Under Section 66(1) of the Indian Income-tax Act, the Appellate Tribunal, Bombay, referred the following question :- "Whether on the facts of the case the share of loss of Rs. 7,226 arising from the Jaipur firm can be set off against the profits accruing to the assessee in British India, under Section 24(1) of the Indian Income-tax Act ?" By an order dated January 31, 1950, it was held by us that on the statement of the case the question referred should have been :- "Whether on the facts of the case the share loss of Rs. 7,226 arising from the Jaipur firm could be set off against his share income from the several businesses in British India in computing income of the assessee the head business ?" In view of the emphatic statement of their Lordships of the Privy Council in Commissioner of Income-tax, Bihar and Orissa v.Maharajadhiraj of Darbhanga we did not accept the argument of the assessee that we could resettle the question and give our opinion thereon. Acting under Section 66(4) of the Act, we therefore referred the case back to the Appellate Tribunal to state such additional facts as may be necessary and refer to us for opinion the question which we held arose from the facts of the case. Accordingly the Appellate Tribunal referred that question to us but did not add to the facts already stated. The Appellate Tribunal, however, went beyond its powers in referring the case in the manner it did. We will advert to that in some detail later on.
"Whether on the facts of the case the share loss of Rs. 7,226 arising from the Jaipur firm could be set off against his share income from the several businesses in British India in computing income of the assessee under the head business ?" 3. The assessee, an individual, who is resident and an ordinary resident of British India, was a partner in various registered firms in British India in the year ending Divali 1944 which is the "previous year" of the assessment year 1945-46. Setting off losses of his share income in some firms against the share income in the others, his total income from the business of the several registered firms in British India, of which he was a partner, was Rs. 44,074. His income from property was computed at Rs. 5,398. The assessee was a partner in the relevant year in a firm at Jaipur, in an Indian State, where he suffered a share loss of Rs. 7,226. His claim for deduction of this loss was negatived by the Income-tax authorities and the Appellate Tribunal.
4. At the instance of the assessee the Tribunal referred to this Court under Section 66(1) of the Act the question which according to it arose out of its order. By our order dated January 31, 1950, we held that the assessee was not entitled to set off this loss against the income from property.
5. Under Section 4(1)(a) and (b)(i) and (ii) of the Act, subject to the provisions of the Act, the total income of any previous year of any person who is a resident and an ordinary resident of British India during such year includes all income, profits and gains from what ever source derived which are received or deemed to be received in British India in such year or which accrued or arisen to him in British India during such year or which accrued or arose to him without British India during such year. When the assessee is a partner in a firm, his share income or share loss has to be computed in the manner provided by Section 16(1)(b) and included in his total income; and under the proviso to that section, if the share so computed is a loss such loss may be set off or carried forward and set off in accordance with the provision of Section 24. Under Section 14(2)(a) tax is not payable by an assessee if he is a partner of an unregistered firm in respect of his income computed in the manner laid down in Section 16(1)(b) on which tax has already been paid by the firm. But if such income is from an unregistered firm carrying on business wholly out of British India, it would not be so exempt from taxation in the hands of the partner under this provision. To such income Section 14(2)(c) will apply and the tax shall not be payable in respect of such income unless it is received or deemed to be received in or brought into British India in the previous year by or on behalf of the assessee or is assessable under Section 42; but the income so exempt has to be included in the total income of the assessee under Section 16(1)(a). It is thus clear that the share income from British India and out of British India are both liable to tax subject to certain exemptions.
6. It was held in Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association, that loss of profits or gains from business done out of British India has to be deducted from the profits and gains of a business in British India to arrive at the income taxable under the head "business". This case entirely in favour of the assessee.
7. It is difficult to appreciate the submission of the learned counsel for the Commissioner, who pressed the argument which is to be found in the second reference of the Appellate Tribunal, that the share income from a firm carrying on trade is not income from business. Under Section 4 of the Indian Partnership Act, partnership is a relation between persons who have agreed to share profits of a business carried on by them or by any of them acting for all; persons who have entered into partnership with one another are called individually "partners" and collectively "a firm" and the name under which their business is carried on is called the "firm name". A firm is not a juristic person, distinct from partners. The crucial test of partnership is the carrying on of business with a view to profit by all the partners or any of them acting for all. Every partner is under law an agent of the other partners. Common interest, mutual agency and division of profits are thus the essential conditions for the existence of a partnership. It is not clear from the statement of the case that the assessee was taking any active part in the conduct of the business. Nor is it to be found that the assessee received any salary, interest, commission or other remuneration from the Jaipur firm. We will therefore assume for the purpose of this case that the partners residing at Jaipur were carrying on the business acting for the assessee. It follows that the assessee was carrying on the business at Jaipur in the firm name through his agents and that the income he would have received from that business would be the profits of that business earned out of British India.
