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The Commissioner of Income-tax, Gujarat, Ahmedabad Vs. Jethalal Zaverchand Patalia - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 12 of 1965
Judge
Reported inAIR1967Guj141; [1966]61ITR357(Guj)
ActsIncome-tax Act, 1922 - Sections 10; Income-tax Act, 1961 - Sections 28, 66, 75 and 77
AppellantThe Commissioner of Income-tax, Gujarat, Ahmedabad
RespondentJethalal Zaverchand Patalia
Appellant Advocate J.M. Thakore, Adv. General, i/b.; M.M. Thakore, M.G. Doshit and;
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredSitaram Motiram Jain v. Commr. of Income
Excerpt:
direct taxation - adjustment of loss - section 10 of income-tax act, 1922 and sections 28, 66, 75 and 77 of income-tax act, 1961 - whether partner of unregistered firm entitled to adjust his share of loss sustained by firm against profits from other business - even after amendment of 1939 partner's share in profit and loss of unregistered firm is liable to be taken into account in computing income under section 10 - in case of profit it would be added to profits from other business subject to section 14 (2) (a) - in case of loss same to be adjusted against profits from other business - such adjusted profit of unregistered firm would be income under section 10. - - order (1) an interesting question of law arises on this reference. it is, however, necessary to bear in mind the rule.....order(1) an interesting question of law arises on this reference. the question is whether a partner of an unregistered firm is entitled to adjust his share of the loss sustained by the firm against his profits from other businesses in computing his income, profits and gains under s. 10 of the income-tax act, 1922. the question lies in a narrow compass and is primarily one of construction requiring examination of a few provisions of the act. we shall presently refer to these provisions but before we do so, it would be convenient to briefly recapitulate the facts giving rise to the question as stated by the tribunal in the statement of the case. the assessee is an individual who was at the material time a partner in two firms, namely m/s. halar salt and chemical works, and m/s. subash oil.....
Judgment:
ORDER

(1) An interesting question of law arises on this reference. The question is whether a partner of an unregistered firm is entitled to adjust his share of the loss sustained by the firm against his profits from other businesses in computing his income, profits and gains under S. 10 of the Income-tax Act, 1922. The question lies in a narrow compass and is primarily one of construction requiring examination of a few provisions of the Act. We shall presently refer to these provisions but before we do so, it would be convenient to briefly recapitulate the facts giving rise to the question as stated by the Tribunal in the statement of the case. The assessee is an individual who was at the material time a partner in two firms, namely M/s. Halar Salt and Chemical Works, and M/s. Subash oil Traders and besides, he also carried on his own individual business. The firm of M/s. Subhash oil Traders filed a return of its income for the assessment year 1957-58 on 2nd May 1958 showing a loss of Rs.38,835 but since the return was filed long after the expiration of the time prescribed for the filing of a return under S. 22(2), the Income tax Officer ignored the return and did not process to assess the firm and determine the loss sustained by it. The result was that the firm was unregistered and unassessed for the assessment year 1957-58. The assessee's share and the assessee, therefore, in the course his assessment for the assessment year 1957-58, the corresponding account year being Samvat Year 2012, claimed to adjust such share of the loss against his profits from other businesses. This claim was rejected by the Income-tax officer and in appeal by the Appellate Assistant Commissioner, but the Tribunal on further appeal upheld the claim and directed that the assessee's share in the loss of the firm should be adjusted against his profits from other businesses in computing his business income under S. 10. The Tribunal in taking this view followed the decision of the Bombay High Court in Commr. Of Income-tax v. Jagannath Narsingdas : [1965]55ITR128(Bom) which directly covered the point. The Commissioner thereupon applied for a Reference and on the application the Tribunal drew up a Statement of the Case and referred the following question namely:

'Whether on the facts and in the circumstances of the case the assessee was entitled to set off the loss of Rs. 12,448 being his share of loss of the firm of M/s. Subhash Oil Traders against profits of his other business?' for the opinion of the Court. The determination of the Bombay High Court in Jagannath Narsinghdas's case (1965) 55 ITR 123 but that decision being a decision given subsequent to bifurcation is not binding on this Court and it is, therefore, open to us to consider the questions on merits. It is, however, necessary to bear in mind the rule which may now be regarded as well established that in construing an All India statute like the Income tax Act, uniformity of construction is desirable and the considered opinion of another High Court should be followed unless there are overriding reasons for taking a divergent view. Applying this rule in the present case, we find that not only there are no overriding reasons for taking a different view but the view taken by the Bombay High Court is, if we may respectfully say so, the only correct view which can be taken on this question of construction. Our reasons for saying so are as follows:

(2) In order to arrive at a proper determination of the question before us, it is necessary to refer to a few provisions of the Act and see what is the scheme of taxation embodied in the Act. 'Total income' is defined in S. 2 (15) to mean total amount of income, profits and gains referred to in S. 4 (1) computed in the manner laid down in the Act. This definition is an important one since the charge of tax is levied by S. 3 on the total income of the previous year of an assessee and it, therefore, runs through almost every Section of the Act. Section 4(1) defines the scope of the total income with reference to the factor of residence. Section 6 lays down the heads of income chargeable to income-tax and for each head appropriate rules are provided in Sections 7 to 12 for computing the amount of income. The heads are six in number and amongst them is the head 'Profits and gains of business, profession or vocation'. Section 10 lays down the rules for computing the income of the assessee under the head 'profits and gains of business, profession or vocation'. There is no specific provision in the Section for adjustment of losses in one or more businesses against profits in other businesses where several businesses are carried on by an assessee. But it is now well settled by the decision of the High Court of Bombay in Commr. Of Income-tax v. Murlidhar Mathurawalla : [1948]16ITR146(Bom) a view which has also received the approval of the Supreme Court in Anglo-French Textile Co. Ltd. V. Commr. Of Income-tax : [1953]23ITR82(SC) that all businesses constitute one head under S. 10 and in order to determine what are the profits and gains of business under S. 10, an assessee is entitled to show all the profits and adjust against those profits, losses incurred by him under the same head. In other words, while profits or losses of each distinct business may be computed separately, the tax is chargeable under S. 10 and not on the separate income of every distinct business but on the aggregate of the profits of all the businesses carried on by the assessee after adjusting the profits of one or more businesses against the losses, if any, in other businesses. (Vide Commr. of Income-tax v. Muthuraman Chettiar : [1962]44ITR710(SC) .

(3) This rule would apply equally whether the profits or losses are derived by the assessee from a business carried on by him alone or in partnership with others. The profits and gains under the head 'Profits and gains of business, profession or vocation' computed under S. 10 comprise profits and gains of any business carried on by the assessee. Now where a business is an individual business of the assessee, it is certainly a business carried on by the assessee. But even where a business is carried on by a firm in which the assessee is a partner, it would still be correct to say that it is a business carried on by the assessee. It is now well settled by the decision of this Court in Sitaram Motiram Jain v. Commr. of Income-tax : [1961]43ITR405(Guj) that where a business is carried on by a firm, it is a business carried on by a partner of the firm. K.T. Desai, C.J., as he then was, observed in that case, at p. 412 of the report:

'A `partnership' is defined by S. 4 of the Indian Partnership Act as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. When a firm carries on business, it is a business carried on by the partners of that firm. One partner is the agent of the other in carrying on that business. When a partnership firm carries on a business each partner thereof carried that business'.

The business carried on by the firm in which the assessee is a partner would, therefore, be business carried on by the assessee and the assessee's share in the profits or gains of business carried on by him and would be liable to be taken into account in computation of his income under S. 10. This reasoning would apply equally whether the firm be registered or unregistered and it must therefore follow that even where the firm is unregistered the assessee's share in the profit or loss of the firm is liable to be taken into account in computing his income under S. 10 and if such share is a loss, it must be adjusted against his profits from other businesses.

