M. S. MENON C.J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The assessment year concerned is 1961-62, and the accounting period the twelve months ended on December 31, 1960. The question referred is :
'Whether, on the facts and in the circumstances of the case, the loss amounting to Rs. 7,838 determined in its 1960-61 assessment, when the firm was unregistered, could be set off against the profits in 1961-62 assessment, when it has become a registered firm ?'
Section 24(2) of the Indian Income-tax Act, 1922, omitting the proviso thereto, reads as follows :
'24. (2) where any assessee sustains a loss of profits or gains in any year, being a previous year not 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 cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and
(i) where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any, of any business in speculative transactions carried on by him in that year;
(ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession, or vocation carried on by him in that year : provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; and
(iii) if the loss in either case cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on, but no loss shall be so carried forward for more than eight years.'
A firm is an assessee under section 2(2) of the Indian Income-tax Act, 1922 whether it is registered or not under section 26A of that Act. It can trade without such registration and all that a registration affords is the benefit of lower rates of assessment than those which would be applicable to the whole income of the firm when charged as a unit of assessment
There are three distinct steps in assessment proceedings; the computation of the taxable income, the determination of the tax payable, and the demand for the tax so found due. The registration of a firm makes no difference whatsoever as far as the first step is concerned. A firm is a unit of assessment and the income of the firm is computed in its hands as that of an entity irrespective of whether the firm is registered or not.
In the case of a registered firm the profits of the firm are computed just as in the case of an unregistered firm. It is true that when a firm is unregistered, the tax is assessed on and payable by the firm itself, and that when a firm is registered the tax (apart from income-tax at specially low rates) is assessed on and payable by the partners individually on their respective shares in the firms profits, lumped with each partners individual income. But that cannot make a difference as far as the question before us is concerned.
That question is dealt with by Sundaram in his Law of Income-tax as follows :
'Where the status of a firm changes from unregistered to registered while the current profits or losses when registered must be apportioned, the loss of the firm when unregistered can be carried forward and set off against its next years profits even if then registered. So long as the overall time-limit of eight years is not exceeded and the net profits or losses when registered are apportioned, and the other conditions about the existence of the business which made the loss, etc., are satisfied, the firm whose identity is not changed cannot be deprived of its right to carry forward the loss as an unregistered firm merely because it is registered next year. Once it is registered, the entire loss including that carried forward from the status of unregistered firm will be apportioned to the partners. In the reverse case, when the firm ceases to be registered, ex hypothesi, there will be no loss to carry forward for a registered firm, because the net loss or gain has to be apportioned.' (Ninth edition, page 664).
We are in agreement with the statement of the law in the passage extracted above; and it follows that we should answer the question referred in the affirmative, that is, in favour of the assessee and against the department. We do so, but in the circumstances of the case without any order as to costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.