KAPUR J. - The dispute relates to the assessment year 1951-52, the relevant previous year being the year ended on 31st March, 1951. In the accounting years relevant to the assessment years 1949-50 and 1950-51, i.e., the two years preceding the year of assessment, the assessed took certain contracts regarding the sale of liquor in his individual name and sustained losses of Rs. 48,619 and Rs. 4,892, respectively. During the assessment year 1951-52, with which we are concerned, the assessed with ten toher persons, took antoher liquor contract and the business was carried on by the partnership under the name and style of Dulat Ram, Hans Raj and Co. This partnership was registered for the assessment year 1951-52, and, thereforee, the question has to be answered in the light of this fact. The assesseds share in the said registered firm was 11 1/4 pies in a rupee and during that year, his share of profits came to Rs. 20,414. The assessed claimed that he was entitled to carry forward and set off the losses assessed in the assessment years 1949-50 and 1950-51 to the extent of Rs. 20,414 against his share of the profits from the registered firm assessable in the assessment years 1951-52. The Income-tax Officer rejected the claim of the assessed, but the Appellate Assistant Commissioner in appeal allowed the same. The Income-tax Appellate Tribunal, on an appeal by the revenue, decided that there was no identity between the business which was carried on by the assessed alone in the assessment years 1949-50 and 1950-51 and the business which was carried on by the partnership in the name of Dulat Ram Hans Raj and Co. and, consequently, the assessed was nto entitled to carry forward the losses. At the instance of the assessed, the Income-tax Appellate Tribunal stated the case to this court and referred the following question of law :
&quto;Whether the loss of Rs. 46,619 and Rs. 4,892 determined for the assessment years 1949-50 and 1950-51, respectively, in the above circumstances can be set off against the share of income of Rs. 20,414 determined in the assessment year 1951-52 ?&quto;
The parties were in agreements to the test applicable and that agreement is reflected in the observation of the Tribunal when it says that, before such a claim can be allowed, two identities have to be satisfied, viz., (i) the identity between the assessed who sustained the loss and the assessed who made the profit; and (ii) the identity in regard to the business or, in toher words, the assessed should be carrying on &quto;the same business, profession or vocation&quto; in all the years. It is significant that that the revenue did nto dispute the existence of the first identity but founded its argument on the absence of the second identity. The Tribunal observed : &quto;Merely because the nature of the business at the two material times was the same, it cannto lead to the conclusion that the business in which the loss was sustained is the same business, in which the assessed made some profit in a subsequent year.&quto; Since we are concerned with the assessment year 1951-52, the reference has to be answered in the light of section 24(2) of the Indian Income-tax Act, 1922, as in existence at that time. Section 24(2) at the material time read :
&quto;Where any assessed sustains a loss of profits or gains in any year, being a previous year nto earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannto be wholly set off under subsection (1), so much of the loss as is nto so set off or the whole loss where the assessed had no toher head of income shall be carried forward to the following year and set off against the profits and gains, if any, of the assessed from the same business, profession or vocation for that year...&quto;
The section underwent a change introduced by the Finance Act, 1955, and the change, material for the purposes of the present controversy, is that the loss incurred in an earlier year could be set off in subsequent years nto only against the profits of the same business but against the profits and gains of any business, profession or vocation carried on by the assessed in the subsequent year, provided the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year. I have mentioned the change in the law because the Income-tax Appellate Tribunal has sought to distinguish the decision of the Gujarat High Court in the case of Sitaram Mtoiram Jain v. Commissioner of Income-tax on that ground. Considerable arguments have been addressed at the Bar about the tests to be adopted in determining whether the two businesses are the same or nto and I shall revert to that a little later. As I look at the problem, it is nto so much about whether or nto the assessed was carrying on the same business in all the three years but whether the fact that, in the assessment years 1949-50 and 1950-51, the assessed carried on liquor contracts in his own name, while in the year 1951-52, his profit consisted of his share in a registered firm which carried on the same business, viz., liquor contract, makes any difference. I say so because in all the three years the nature of the business was the same; and it is the contention of the revenue that, since the source of income in the year 1950-51, was different, that renders section 24(2) inapplicable. Mr. Kirpal, the learned counsel for the revenue, founded an argument on the ground that each contract for liquor was a yearly contract required to be obtained afresh after the expiry of each year and that by itself rendered the two businesses as different. I would straightaway say that there is no merit in the argument for the determination of the nature of business depends more on the end rather than the means and the method of procuring it cannto be determinative of the nature of the business. There is a distinction between the assessment of a registered firm and an unregistered firm. Three distinct steps constitute the assessment proceedings :
(i) computation of the income liable to tax;
(ii) determination of the quantum of tax; and
(iii) demand of the tax found due.
