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Commissioner of Income-tax Vs. Smt. Pana Devi and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Income Tax Reference No. 6 of 1966
Judge
Reported in1974WLN259
AppellantCommissioner of Income-tax
RespondentSmt. Pana Devi and ors.
Cases ReferredSeth Jamnadas Daga and Ors. v. Commissioner of Income
Excerpt:
income tax act, 1922 - section 24(1)--adjustment of loss in one business sought against profit in another--held, section 24(1) does not apply.;section 24(1) of the act cannot be applied to a case where the adjustment of loss in one business was sought against profit in another under the same head of income.;(b) income tax act, 1922 - second proviso to section 24(1)--proviso refers to set off of loss under one head against his profit under another head.;the second proviso to section 24(1) has reference only to set off of loss incurred under one head against his profit under another head and not where adjustment of his share of loss in one business is desired by a partner of an unregistered firm against profit from his other businesses under the same head, while making a computation of his.....b.p. beri, c.j.1. the income-tax appellate tribunal (delhi bench 'c') has at the instance of the commissioner of income-tax, rajasthar, jaipur, referred this case to us under section 66(1) of the income tax act, 1922 (hereinafter called 'the act') for answering the following question:whether on the facts and in the circumstances of the case, the assessee was entitled to set off his share of loss from the firm m/s ganga theatre, bikaner, against his other income2. the assessce is an individual. he is also a partner in the firm of ganga theatre, bikaner. the assessment relates to the years 1960-61 and 1961-62 for which the relevant previous years ended on 31.10 1959 and 31.10. 1960 respectively. messrs ganga tneatre, bikaner, filed its returns of loss for both the years in question, but as.....
Judgment:

B.P. Beri, C.J.

1. The Income-tax Appellate Tribunal (Delhi Bench 'C') has at the instance of the Commissioner of Income-tax, Rajasthar, Jaipur, referred this case to us under Section 66(1) of the Income tax Act, 1922 (hereinafter called 'the Act') for answering the following question:

Whether on the facts and in the circumstances of the case, the assessee was entitled to set off his share of loss from the firm M/s Ganga Theatre, Bikaner, against his other income

2. The Assessce is an individual. He is also a partner in the firm of Ganga Theatre, Bikaner. The assessment relates to the years 1960-61 and 1961-62 for which the relevant previous years ended on 31.10 1959 and 31.10. 1960 respectively. Messrs Ganga Tneatre, Bikaner, filed its returns of loss for both the years in question, but as the returns were filed beyond the statutory period as laid dawn under Section 22(2A) of the Act, the Income tax Officer did not consider them and the result was that no assessment was made on that firm. The applications made by the firm seeking registration were also shelved. The assessee in his returns for the aforesaid years claimed to set off the share of his loses in the two relevant years ii the said unregistered firm. The Income-tax Officer held that the income of the firm shall be treated as 'nil', subject to rectification under Section 154 of the Act, and disallowed the assessee's claim for the set off arising from the loss. The assessee appealed and Appellate Assistant Commissioner accepted his contention in respect of both the assessment years and directed the Income-tax Officer 'to compute the loss of the firm of M/s Ganga Theatre, Bikaner and Bet off the appellant's share of loss from the siid firm against the other income of the appellant.' The department was dissatisfied and it preferred an appeal before the appellate Tribunal. The Tribunal upheld the directions given by the Appellate Assistant Commissioner, but at the instance of the Commissioner of Income-tax, referred the question mentioned above., for our answer.