(4) This view is considerably strengthened if we turn for a moment to S. 14(2) (a). It is precisely because a partner's share in the net profit of the firm is includible in the computation of his total income that the Legislature had to enact S. 14(2) (a) in order to avoid double taxation in the case of profits of an unregistered firm. Where an unregistered firm is assessed as an unregistered firm, it is taxed as a distinct assessable entity and the profits made by it are taxed in its hands and but for S. 14(2) (a) a partner of an unregistered firm would also be liable to pay tax in respect of his share in the profits of the unregistered firm and this would result in double taxation of the same profits. The legislature, therefore, enacted Section 14(2) (a) to grant exemption from tax to a partner of an unregistered firm in respect of his share of the profits of the firm. This provision clearly postulates that a partner's share in the net profit f an unregistered firm is liable to be included in the computation of his total income and if his share in the net profit is so includible, it is difficult to see on what principle it can be contended that his share in the net loss of the firm where the firm has suffered a loss is not to be taken into account for the purpose of computation of the total income.

(5) Support for this view may also be found in the decision of the privy Council in Arunachalam Chettiar v Commr. Of Income tax . The Privy Council held in that case that whether a firm is registered or unregistered, a partner's share in the loss of the firm can be set off against the profits and gains made by him under the same head or under a different head. It was argued on behalf of the Revenue that an unregistered firm was, for income-tax purpose, an entity distinct and different from the individual partners of the firm and, consequently, the business carried on by the firm could not be regarded as a business carried on by the individual partners. This argument was rejected by the High Court and on appeal the Privy Council agreed with the view taken by the high Court, Sir George Rankin delivering the opinion of the Privy Council pointed out with particular reference to the provision of S. 24(2) of the Income-tax Act, as it then stood, that the Income-tax Act did not treat a firm as a separate assessee in share of a loss being set off against his individual profits or gains and observed that in the opinion of their Lordship '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 the other profits under the same head of income within the meaning of Section 6 of the Act or under a different head (in which case only need recourse be had to S. 24(1)'. This decision of the Privy Council thus laid down that an assessee in his individual assessment was entitled to adjust his share of the loss in an unregistered firm against his profits under the same head or a different head, But, this decision, it was argued on behalf of the Revenue, was given under the Income-tax Act as it stood prior to its amendment by the Amending Act of 1939 and whatever might have been the position under the Act as unamended, the amendments made by the Amending Act of 1939 had made a radical change in the position of a partner in an unregistered firm and that after the amendments a partner in an unregistered firm was not entitled to adjust his share of the loss in the unregistered firm against his profits whether under the same head or under a different head. The amendments which were relied upon on behalf of the Revenue in this connection were those contained in s. 16(1) (b), the proviso to S. 23(5)(a), Section 24(1) second proviso and S. 24(2) proviso (c). Now the assessee agreed that the amendments did effect a change in the position of a partner of an unregistered firm in that after the amendments a partner of an unregistered firm could not adjust his share of the loss in the unregistered firm against his profits under a different head which he could do before but so far as his right to adjust his share of the loss in the unregistered rim against his profits, under the same head, was concerned, that right, contended the assessee , was not taken away by any thing contained in the amendments. It is therefore, necessary to consider the true scope and effect of the amendments and to see whether the amendments make any difference in the position so far as it concerns the right off a partner in an registered firm to adjust his share of the loss in the unregistered firm against his profits under the same head.

