee. A proceeding for rectification of an assessment is a proceeding for assessment; it is a part of the procedure for ascertainment and imposition of tax liability on the assessee. Thus, when an assessment is rectified by an order of rectification, what was a wrong quantification of tax liability is rectified and a correct quantification of liability is substituted for it, order of rectification thus corrects the assessment and the correct assessment is the final order, unless it is followed by a subsequent order disturbing the correct assessment. The period of four years within which order of rectification can be passed under Section 35(5) was to be counted for the date of such order of rectification. An almost similar question are Kishanlal Haricharan v. ITO : 86ITR141(SC) . In that case a best judgment assessment had been made on the firm in the assessment year 1950-51. On the firm's application the Commissioner set aside the assessment on the firm and directed the ITO to make it afresh. Pursuant to the Commissioner's order, the ITO passed an assessment order in the case of the firm and thereafter passed an order of rectification against the appellant who was a partner in the firm including his share of the firm's income. On the assessee's challenge it was held that the Commissioner's order in revision was riot the final order but the final order was the one made by the ITO pursuant to the Commissioner's order and the four years' period of limitation prescribed under Section 35(5) was to be computed from that date.
16. In our opinion since the apportionment of total income amongst the partners constitutes a part of the procedure of ascertainment and imposition of tax liability on the firm as also on the partners, the final order shall be taken to have been passed on the date on which such apportionment order is made and for purposes of amendment under Section 155(1) or (2), four years' period is to be counted from the date of that order. On this view of the matter the assessee's claim for set-off could not be treated as legally not maintainable. It was clearly an allowable claim and the Appellate Tribunal rightly accepted it.
17. The question is, therefore, answered in the affirmative, against the department and in favour of the assessee. The respondent-assessee is entitled to costs which are assessed at Rs. 200 and counsel's fee in like figure.