3. Mr. S.K Mal Lodha, learned Counsel for the Revenue has submitted before us that the assessee's share of loss in an unregistered firm, which has not been assessed, cannot be set off against the assessee's individual profit?, even though they may be under the head of 'business', although of a different texture. He cited in support of his contention Commissioner of Income-tax, Nagpur v. Hirani Construction Co. 0065/1964 : [1966]60ITR599(Bom) , Commissioner of Income-tax, Bihar and Orissa v. Gangadhar Nathmal : [1966]60ITR790(Patna) , B. Coickotappa and Ors. v. Income tax Officer, Central Circle II, Bangalore : [1971]81ITR431(KAR) and Razi Sugar Co. v Commissioner of Income-tax : [1970]76ITR541(All) . His further submission was chat all these authorities have their foundation in the Supreme Court authority in Commissioner of Income-tax, Bombay City II v. Jadavji Narsidas & Co. : [1963]48ITR41(SC) . In all fairness, he also cited before us the authorities which have taken the view contrary to one canvassed by him, namely, Commissioner of Income-tax v. P.M. Muthuraman Chettiar and Anr. : [1962]44ITR710(SC) , Commissioner of Income-tax, Mysore, Travancore-Cochin and Coorg v. Indo Mercantile Bank Ltd. : [1959]36ITR1(Cal) , Commissioner of Income tax, Bombay South v. Jagannath Narsingdas : [1965]55ITR128(Bom) , Commissioner of Income-tax, Gujarat v. Jethalal Zaverchand Patalia : [1966]61ITR357(Guj) and Commissioner of Income tax, Delhi v. Ram Swaroop Gupta : [1973]92ITR495(Delhi) .

4. Mr. Lodha also submitted that the second proviso of Section 24(1) of the Act was in fact and substance an independent provision, although it is shaped as a proviso and if read in this light it supports his contention, namely, that the loss of an unregistered firm, which has not been assessed, cannot be taken credit of by an individual partner in his own assessment and in support of his contention, he cited Keshav Lal Premchand v. Commissioner of Income tax, Ahmedabad : [1957]31ITR7(Bom) .

5. Mr. J.K. Singhi urged that the second proviso to Section 24(1) of the Act cannot, having regard to its language, be treated as a substantive provision and he placed reliance on Jamnadas Daga v. Commissioner of Income tax Madhya Pradesh and Bhopal, Nagpur : [1958]33ITR274(Bom) and Mohan Lal Hira Lal v. Commissioner of Income-tax C.P and Berar. Nagpur . He further submitted that in Commissioner of Income-tax, Bombay South v. Jagannath Narsingdas : [1965]55ITR128(Bom) the Bombay High Court has not treated it as a substantive provision & there must be strong reasons before the proviso can be treated as a substantive provision.

6. Both the submissions made by the leraned Counsel for the Revenue rest upon the true interpretation of Section 24(1) of the Act, which reads as under:

24. Set off loss in computing aggregate income.--(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 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 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, in any other business consisting of speculative transactions:Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of Clause (b) of Sub-section (5) of Section 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; and where the assessee is a registered firm 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 the section.

It may be mentioned here that the second proviso to Section 24(1), as it stood at the relevant time, was introduced by Section 27 of the Indian Income-tax (Amendment) Act, 1939 (Act No. 7 of 1939).

7. Prior to the introduction of the aforesaid proviso by the Amending Act of 1939, Section 24(1) of the Act was interpreted by their Lordship3 of the Privy Council in Arunachalam Chettiar v. Commissioner of Income-tax, Madras (1936 (4) ITR 173. Their Lordships approved the decision of the Madras High Court in Commissioner of Income-tax, Madras v. Arunachalam Chettiar AIR 1924 Mad 474 wherein Schwabe, Chief Justice, held that 'a partner in an unregistered firm which has made a loss in the year of account is entitled to set off his share of the loss against the profits add gains made by him in his individual trade and otherwise.' Their Lordships of the Privy Council observed:

In their Lordships' opinion 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 the Act or under a different head, in which case only need recourse be had to Section 24(1).

Thus, the Privy Council emphasised that the object of Section 24(1) was to fellow a set off of profits against losses which arose under different heads of of income and only in those cases Section 24(1) could be pressed into service. In a case where profits and losses arose under the same head, they had to be adjusted against each other for computing the income of the assessee.