(6) Turning first to Section 16(1)(b) that Section consists of a substantive provision and a proviso and in the following terms:

'16. (1) In computing the total income of an assessee -

xx xx xx xx xx (b) When the assessee is a partner of a firm, the, whether the firm has made a profit or a loss, his share )whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the fir, in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary commission or other remuneration payable to any partner in respect of the previous year:-

Provided that if his share so computed is a loss, such loss may be State Government off or carried forward and set off in accordance with the provisions of Section 24'

Now so far the substantive provision in Section 16(1)(b) is concerned, we find that this provision for from militating against the right of a partner in an unregistered firm to adjust his share of the loss in the unregistered firm against his profits form other business, actually, affirms that right. The provision starts with the words: 'in computing the total income of the assessee' and proceeds to enact how in computing the total income of an assessee, his share in the net profit or loss of a firm in which he is a partner shall be calculated and thus clearly recognizes that whether a firm be registered or unregistered, a partner's share in the net profit or loss of the firm is liable to be included in the computation of his total income. It indicates clearly and unmistakably, as did S. 24(2) of the unamended Act in Arunachalam Chettiar's case that the Income tax Act does not treat an unregistered firm as a separate assessee in so absolute a sense as to prevent a partner's share in the net profit or loss of the firm from being regarded as his profit or loss form business within the meaning of Section 10 and the ratio of the decision of the Privy Council in Arunachalam Chettair's Case must, therefore, still continue to apply even after the amendment of the income -tax Act by the Amending Act of 1939.

(7) The question however remains whether there is anything in the proviso to Section 16(1)(b) or in any of the other provisions of the Act relied on behalf of the Revenue which takes away this right of a partner in an unregistered firm to adjust his share of the loss firm the unregistered firm against his profits from other businesses under S. 10. Now when we turn to the proviso to Section 16(1)(b) we find that all that it says is that if the share of a partner in a firm, registered computed in accordance with the main provision enacted in s. 16(1)(B) is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of S. 24. the proviso does not seek to affect the computation of the income of the partner under the head ' Profits and gains of business, profession or vocation' or under any other head but makes a provision only in regard to set-off to carry forward and set-off being matter dealt with in S. 24 and provides that the partner's share of the loss may be set off or carried forward and set off in accordance with the provisions of that Section. It is, therefore necessary, to refer to s. 24 and see what is the set- off or carry forward and set off dealt with in that Section.

(8) Section 24(1) provides for set-off in the following terms:

'24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in S. 6 he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year:

Provided that in computing the profits and gains chargeable under the head 'profits and gains chargeable under the head 'profits and gains of business, profession or vocation, any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions:

Provided further that where the assessee is an unregistered fir, which has not been assessed under the provisions, of C1 (b) of sub-section (5) of S. 23, 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; an where the assessee is a registered fir, any loss which cannot be set off against other 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'.

It is clear from the main enactment contained in S. 24(1) that where an asseseee sustains a loss under any of the heads mentioned in Section 6, he is entitled to have the loss set off against his income, profits or gains under any other head. Section 24(1) thus deals with set-off between different heads and by the very nature of things it comes into play when income is computed under each of different heads by applying the appropriate mode of computation and it is found that there is a loss under one or more of the heads and there is a profit under the other heads so that the loss can be set off against the profit in order to arrive at the total income assessable to tax. The first proviso though enacted in the form of a proviso to the Section s really a substantive enactment dealing with the computation of profits and gains under the head 'profits and gains of business, profession or vocation' any loss sustained in speculative transactions shall not be taken into account except to the extent of the profits, and gains, if any in any other business consisting of speculative transaction. We are not concerned in this reference with the first proviso and we shall, therefore, say no more about it. The second proviso was however strongly relied on behalf of the revenue and the argument based on the second proviso was that by reason of the rule enacted in that proviso the loss of the unregistered firm could be set off only against the income, profits an gains of the firm and not against the income, profits and gains of the partners of the firm and no partner could, therefore, claim to set off his share of the loss of the firm against his profits from other business. The revenue relied on the prohibition contained in the second proviso which was in the following words: 'any such loss shall be set off only against the income, profits and gains of any of the partners of the firm' and urged that this prohibition prevented a partner in an unregistered firm from claiming to set off his share in the loss of the firm against his profits from other businesses. Now obviously this contention could succeed only if the second proviso were read as a substantive provision applicable not only to set off loss under one head against profit under another but also to set off of loss in one business against profit in another under the same head. But it is now well settled by the decision of this court in Commr. Of Income-tax v Kantialal Nathuchand, : [1964]53ITR420(Guj) that the second proviso cannot be read as an independent enactment but must be read as a proviso to S. 24(1) and it must be read as a proviso to S. 24(1) and it must, therefore, be held to refer only to set of loss under one head against profit under another. We pointed out in that case while dealing with a similar argument advanced before us on behalf of the Revenue:

' It treats the second proviso to s. 24(1) as if it were an independent enacting clause instead of being dependent on the main enactment. It must be remembered that the proper function of a proviso is to except and deal with a case which would otherwise fall within the general language the main enactment and the effect of the proviso must ordinarily be confined to the subject-matter of the main enactment. The proviso must ordinarily be confined to he subject-matter of the main enactment . The proviso must operate within the sphere occupied by the main enactment and should not ordinarily be extended beyond the main enactment unless the language compels a contrary conclusion as was the case in regard to the first proviso to s. 24(1). No consideration such as those which the Bombay High Court took into count while construing the first proviso as a substantive enactment arises in the case of the second proviso and the principle of construction to which we have referred must apply in construing the second proviso, Section 24(1) deals with set-off of loss under one had against profit under another head and the language of the second proviso is clearly applicable to a case of set-off as between different heads. The second proviso fits in appropriately with the language of the main enactment so as to be a real proviso and it must be construed as dealing with the subject-matter of the main enactment .so construed it is clear that what the second proviso says is that if any loss under one head cannot be set off against in come, profits and gains under nay other head as provided in s. 24(1) such loss shall be apportioned amongst the partners of the firm and they alone shall be entitled to have the amount of the loss set off under Section 24' The last observation in the passage quoted above was of course made in relation to the second part of the second proviso since the case before us was a case of a registered firm but what we have said there must apply equally to the first part of the second proviso which deals with the case of an unregistered firm It is only where the assessee is an unregistered. Firm and loss under one had is sought to be set off against profit under another that the second proviso says that such loss shall be set off only against the profit f the firm and not against the profit of any of the partners of the firm. The second proviso has no application where a partner of an unregistered firm seeks to adjust his share of the loss of the unregistered firm against his profits from other businesses in the computation of his income under S.10. In such a case no question of set off of loss under one head against profit under another head arises and the inhibition contained in the second proviso is not attracted. This view is clearly borne out by the decision of the Supreme Court in : [1962]44ITR710(SC) . Moreover the second proviso on its plain language, applies only where the assessee is an unregistered firm. Here in the present case the assessee is not an unregistered firm but a partner of an unregistered firm and on this ground to the second proviso can have no application to defeat the right of the assessee to adjust his share of the loss against his profits from other businesses.

(9) Section 24(2) relates to carry forward of losses and omitting portions immaterial. It provides as follows:

'24. (1) xx xx xx xxx xx (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 31 State Government 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 it 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 continue 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:

Provided that -

xx xx xx xx xx xx (c) nothing herein contained shall entitle any assessee , being a registered fir, to have carried forward and set off any loss which has been apportioned between the partners, under the proviso to sub-section (1) or entitle any assessee being a partner in an unregistered firm which has not been assessed under the provisions of C1 (b) of sub-section (5) of S. 23, to have carried forward and set off against his own income any loss sustained by the firm: xx xx xx xx xx xx'

Strong reliance was placed on behalf of the Revenue on proviso (c) but we fall to see how this proviso can afford any help to the Revenue in its present contention. This proviso in so as it is material prescribes inter alia that nothing contained in the Section shall entitle any assessee being a partner in an unregistered firm to have carried forward and set off against his own income any loss sustained by the firm. There can be no dispute about the applicability of this proviso if what a partner of an unregistered firm seeks to do is to carry forward his hare of the loss and set it of against his own income in the subsequent years. Just as partner of an unregistered firm cannot set off his share of the loss under one head against his profits under another, so also he cannot claim to carry forward his share of the loss and to set it off against his own income in the subsequent years. If there is a loss suffered by the unregistered firm, that loss can be carried forward and set off only by the unregistered firm. But this proviso obviously can have no application where what a partner of an unregistered firm seeks to do is to adjust his share of the loss against his profit from other businesses in the same year in computation of his income under S. 10.

