1. This appeal by the assessee, Blue Chips & Metals, Coimbatore, a partnership firm, relates to its income-tax assessment for the year 1980-81. The firm was assessed as a registered firm for the assessment year concerned. Previously, assessments were made on it in the status of an unregistered firm and it had incurred losses from the assessment years 1973-74 to 1979-80 aggregating to Rs. 5,24,410. In the assessment made for the assessment year 1980-81 also, the firm had incurred a loss of Rs. 75.000 and such loss was allocated to its various partners. The assessee claimed in the appeal before the AAC that the losses brought forward from the earlier years should also be allocated and set off against the partners' income. The AAC found that according to the Kerala High Court decision referred to and relied on by the assessee in this connection, the loss incurred by a firm in an earlier year, when it is assessed as an unregistered firm, is eligible to be carried forward and set off under Section 24(2) of the Indian Income-tax Act, 1922 ('the 1922 Act'), against the profits of the firm in the following year even though the firm was assessed as an unregistered firm for the earlier years and as a registered firm in the following year. He, therefore, agreed that though the losses were incurred in the earlier years by the assessee in the status of an unregistered firm, it is entitled to carry forward and set off those losses against profits in the year under consideration when it is assessed as a registered firm ; but held that it could be done so only if there is positive income of the firm itself for the year under consideration. But, as in this case, there is no positive income determined for the year 1980-81, he held that the set off as required by the assessee cannot be granted. He, therefore, dismissed the assessee's appeal. Aggrieved by his order; the assessee is in further appeal.
2. The assessee reiterates its contention before the Tribunal. Reliance is placed on the decision of the Kerala High Court in the case of Excel Productions v. CIT  64 ITR 65 and that of the Karnataka High Court in the case of Addl. CIT v. B.S. Doll Mills  131 ITR 111.
The learned departmental representative contended that the provisions of Section 77(2) of the Income-tax Act, 1961 ('the Act'), clearly prohibit the set off of the loss . of an unregistered firm carried forward by a partner, and, therefore, the assessee is not entitled to set off of the loss of the earlier years in the manner required by it.
He also referred to the Kanga and Palkhivala's commentary on Income-tax Laws at page 632 of Vol. 1, seventh edn,. wherein the change brought about between the 1922 Act and the 1961 Act has been indicated. The assessee's learned representative also referred to page 1889 of V.S.Sundaram's commentary on Income-tax Law, eleventh edn., where reference is made to Board's Circular No. 14-D (XXV-27), dated 2-8-1967.
3. On a careful consideration of the case and the submissions of the parties, we consider that there is force in the assessee's contention.
The department's stand, as explained by the learned departmental representative, is that the loss incurred on a firm assessed as an unregistered firm cannot be carried forward and set off when it is assessed as a registered firm in a later year. This contention has to be negatived both having regard to the language of the provisions concerned and the decisions referred to and relied on by the assessee.
The relevant provisions that touch upon the dispute involved and connected with the point in this case, are contained in Sections 72, 75 and 77 of the Act. Before we consider those sections, we may point out that the set off of loss against income under same head and under another head in the same assessment year is provided in Sections 70 and 71 of the Act. Section 72 deals with carry forward and set off of business losses, which are not absorbed in the same assessment year.
According to this section, where the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee and cannot be set off against income under any other head, then to the extent the loss is not absorbed is to be carried forward and set off against the profits and gains of the following assessment year, and to the extent it is also not absorbed against subsequent year's profits, this will be carried forward further. Now Section 75 deals with a loss, which a registered firm is entitled for set off against its income. It provides that 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 according to the provisions of the Act. There is nothing in this section to show that the loss referred to is a loss of the assessment year concerned only and in construing this provision, we have to take into consideration the provisions of Section 77(1) also and both must be read in harmony so as to lead to a reasonable construction. Section 77(1) says that where the assessee is an unregistered firm which has not been assessed as a registered firm under the provisions of Clause (b) of Section 183 of the Act, any loss of the firm shall be set off or carried forward and set off only against the income of the firm. There is no limitation in this provision, as canvassed by the learned departmental representative, that the carry forward and set off can be made in subsequent years, in respect of the firm only when it is unregistered.