8. The question now is as to whether the principles laid down by the Privy Council in Arunachalam Chettiar's case (1936) 4 ITR 173 are still applicable to the case of a partner of an unregistered firm in the matter of set off his share of loss against the income, profits and gains of his individual business, even after the amendment of the Act in 1939

9. In Anglo-French Textile Company, Ltd., v. Commissioner of Income-tax, Madras : [1953]23ITR82(SC) their Lordships of the Supreme Court followed the aforesaid decision of the Privy Council in Arunachalam Chettiar's case (1936 4 ITR 173 & observed:

A set off under Section 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course the loss can be deducted but that is done Under Section 10 & not Under Section 24(1).

Their Lordships also held in that case that there was no provision in the Act which entitled the assesses to have a loss recorded or computed, unless something was to be done with the loss. Thus, under Section 24(1) a loss could be set off against an income, profit or gain and under Sub-section (2) the balance of a loss could be carried forward to a following year on the conditions set out there.

10. In Commissioner of Income-tax, Mysore, Travancore Cochin and Coorg v. Indo-Mercantile Bank Ltd. : [1959]36ITR1(SC) their Lordships of the Supreme Court, while dealing with the provisions of Section 24(1) observed:

By the addition of this section the loss under one head of profits or gains was allowed to be set off against income, profits and gains under any other head in any assessment year. There was also a provision in Section 24(2) for carrying over the loss after such set off had been effected. Section 24(1) became the subject-matter of controversy in the courts. The Privy Council in Arunachalam Chettiar v. Commissioner of Income tax held that this section was meant for a set off of profits arising under different heads and not where profits and losses had to be adjusted if they arose under the same head.

11. In Commissioner of Income-tax v. P.M. Muthuraman Chettiar and Anr. : [1962]44ITR710(SC) , after referring to Arunachalam Chettiar's case (1936 4 ITR 173,the Supreme Court made the following observations:

It was observed therein that whether a firm was registered or unregistered, a partner's share of the loss in the firm could be set off against the profits and gains made by him in his individual business. That principle applies in the present case, even though after the amendment of the Income Tax Act in 1939, the position of a partner in an unregistered firm may stand on a different footing, a distinction which is not material for the present cases.

12. In Muthuraman Chettiar's case : [1962]44ITR710(SC) one of the assessee was a Hindu undivided family which carried on business as a money lender and dealer in shares in what was then known as ''British India''. The assessee was also a partner in three non-resident firms carrying on business in foreign countries, in the course of assessment proceedings, the assessee claimed a set off in respect of loss as carried in the three foreign businesses in which it was a partner, against its income from money lending business within the taxable territories. The other assessee S. Abdul Shakoor was an individual, who carried on a business in the manufacture and sale of lungies at Madras. A similar business was started at Rangoon in Burma in which the assessee was a partner along with two other persons. The Rangoon firm suffered a loss. The assessee, in the assessment proceedings relating to his Madras business, claimed adjustment of loss of Rangoon firm. Their Lordships of the Supreme Court, following their earlier decision in Indo-Mercantile Bank case : [1959]36ITR1(Cal) held that the second proviso to Section 24(1) had no application to the facts of the cases before them and observed that the object of Section 24(1) of the Act was to allow the set off of loss under one head against income, profits and gains under any other head, and there was nothing in the section or in the proviso thereof which would favour the disintegration of the head 'business'. On this basis, their Lordships concluded that where the assessee carried on several businesses, he was entitled under Section 10, and not under Section 24(1) to set off losses in one business against profits in another. They further held that as Section 24 (1) had no application to the facts of those cases, the second proviso thereto could also have no application. It was pointedly observed at page 714:

Moreover the second proviso to Section 24(1) applies only where the assessee is an unregistered firm. That is not the case here. The assessee before us are, in one case, a Hindu undivided family, and, in the other, an individual. It is obvious, therefore, that the second proviso to Section 24 (1) can have no application in these cases.