8. The learned counsel for the Commissioner next submitted that the several businesses are distinct businesses though they have a common partner and the loss in one cannot be set off against the profits in the other. It was also argued that the share loss of an unregistered firm cannot be set off against the individual income of a partner.
Either submission is devoid of substance. As already observe, the share income from the different partnerships in income under one common head "business". In the assessment order for the year in question, the share losses have been deducted from the share income of he firms in British India to arrive at the profits from business. As held by their Lordships of the Privy Council in Arunachalam Chettiar v. Commissioner of Income-tax, Madras, "Whether a firm is registered or unregistered partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, whether the set-off be against other profits under the same head of income within the meaning of Section 6 of he Act or under a different head (in which case only need recourse be had to Section 24(1))." Their Lordships approved of the decision in Commissioner of Income-tax v. Arunachalam Chettiar and affirmed the decision in Commissioner of Income-tax v. Arunachalam. That assessee was carrying on money-lending business and other businesses. He was a partner with one Pillai in cotton business. There was no contribution of capital as such, but the assessee was the financing partner and these finances carried interest.
The cotton business was running at a loss and in the first year the assessee claimed to deduct his share of loss from his profits of money-lending and other businesses. This deduction was not allowed by the Income-tax authorities on the ground that the share loss of an unregistered firm cannot be set off against the individual income under the same head. This view was not accepted in Commissioner of Income-tax v. Arunachalam Chettiar. In a subsequent year the amount of loss due by the other partner Pillai to the firm was transferred to the account of the assessees money-lending business and debited against the personal account of Pillai. Subsequent interest was added to this account on September 29, 1930, bringing the total debit to Rs. 36,638. On this date Pillai gave the appellant a promissory note for this amount. The previous debit account in the books of the money-lending business was closed and a fresh folio was opened in those books and was styled "Pillai promissory note account". On March 28, 1931, the appellant took from Pillai a mortgage of certain house property for Rs. 500 and at the close of the account year on March, 31, 1931, the assessee wrote off Rs. 36,138 as a bad debt. The question was whether the assessee was entitled to claim this as a bad debt. In affirming the decision of the High Court the Privy Council held that he could not as Pillai never become a debtor of the money-lending business at all.
9. The learned counsel for the Commissioner has drawn our attention to the second proviso to Section 24, sub-section (1), which say :- "Provided further that where the assessee is an unregistered firm .......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;..." In our view, this proviso has no application as it is an exception to the general provision for set-off in Section 24(1) which refers to a set-off of losses under one head against the income under any other head mentioned in Section 6 of the Act. This is what has been recognized by their Lordship of the Privy Council in the case cited supra.
10. We are unable to accept the argument of the learned counsel that the second proviso should be read as an independent provision.
According to him the proviso is applicable to a set-off of the loss of an unregistered firm against the income, profits and gains of any of its partners, whether that firm in British India or outside and whether the set-off is claimed against another head of income or against the same head. As observed by Maxwell in his Interpretation of Statutes, 9th edition, page 165 :- "The true principle undoubtedly is, that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause and proviso, taken and construed together, is to prevail." "There is no rule that the first or enacting part is be construed without reference to the proviso. The proper course is to apply the broad general rule of construction, which is that a section or enactment must be construed as whole each portion throwing light if need be, on the rest. There is no other rule even in the case of a proviso in the strictest or narrowest sense" : (Jennings v. Kelly).
As stated by their Lordships of the Privy Council in M. and S. M.Railway v. Bezwada Municipality :- "The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case." Section 24(1) of the Act refers to the set-off of loss under one head against the income of the assessee under another head under Section 6.
To this general rule the second proviso provides an exception that in the case of an unregistered firm any loss of that firm under one head must be set off against its income, profits and gains under another head and not against the income, profits and gains of any of its partners. If the unregistered firm still returns a loss, that loss can be carried forward under sub-section (2).
11. It was also argued that a partner cannot be an assessee with respect to the income of the firm of which he is a partner. Reliance was placed on Commissioner of Income-tax v. Ballarpur Collieries. That case is distinguishable on facts. This contention may be correct when an unregistered firm is a unit of assessment. The Jaipur firm is not a unit of assessment under the Indian Act. The assessee, and not the Jaipur firm of which he is a partner, was treated as a unit of assessment.