(10) Having examined the provisions of S. 24(1) second proviso and S. 24(2) proviso (c), we must go back to the proviso to s. 16(1) (b). That proviso declares that if a partner's share in the income a firm is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of S. 24. Now S. 24(1) as pointed out above, deals with set off of loss under one head against profit under another head and not with adjustment of loss in one business against profit in another under the same head (barring of course the first proviso to that section which admittedly has no application in the present case) and the set off mentioned in the proviso must, therefore, clearly have reference only to set off of the partner's share of the loss under one head against his profit under another head and not adjustment of his share of the loss against his profit from other businesses under the same head of S. 10 where, therefore, a partner in a firm wants to set off his share of the loss under a particular head against his profit under another head, the proviso says that such set-off can be allowed only if it is permitted by the provisions of S. 24. Similarly if the partner wants to carry forward his share of the loss and set it off against his income in subsequent years, he can do so only in accordance with the provisions of S. 24. But where the partner does not seek to set off his share of the loss under one head against his profits under another head not to carry forward and set off his share of the loss but merely seeks to adjust his share of the loss from business against his profits from other businesses in the computation of his income under S. 10 the proviso can have no application. The proviso therefore does not preclude a partner of an unregistered firm from adjusting his share of the loss of the unregistered firm against his profits from other businesses under S.10.

(11) It is undoubtedly true that the result of this interpretation which we re placing up on the various Sections of the Act would be that where an unregistered firm suffers a loss in business, it would be entitled to carry forward that loss and set it off against its own income in the subsequent years and a partner in the unregistered firm would also be entitled to adjust his share of the loss against his profits from other businesses but that result would follow in the one case by the operation of Section 24(2) and in the other case by the operation of Section 10 which are two distinct provisions and that would not justify us in reading the Sections in such a manner as to reach the conclusion that the right which a partner of an unregistered firm has under Section 10 and Section 16 (1) (b) to adjust his share of the loss against his profits from other businesses is taken away by anything contained in those Sections. There is in our opinion no express provision which takes away such right nor can any such provision be spelt out by necessary implication. We must, therefore, reach the conclusion that even after the amendment of the income-tax Act by the Amending act of 1939, a partner's Share in the profit of loss of an unregistered firm is liable to be taken into account in computing his income under the head 'profits and gains of business, profession or vocation' referred to in Section 10: if his share is a profit, it would be added to his profits from other businesses subject to Section 14 (2) (a) and if his share is a loss, it would be adjusted against his profits from other businesses and that aggregate of the profits of all the businesses after adjusting the loss from the unregistered firm against the profits of the other businesses would be the income under the head 'profits and gains of business, profession or vocation' under section 10.

(12) This view which we are taking is supported by a decision of the Madras High Court in Muthuraman Chettiar v Commr. Of Income-tax : [1957]31ITR61(Mad) , where in a case arising under the amended income-tax Act, the Madras High Court held following the decision of the Bombay High Court in Shantikumar Narottam Moraji v Commr. Of Income-tax : [1955]27ITR69(Bom) that a partner's share in the net profit or loss of a firm, whether registered or unregistered, falls under the head 'Profits and gains of business, profession or vocation' and is liable to be taken into account in computing his income under S. 10. The Madras High Court made the following observations which are very material:

'The share income of a partner of a firm falls under the head 'profits' and gains of business' referred to in Section 10 of the act and is not 'income from other sources' falling under Section 12, and a loss incurred by an assessee as a partner in a firm must, therefore be deducted in computing his total income under the head 'business' under Section 10 (2)'