13. The ratio of the decision in the aforesaid case is that Section 24(1) has no application whatsoever when set off is claimed in respect of losses sustained by the assessee under one of the heads enumerated in Section 6 against income, profits and gains under the same head of income, although there may be distinct and independent entities under the same head, and further that when Section 24(1) has no application, the second proviso thereto cannot apply. Section 6 of the Act enumerates various heads of income, profits and gains chargeable to income-tax, namely, salaries; interest on securities; income from property; profits and gains of business, profession and vocation; income from other sources and capital gains. Thus, profits and gains of business, profession or vocation is one head, in respect of which income has to be computed in the manner provided under Section 10 of the Act and this head embraces all the businesses, profession or vocation carried on by the assessee. The share of income of a partner in a firm falls within the head 'profits and gains of business' and is liable to be included in computing his total income under Section 10 of the Act and not under the head 'income from other sources' falling under Section 12 of the Act. If that is so, there is no reason as to why the loss incurred by an assessee as a partner of a firm should not likewise be deducted in computing his total income under Section 10 of the Act, under the head 'business'. Although under the proviso to Section 16(1)(b), the share of loss incurred by a partner of a firm may be set off or earned forward and set off according to the previsions of Section 24, but that is only possible in the circumstances under which Section 24 could be attracted, that is, where loss under one head of income is sought to be adjusted against profits or gains under a different head. When, however, the loss incurred in one business is sought to be adjusted against profits of another business of the same assessee, during the same year, such loss is capable of being taken into account in the computation of profits and gains of business under Section 10 of the Act and the proviso to Section 16il)(b) does not prohibit such a course The Supreme Court in Muthuraman Chettiar's case : [1962]44ITR710(SC) clearly held that where an assessee carries on several businesses, be is entitled under Section 10 and not under Section 24(1) to set off losses in one business against profits in another. Section 24(1) could only be pressed into service when the assessee sought adjustment in respect of his share of loss in the unregistered partnership firm against his profits under a different head of income and not where the adjustment was sought by the individual partner of an unregistered firm under the same head, enumerated under Section 6 of the Act. It would be seen that Section 24(1) provides for set off between different heads and it comes into play only when income is computed under each of the different heads and it is found that there is loss under one or more of the heads and there is profit under other heads, so that the loss could be set off against the profit in order to arrive at the total income assessable to tax. We therefore, hold that Section 24(1) of the Act cannot be applied to a case where the adjustment of loss it) one business was sought against profit in another under the same head of income and further that the seeded proviso to Section 24(1) has reference only to set off of loss incurred under one head against his profit under another head and not where adjustment of his share of loss in one business is desired by a partner of an unregistered firm against profit from his other businesses under the same head, while making a computation of his income under Section 10 As Section 24(1) of the Act provides for set off of losses under one head against profits under any other head of the same assessee in the same year, the second proviso to that Sub-section would operate in the same field in which Section 24(1) operates. Moreover, the second proviso of Section 24(1) on its plain language, could only apply where the unregistered firm was an assessee. If the assessee is a partner of an unregistered firm, which has not been assessed, as is the case before us, and not the unregistered firm itself, the aforesaid proviso cannot be attracted. The decision of their lordships of the Supreme Court in Muthuraman Chettiar's case : [1962]44ITR710(SC) fully supports the aforesaid view.

14. Learned Counsel for the Revenue, however, relied upon certain observations made by their lordships of the Supreme Court in Commissioner of Income-tax, Bombay City II v. Jadavji Narsidas & Co. : [1963]48ITR41(SC) . The facts of that case were that the assessee, a registered firm consisting of four partners, carried on butiness which was mainly of speculation. In the year of account, the assessee firm carried on a joint venture with one Damji Laxmidas, an individual, and sustained losses in transactions of speculative nature. The aforesaid joint venture was carried on in the name of Damji Laxmidas and was an unregistered firm of which the assessee (registered firm) and Damji were the partners. The question arose as to whether the assessee could claim a set off of its share of losses incurred by the unregistered partnership with Damji. The Supreme Court held that the losses of the unregistered firm could not be set off against the income of the assessee film on the ground that the losses of unregistered firm could only be set off against the income of that unregistered firm. Their lordship held that the assessee-firm, as a firm, could not enter into partnership with Damji as it was a registered form and there was thus partnership between Damji and the members of the assessee firm acting for themselves individually. There were two distinct partnerships, namely, (1) the assessee-firm which was registered consisting of four partners, and (2) the unregistered firm consisting of five partners, of whom the fifth. was Damji. Their lordships observed that the unregistered firm has not been assessed and the assessee-firm which was a registered firm of four partners, on its own assessment, showed a profit and it could not set off against its profits, a loss which was incurred by an unregistered partnership between Damji and the four partners of the assessee-firm in their individual capacity. In these circumstances, the Supreme Court held:

Now under Section 24(1) second proviso, the losses of the unregistered firm of Damji and these four partners can only be set off against the income, profits and gains of the unregistered firm and not those of its partners.

It must be remembered that in the case of Jadavji Narsidas & Co. : [1963]48ITR41(SC) the assessee was a registered firm and not an individual. Moreover, in that case it was held that there could be no partnership between the assessee-firm and Damji as the assessee-firm being a registerd partnership firm, could not enter into any such partnership. If the partnership did not exist, there was no question of the assessee-firm suffering any loss as a partner in it and therefore there was no loss of the assessee firm (registered firm) for which it could claim a set off. The assessee-firm had no interest in the unregistered partnership consisting of five persons and therefore it had no concern with the losses incurred by the unregistered partnership. Thus, the question in that case was as to whether the assessee, the registered firm, could claim a set off in its own assessment in respect of losses incurred by a different body, that is, the unregistered firm, of which the assessee-firm could not have been a partner.

15. It would be relevant to remember that the question before us in the instant case did not arise as in that case and their lordship of the Supreme Court made it clear by making the following observations at page 50:

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 Arunachalam Chettiar v. Commisioner of Income-tax (a point almost conceded before us) is not a matter on which we need pronounce our opinion. That question does not arise for our consideration.

16. The view taken by us above has also been taken by the Bombay, Gujrat and Delhi High Courts. The Bombay High Court in Commissioner of Income-tax, Bombay South v. Jagannath Narsingdas : [1965]55ITR128(Bom) , while dealing with the case of an assessee who was an individual, held that he was entitled to adjust his share of the loss sustained by an unregistered firm, in which the assessee was a partner, against the profits made by him in a business carried on by him individually. The learned Council in Arunachalam Chettiar's case (1936 4 ITR 173 continued to apply even after the amendment of the Act in 1939. The Bombay High Court relied upon the observations of their Lordships of the Supreme Court in Mathuraman Chettiar's case : [1962]44ITR710(SC) and held:

The treatment of the losses under Section 24 will only be for the purpose of setting of losses under different heads. Where the partner of an unregistered firm seeks a set off or a carry forward and set off of his losses under one head against profits under another head, no doubt he will have to be governed by Section 24 and also by the second proviso to that section. In view of the second proviso, his share of the losses in the unregistered partnership will not be capable of being set off against his income from any other head, but so long as the adjustment that he seeks is in his income under the same head viz. 'business', there is nothing in the provisions of Section 24 which would preclude him from seeking that adjustment under Section 10 of the Indian Income Tax Act.

We respectfully agree.

17. The Bombay High Court also held that the second proviso to Section 24 (1) could only be attracted, even if it be considered to be an independent provision, if the assessee was an unregistered firm and in the case before them, the assessee was an individual and the question was with regard to the computation of the income of that individual under Section 10 of the Act. It was contended before the Bombay High Court as it has been urged before us that the decision in the case should be governed by the judgment of their lordships of the Supreme Court in Jadavji Narsidas's case : [1963]48ITR41(SC) , but the Bombay High Court, relying upon the observations of the Supreme Court at page 50 of the report, extracted by us above, observed that the matter in issue relating to the individual assessments of the partners of an unregistered firm was not decided by their lordships of the Supreme Court in Jadavji Narsidas's case : [1963]48ITR41(SC) .