Registration of a firm is immaterial for the purpose of the first step but brings about a material difference in so far as the second and third steps are concerned. By virtue of section 23(5) of the said Act, the ttoal income of the firm has to be computed under the earlier sub-sections of section 23. That having been done, in case of an unregistered firm, the tax payable by the firm as a distinct entity is levied and demanded from the firm. If, on the toher hand, the firm is registered, the firm does nto pay the tax itself. Each partners share in the firms profit is added to his toher income, the tax payable by each partner on the basis of his ttoal income determined and the demand is made on the partners individually. Slight change was introduced in 1956 by the Finance Act, 1956, Schedule I, Part D, which has no bearing on the present controversy, inasmuch as the change was to levy income-tax at special low rates on a registered firm also. By virtue of the provision section 16(1) (b) and section 23(5), if the share of a partner of a registered firm happens to be a loss, it can be set off against his toher income or carried forward and set off in accordance with section 24. Under the second proviso to section 24(1), &quto;where the assessed is a registered firm, any loss which cannto be set off against toher income, profits and gains 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 under this section.&quto; The position, thereforee, appears to be that, if the loss in the case of a registered firm is nto absorbed by a set-off against its income of the same year under the same head or any toher head, a partner may set off his share of loss against his income of the same year under the same head or any toher head and, if there still remains unabsorbed loss he may carry forward and set-off his share of loss in accordance with the provisions of section 24(2) against his income in a subsequent year. No such right of carry forward exists in a case of a registered firm since the loss is apportionable among the individual partners. This provision seems to be based on logic, inasmuch as there was no point in conferring a right on a registered firm to carry forward, as such a right will then nto coincide or be in accord with the principle of apportionment of losses among the individual partners. In that situation, it would be completely devoid of logic to hold that, if toherwise the business in two years is the same, a partner, suffering a loss in his individual capacity, cannto be allowed to set it off against his share of profits in a registered firm. That would result in this that though under section 24(1) read with section 24(2) a partner alone can carry forward and set off his share of losses against his income in the subsequent year, yet that benefit cannto be availed of by a partner in his individual capacity because the business in the two years, on the process of reasoning advanced by the revenue, can never be the &quto;same&quto;. Consistent with the principle of apportionment, it must be held that the amount of profit and loss falling to the lto of a partner of a registered firm is his profit and loss of the business carried on by the firm. Possibly such an argument may be raised in a case where a registered firm engages in two distinct businesses in the sense applied to income-tax cases and those different businesses are, for example, dealing in cltoh and manufacturing cycles. Cycle business produces profit while the toher results in a loss and the partners share after the set-off happens to be a profit. In such a case, if the loss of a partner in his individual capacity in the earlier year arises out of the cltoh business, it may be possible to urge that the profit is nto out of the same business and, consequently, the requirements of section 24(2) as then in force nto satisfied. I need nto, however, express my views finally on that aspect, as the question does nto arise now before me. Here, in all the years the business was a liquor business and, thereforee, the same business. The learned counsel for the revenue, while conceding that it was impossible to formulate any infallible general rule or test applicable to all cases for determining whether the two businesses are separate or the same, did make an effort to suggest some principles affording guidance in such matters and according to him, the real test, and the best one too, is to find out whether there is any inter-connection, any interlacing, any inter-dependence or any unity embracing the two businesses. If these elements are present, the