The learned Advocate General, however, relied strongly on a recent decision of the Supreme Court in Commr. Of Income-tax v Jadavji Narasidas and co. : [1963]48ITR41(SC) ; and contended that that decision clearly laid down that a partner in an unregistered firm cannot adjust his share of the loss of the unregistered firm against his profits from other businesses. Now in order to appreciate the true ratio of that decision it is necessary to notice the facts on which the decision was based. The position in that case was that the assessee was a registered firm consisting of four partners. The four partners of the assessee were partners with one Damjo in another firm and this firm of five partners was unregistered. The assessee made profit in speculation while the unregistered firm suffered a loss in speculation. The assessee in its assessment claimed to adjust against its profit the loss of the unregistered firm which came to the share of the four partners of the assessee. Now the assessee being a firm could not be a partner in the unregistered firm an was in fact not such partner and the only partner were the four partners of the assessee and Damjo. The loss was suffered by the four partners of the assessee in their individual capacity and Damji. On these facts the Supreme Court held that the share of the loss of the four partners of the assessee in the unregistered from could not be adjusted by the assessee against its profit in speculation in commuting its profits under S. 10. Hidaytullah J. Delivering the majority judgment observed:

'What then is the position here? The unregistered firm has not been assessed. The assessee firm alone has been assessed and on its own assessment it has shown a profit. It seeks to set off against its profits a loss of Rs. 1,05,641/- which it is said, was incurred by it in partnership with Damji. We have shown above that the candidate be no partnership between the assessee firm and Damji. There was, however, a partnership between Damji and the four partner of the as firm in their individual capacity. Now under S. 24(1),, second proviso, the losses of the unregistered firm of Damji an these four partners can only be set off against the income, profits and gains of the unregistered firm : and not those of its partners. The loss of Rs. 1,05,641/- could be set off against the income, profits and gains (if any) of the unregistered firm of five persons and not of the partners. In the same manner, the loss if not absorbed, could be carried forward to be State Government off against further income profits and gains of the same unregistered firm of five persons. The High Court was thus in error in holding that those losses could be set off against the income of the assessee firm. It makes no difference that the department has not assessed the unregistered firm or taken action under S. 23(5)(b) what the High Court has ordered just cannot be done as it is against the provisions of Section 24'.

The learned Advocate General relied strongly on these observations but these observations must be read in the context of the facts of the case which we have set out above. As a matter of fact the Supreme Court once again emphasized in the passage quoted above that 'there can be no partnership between the assessee firm and Damji. There was, however, a partnership between Damjo and the four partners of the assessee firm in their individual capacity'. We cannot read these observations of the Supreme court as laying down the proposition that even in a case where partner of an unregistered firm seeks to adjust his share of the loss against his profits from other businesses in the computation of his income under Section 10, the second proviso to Section 24(1) applies to prevent such adjustment being made In : [1962]44ITR710(SC) (supra) the supreme court itself held that the second proviso to Section 24(1) can have no application where what is sought to be done is adjustment of loss in one business against profit in another and not set off of loss under one head against profit under another head and that is why the majority judges in Jadavi Narsidas's Case : [1963]48ITR41(SC) (supra) after arriving at their conclusion in the passage quoted above made it clear that they were not deciding what would be the position if a partner in an unregistered firm claimed to adjust his share of loss in his individual assessment. The majority Judges said:

'Whether the partners in their individual assessments would be able to take advantage of Section 16 (1) (b) and the decision of the Privy Council in ( a point almost conceded before us) is not a matter on which we need pronounce our opinion'.

This decision does not, therefore, assist the contention urged on behalf of the revenue and cannot be invoked by the Revenue to negative the construction which we are inclined to place on the relevant Sections of the Act

(13) In the result we answer the question referred to us in the affirmative. The commissioner will pay the costs f the assessee.

(14) Reference answered.


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