12. It is next contended that there is no provision in the Act for bringing any loss incurred out of British India into British India as the assessee seeks to do. This contention is fallacious. As already observe, the assessee is not seeking to bring any loss into British India, but the Income-tax authorities have to determine his total income having regard to the several provisions of the Act to which reference has been made by us; and in doing so the Income-tax Officer is bound to take into account the share loss suffered by the assessee out of British India.
13. We therefore answer the question referred to us in the affirmative.
The assessee is entitled to set off his share loss of the Jaipur firm against the share income of the several firms in British India. The Commissioner will pay the costs of the reference including the costs of the paper book. Counsels fee Rs. 100. A copy of this judgment be sent to the Appellate Tribunal under Section 66(5) of the Act.
14. We now advert to the observations of the Tribunal on the powers of the High Court in dealing with references made to it under Section 66(1) of the Act. We have already set out the question of law referred to us under that section and the question of law that ought to have been referred as arising on the same facts. The Appellate Tribunal seems to think that it is not bound to decide an appeal before it by applying the appropriate law to the facts found by it simply because the assessee has erroneously railed on wrong provisions in support of his relief; and that it is not bound to refer to the High Court the question of law that really arises on the facts found by it if the assessee does not raise the question of law in a particular form at the hearing of the appeal before the tribunal or in his application under Section 66(1) of the Act. In the view of the Tribunal, the High Court has no jurisdiction to allow the assessee to present the case back to the Appellate Tribunal under sub-section (4) to re-submit the case with appropriate question for decision by the High Court; and that to pursue this course would be to permit the assessee to set up an entirely new case which he had not set up before the Income-tax authorities. In this view to Appellate Tribunal pointed out that this Court had no jurisdiction to refer back the case to re-submit it with the question of law that this Court thought arose on the facts of the case.
15. This is a serious misconception about the duties of Appellate Tribunal in deciding appeals and the applications under Section 66(1) of the Act. It is a fundamental principle of administration of justice that a litigant has a right to present at any stage any question of law arising on the facts found by a Tribunal. He has to plead facts an not law, and the Tribunal is always under the obligation to apply the appropriate law to the facts found by it. There is no provision either in the Indian Income-tax Act or in the rules framed by the Tribunal to warrant a contrary view.
16. Under Section 66(1) the assessee can require the Appellate Tribunal to refer to the High Court any question of law arising out of such order, and the Appellate Tribunal shall, if it finds that a question of law does arise, draw up a statement of the case and refer it to the High Court. If the Tribunal is of the opinion that a question of law does not arise out of the order, the assessee can move the High Court to require the Appellate Tribunal to state the case and refer it and if the High Court is not satisfied of the correctness of the decision of the Appellate Tribunal, it shall require the Tribunal to state the case. In interpreting the expression "the question of law arising out of such order" Chagla, C.J., summed up the correct legal position very tersely thus; "........looking at the plain language of the section apart from any authority, I should have stated that a question of law arose out of the order of the Tribunal if such a question was apparent on the order itself or it could be raised on the facts found by there Tribunal and which were stated in the order. I see no reason to confine the jurisdiction of this Court to such questions of law as have been argued before the Tribunal or are dealt with by Tribunal. The section does not say so and there is no reason why we should construe the expression arising out of such order in a manner unwarranted by the ordinary grammatical construction of that expression" : Madanlal Dharnidharka v.The Commissioner of Income-tax, Bombay City.
There cannot thus be any reasonable doubt that this Court had jurisdiction to refer the case back to the Tribunal to make such additions to or alterations in the statement of the case as it may direct.
17. The statement of a case which the Appellate Tribunal is required to submit to a High Court should not be coloured by the expression of opinion of the Tribunal. We have noticed in this case and several other cases that the Tribunal does not state all the facts found by it which are necessary for answering the question that it referred to this Court, but it proceeds as if it is required to decide that question of law. In our view, this is outside the jurisdiction of the Appellate Tribunal. Prior to the amendment of Section 66 in 1939, the Commissioner in referring the case was required to submit his opinion on the case that he referred to the High Court. The section as now stands does not require the Appellate Tribunal to express its opinion.
That opinion can be found in the order under Section 33(4) of the Act.
It is unfair to the assessee that the Appellate Tribunal, which may not have given full consideration to his case in the appellate order, should supplement that order by giving additional reasons, and sometimes additional facts, to the prejudice of the assessee. In our view, the Tribunal should state all the facts which were considered by it in coming to the conclusion it did under Section 33(4), whether those facts are referred to in its order or in the orders of the Income-tax authorities and to refer to any document which may have been used in deciding the case.
It is also necessary to state the case in restrained language even though the Tribunal considers an order of the High Court under Section 66(4) erroneous. The Tribunal is not called upon by the Act to express its opinion on the correctness or otherwise of the order which under law it is bound to carry out.