businesses would be the same, toherwise nto. By way of instances, the learned counsel referred to various decisions such as Scales v. George Thompson and Co. Ltd., Birt, Ptoter and Hughes Ltd. v. Commissioners of Inland Revenue, H. & G. Kinemas Ltd. v. Cook, Morning Post Ltd. v. George, Gordon & Blair Ltd. v. Commissioners of Inland Revenue, and Commissioner of Income-tax v. International Industries Ltd. Before I deal with these cases, I may point out that, by and large, the answer to the question must depend on the facts and in the English cases referred to above, the courts merely endorsed the finding of fact arrived at by the Commissioners. As a matter of fact, in the finding of fact arrived at by the Commissioners. As a matter of fact, in Commissioner of Income-tax v. Prithvi Insurance Co. Ltd. their Lordships of the Supreme Court underlined the importance of &quto;the nature of the business&quto; in deciding such questions. It was observed : &quto;Whether two or more lines of business may be regarded as the same business or different businesses depends nto upon the special methods prescribed by the Income-tax Act for computation of the taxable income, but upon the nature of the businesses, the nature of their organisation, management, source of the capital fund utilised, method of book-keeping and a host of toher related circumstances which stamp them as the same or distinct.&quto; Mr. Kirpal also sought aid from those authorities in support of the proposition that this court should nto reverse a finding of fact arrived at by the Tribunal. In answering the question in favor of the assessed, I am nto disturbing any finding of fact, But I am only applying law to the facts found and, consequently, this case falls out of the category of cases which depend merely on a finding of fact. All the English cases referred to merely endorsed the finding of fact arrived at by the Commissioners on the ground that there was evidence in support of the finding. In the case of Morning Post Ltd. the decision was based on a further fact that the companys activity after 1st October, 1937, to receive the sums due under the agreement did nto constitute a trade within the meaning of the statute. Again in Commissioner of Income-tax v. International Industries Ltd. the Calcutta High Court came to the conclusion that the celluloid business was different from the toher activities constituted the same business It is from this angle that the tests of interlacing or dovetailing were applied and considered for finding out whether or nto, as a result of closure of one activity, the same business was continued. As I have indicated earlier, that question hardly arises here as there was one and one activity alone, namely, dealing in liquor in all the three years. In spite of the observations of the learned Members of the Tribunal that Sitaram Mtoiram Jain v. Commissioner of Income-tax dealt with the law as amended in 1955, I still consider the ratio of the decision applicable to this case of deciding the controversy. In that case, it was held that, where an individual incurred a loss in a business as a sole proprietor, he was entitled to carry forward his loss and set off against his share of the profits of a registered firm in a subsequent year when the firm took over the business of the individual as a running concern. The observations material to this case are : &quto;In our view, the same business which was carried on by the assessed alone in Samvat year 2009 was continued and carried on by the assessed and his partner in Samvat years 2010 and 2011&quto;. Again it was observed : Reading the provisions of proviso(e) and the provisions of sub-section (2) (ii) of section 24, we are of the view that where a business carried on by a person on his sole account has been continued by that person in partnership with antoher, the provisions relating to set-off would apply.&quto; Under these circumstances, the Gujarat High Court came to the conclusion that the identity of the business did nto change. In this view, I am also supported by the decision of the Kerala High Court in the case of Dwarkadas Liladhar v. Commissioner of Income-tax, which was a converse case. My conclusion, thereforee, is that the assessed was entitled to set off the loss incurred in the assessment years 1949-50 and 1950-51 against his share of income during the assessment year 1951-52. The question is, thereforee, answered in the affirmative and in favor of the assessed. The assessed will have the costs of this reference.
ANDLEY J. - I agree.
Question answered in the affirmative.