This section clearly contemplates the set off against the income of the firm. Now, it may be remembered, that the classification of the assessees under the Act contemplates only, as a unit of assessment, the firm. The grant of registration and determination of its status as an unregistered firm, does not create two distinct assessable entities.
The registration or non-registration only makes a difference in the rate and mode of tax payable, the registration granting certain benefits. Consequently, the fact that in one year the firm was not registered and in the later year it was registered, does not mean that the firm, subsequently, registered is a different assessable entity from the firm when it was unregistered in the earlier years, the assessee continuing the same, viz., the firm. Therefore, Section 77(1) clearly contemplates, according to us, carry forward and set off of loss of a firm, incurred by a firm, which is unregistered in the earlier years against its income in the year in which it may be assessed as a registered firm, if it makes a profit or positive income.
The decisions relied on by the assessee and referred to by the AAC in his order clearly upholds this position in law.
4. Now reverting to Section 75, in the absence of any qualification with regard to the expression 'loss thereon', such as that loss is for the concerned year of assessment only, it can as well refer to a loss which the firm is entitled for set off against any other income, i.e., a loss carried forward from the earlier years also. Therefore, the language in this section, as well as the decisions referred to above, clearly provide that if there is a positive income of the firm, such loss can be set off against the same. This section further provides that where such set off is not possible, then it has to be apportioned between the partners of the firm and they will be entitled to have the amount of loss carried forward and set off. It follows, therefore, that the brought forward loss of the past years in this case, when the assessee was assessed as an unregistered firm, is entitled to be apportioned amongst the partners for set off against their individual income.
5. Another section which requires consideration in this connection and which was relied on by the department is Sub-section (2) of Section 77.
The provisions of this Sub-section state that : Where the assessee is a partner of an unregistered firm which has not been assessed as a registered firm under the provisions of Clause (b) of Section 183, and his share in the income of the firm is a loss, then, whether the firm has already been assessed or not- (a) such loss shall not be set off under the provisions of Section 70, Section 71, Sub-section (1) of Section 73 or Section 74A ; (b) nothing contained in Sub-section (1) of Section 72 or Sub-section (2) of Section 73 or Sub-section (1) of Section 74 or Sub-section (3) of Section 74A shall entitle the assessee to have such loss carried forward and set off against his own income.
6. On a superficial reading of this provision, it would appear that this will stand in the way of the assessee in this case ; but a careful scrutiny will show that this is not so. This provision, as pointed out on behalf of the department, and as stated in Kanga and Palkhivala's commentary on Income-tax Law at page 632 of Vol. 1, was enacted to bring about a change in the law existing under the 1922 Act, under which the position was that if a firm was not assessed at all as a firm, any partner could set off his share of the firm's loss against his other business income or against his income under any other head and he could also carry forward his share of the firm's loss. It is stated that an 'unregistered firm' means a firm which is not a registered firm [Section 2(45) of the Act] and, therefore, it includes a firm which is not assessed at all under the Act. But the prohibition contained in Section 77(2) cannot operate in the present case because, according to us, this provision contemplates the situation where a firm itself has not been assessed or even if it is assessed, it is an unregistered firm and the partner concerned is a partner of that firm.
It will apply only to the year in which the firm is not assessed or assessed as an unregistered firm, and the assessee concerned is a partner in that firm. Where, however, the firm is assessed as a registered firm and the assessee concerned is a partner in that registered firm, the prohibition contained will not operate. In other words, in the present case, even though in respect of the assessments on the assessee for the past years assessed in the status of an unregistered firm, the partners concerned would not be eligible to have the share of income or share of loss set off against the profits for those years or carry forward the same, in the year under appeal, where it is the firm which is entitled to the carry forward and set off against the profits in the year of assessment concerned, even when it is assessed as a registered firm, the provisions of Section 77(1) will clearly come into play and the firm's loss, whether it is the loss of the year or carried forward loss, will be eligible to be apportioned in the partners' assessments, who should be entitled to the set off and carry forward of the balance, if any, left. We, therefore, accept the assessee's contention and direct assessment of the firm and apportionment of the partners' share, accordingly. The set off will, of course, be subject to the other provisions, which may have a bearing on or may apply to the facts such as Sections 70, 71, 72, etc.