18. In Commissioner of Income-tax, Gujarat v. Jethalal Zaverchand Patalia : [1966]61ITR357(Guj) , the Gujarat High Court took the same view as was taken by the Bombay High Court in Jagannath Narsingdas's case : [1965]55ITR128(Bom) .

19. In Commissioner of Income-tax, Delhi v. Ramswaroop Gupta : [1973]92ITR495(Delhi) , the Delhi High Court agreed with the decisions of the Bombay and Gujarat High Courts in Jagannath Narsingdas's case : [1965]55ITR128(Bom) and Jethalal Zaver Chand Pataiia's case : [1966]61ITR357(Guj) . In this case, the Patna : [1966]60ITR790(Patna) , Allahabad : [1970]76ITR541(All) & Mysore : [1971]81ITR431(KAR) cases, which took a different view, were also considered As regards the Patna case : [1966]60ITR790(Patna) , it was observed that 'it was assumed that there was no difference between the claim of an assessee to adjust losses suffered by him as a partner in an unregistered firm and the facts in Jadavji Narsidas's case : [1963]48ITR41(SC) . In actual fact, in the latter case, the claim was made by a registered partnership. The Supreme Court expressly left open the question whether the adjustment could be claimed by the partners individually'. Raza Sugar Company's case : [1970]76ITR541(All) was distinguished on the ground that in that case the unregistered firm was assessed and loss computed and the second proviso to Section 24 (1) was held to apply in those circumstances. The Delhi High Court preferred to follow (he view taken by the Bombay : [1965]55ITR128(Bom) and Gujarat : [1966]61ITR357(Guj) High Courts and did not agree with the view taken by the Mysore High Court : [1971]81ITR431(KAR) .

20. We will now consider the other decisions relied upon by the leraned Counsel for the Revenue.

21. In Commissioner of Income-tax, Bihar and Orissa v. Gangadhar Nathmal : [1966]60ITR790(Patna) where the assessee was an individual and claimed a set off in respect of his share of loss in an unregistered partnership firm against profits from hi8 other business. The Patna High Court assumed as if that case was fully covered by the decision of the Supreme Court in Jadavji Narsidas's case : [1963]48ITR41(SC) & held that the loss incurred by an unregistered firm, which has not been assessed, could 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. We may observe with respect that there is no discussion of the law on the subject in that case and it was decided under the impression that the judgment of the Supreme Court in Jadavji Narsidas's case : [1963]48ITR41(SC) felly covered the matter.

22. In B. Chickotappa and Ors. v. Income-tax Officer, Central Circle II, Bangalore : [1971]81ITR431(KAR) , the Mysore High Court held that until the amendment of the Income-tax Act, 1922 in 1939, a partner's share of the loss in the firm whether registered or unregistered, could be set off against the profits and gains made by him in his individual business, but, after the amendment of the Act in 1939, and under the Act of 1961, the position of a partner in the unregistered firm stands on a different footing. It was observed:

Any loss incurred by an unregistered firm may be set off by the firm against its profits of the same year under the same head or any other head and further any unabsorbed loss may be carried forward by the firm and set off against its profits in a subsequent year in accordance with the provisions of Section 24(2). If the contention of the leraned Counsel for the petitioners is accepted, partners of unregistered firms stand to gain a double advantage. The firm itself is entitled to carry forward its loss and set off against its profits in a subsequent year in accordance with the provisions of Section 24(2) The partners of the unregistered firm at the same time will also be entitled to set off their share of loss against their own income of the same year under the same head notwithstanding the fact that the unregistered firm is entitled to carry forward its loss and set off against its profits in the subsequent year. Such a position can never have been contemplated by the Legislature.

The learned Judges further found support for the view that they took from the fact that under the Income Tax Act of 1931, a partner is not entitled to claim a set off of his share of loss in an unregistered firm against his individual income under the same head, because of the provisions of Section 77 of the new Act.

23. With respect, we are unable to agree with the view taken in this case because in the first place, the question of set off and carry forward and set off of the losses of the firm against its profits would only arise if the unregistered firm is assessed but such a situation cannot arise when the unregistered turn is not assessed at all, Secondly, even if the unregistered partnership claimed a set off under Section 24(2) in a subsequent year, the assessments of individual partners were not affected thereby as the Income-tax Officer could refuse to assess the income of the unregistered partnership by exercising the option contained in Section 23(5)(b) and in that event, the previous loss could not be adjusted by the unregistered partnership firm. The provisions of the Act of the Act of 1961, in our opinion, do not afford any guidance in the matter.

24 Learned Counsel for the Revenue also relied upon two more cases namely, Raza Sugar Company v. Commissioner of Income-tax : [1970]76ITR541(All) and Commissioner of Income-tax, Nagpur v. Hirani Construction Company 0065/1964 : [1966]60ITR599(Bom) , but they are clearly distinguishable. In Raza Sugar Company case : [1970]76ITR541(All) , the assessee was a limited liability company and it sought to set off its share of loss incurred in an unregistered partnership with another company against the profits of the company but in that case the partnership firm was assessed as an unregistered firm and that assessment had been accepted and no appeal was filed against it. It was held that the second proviso to Section 24(1) was attracted and the assessee company was not entitled to have the amount of loss sustained by the unregistered partnership set off against the assessee's income. The Allahabad High Court mainly relied upon the judgment of the Supreme Court in Jadavji Narsidas and Company : [1963]48ITR41(SC) and distinguished the decisions in Muthuraman Chettiar : [1962]44ITR710(SC) , Jagannath Narsing Das : [1965]55ITR128(Bom) and Jethalal Zaverchand : [1966]61ITR357(Guj) cases on the ground that in those cases the unregistered firm was not assessed while in the case before them the unregistered firm had been assessed as a separate unit and the said assessment had become final. However, in the case before us, the unregistered partnership has not been assessed at all, as was the situation in Jagannath Narsinghdas : [1965]55ITR128(Bom) and Jethalal Zaverchand : [1966]61ITR357(Guj) cases.

25. In Hirani Construction Company case 0065/1964 : [1966]60ITR599(Bom) , the assessee was a registered firm and it entered into a partnership with a limited company and as the partnership sustained loss, the same was dissolved. The partnership of the assessee firm and the limited company disclosed loss in the assessment proceedings The Bombay High Court following the judgment of their lordships of the; Supreme Court in Jadavji Narsidas and Company : [1963]48ITR41(SC) held that the assessee, which was a registered firm, was not entitled to set off the losses in the dissolved unregistered firm, as the dissolved firm had not been assessed Under Section 23(5)(b), As in the case before the Bombay High Court, the assessee was a registered firm, that case was certainly covered by the decision in Jadavji Narsidas's case : [1963]48ITR41(SC) , but, it is clearly distinguishable from the present case, in as much as the assessee before us is an individual, who was a partner of an unregistered fiim which was not assessed at all.

26. The second submission made by Mr. Lodha for the Revenue is that the second proviso to Section 24 (1) of the Act is an independent provision and, if it is so considered, a partner of an unregistered firm could not seek an adjustment of his share of loss in the unregistered firm against profits made in his individual business. He has mainly relied upon a decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax, Ahmedabad : [1957]31ITR7(Bom) in which the first proviso to Section 24(1) was considered to be an independent provision. By a parity of reasoning, leraned Counsel submitted that if the first proviso to Section 24(1) could be considered as an independent provision, the second proviso should likewise be so considered and full effect should be given to the second proviso of Section 24(1) independently of the main enacting part of the aforesaid Sub-section. The submission made by the leraned Counsel is negatived by the very language employed in the second proviso to Section 24(1) wherein a reference has been made to ''any such loss' which can obviously mean the loss referred to in the main enacting part of Section 24 (1) of the Act. The use of the word 'such' therefore in the second proviso is a clear pointer to the fact that the said proviso could not be read as an independent provision, but must be read as an exception to the main provisions of Sub-section (1) of Section 24. Moreover, the function of a proviso is to carve out an exception to the main enanctment and to exclude something which would otherwise have been within the scope of the main provision. It has been held by their lordships in the Supreme Court in Ramnarain Sons Ltd. v. Assistant Commissioner of Sales Tax : [1955]2SCR483 as under:

It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision It car vet out an exception to the main provision to which it has been enacted as a proviso and to no other.

Therefore, very strong reasons are necessary to consider a proviso as an it dependent provision, which is ordinarily foreign to the proper functioning of a proviso.

27. In Commissioner of Income tax v. Indo Mercantile Bank Ltd. : [1959]36ITR1(Cal) , their lordships of the Supreme Court rejecting a similar argument in respect of the first proviso to Section 24(1) observed:

In the proviso in dispute there are no positive words which would support an interpretation in favour of the disintegration of the head 'business' and compel the application of the proviso to the same head, specially keeping in view the object of the main section, i.e. Section 24(1) which was to set off loss or profits or gains under one head against income, profits or gains under any other head.

28. We may also refer to Mohan Lal Hira Lal v. Commissioner of Income-tax , where a similar argument regarding the second proviso to Sub-section (1) to Section 24 was made and it was held by the Nagpur High Court as follows:

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 is in British India or out side and whether the set off is claimed against another head of income on against the same head.

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 another 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).

29. In Jamnadas Daga v. Commissioner of Income-tax : [1958]33ITR274(Bom) , the same contention was made that the second proviso to Section 24(1) should be read as a substantive enactment. While rejecting the aforesaid contention, Tandolkar J. of the Bombay High Court observed as under:

No such consideration arises from the language of the second proviso, which we have reproduced. That language is clearly applicable to a set off as between different heads; and, therefore, in our opinion, the proviso should be restricted to the normal function of a proviso, namely, to exclude from the operative part of Section 24 (1) something which might otherwise have been included in it.

The decision of the Bombay High Court on the main issue was upheld by the Supreme Court on appeal in Seth Jamnadas Daga and Ors. v. Commissioner of Income-tax : [1961]41ITR630(SC) .

30. In Commissioner of Income-tax v. Jagannath Narsingdas : [1965]55ITR128(Bom) the Bombay High Court had again an occasion to consider the same argument which was repelled on the ground that it was a prima facie a proviso and would have to be regarded as such unless there is very good and strong reason to hold that its scope is not merely that of a proviso but of an independent provision. Relying upon the decision of the Nagpur High Court in Mohanlal Hiralal's case , it was held that the second proviso in question could not be regarded ae an independent provision affecting the computation of the income of the assessee Under Section 10 of the Act.

31. We may also observe that in Commissioner of Income-tax v. Muthuraman Chettiar : [1962]44ITR710(SC) , their lordships of the Supreme Court made the following significant observations:

It follows from this that where the assessee carries on several businesses, he is entitled under Section 10, and not under Section 24(1) to set off losses in one business against profits in another. If as we hold Section 24(1) has no application to the facts of the present cases, the second proviso thereto can also have no application.

It is thus clear that their lordships of the Supreme Court indirectly refused to consider the second proviso to Section 24(1) as an independent provision and leraned Counsel for the Revenue has been unable to show any strong or sufficient reasons for holding the said proviso as an independent provision. On the ether hard, as we have mentioned above, the plain language of the second proviso indicates that it only provides an exception and qualifies the generality of the main enactment contained in Sub-section (1) of Section 24.

32. In the result, we hold that the assessee, in his individual assessment, was entitled to set off his share of less in the unregistered firm Messrs Ganga Theatre, Bikaner, against his other income and answer the question referred to us by the Tribunal in favour of the assts6ee and against the Revenue. The assessee shall be entitled to costs which we assess at Rs. 200/-.


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