Rajagopala Ayyangar, J.
Case Refd. No. 68 of 1953 :--
1. The question referred to this court for determination under Section 66 (1) of the Indian Income-tax Act is whether the loss of Rs. 23672 Incurred by the assessee as a partner of the three firms outside India could be set off against the assessee's income from business in India having regard to the provisions of the Indian Income-tax Act on this behalf?.
2. The assessee is an undivided Hindu family consisting of a father and his minor son. The managing member of this family was carrying on business as money lender and a dealer in shares in British India. He was also a partner in three non-resident firms carrying on business at Penang, Kauntan and Raub.
3. Having regard to the residence of the manager in the year of assessment, with which this reference is concerned, namely, 1946-47, the assessee (undivided Hindu family) was treated as resident and ordinarily resident.
4. In the course of the assessment proceedings of this assessee it claimed that it had incurred a loss of Rs. 23672 in the three foreign businesses in which the assessee was a partner and claimed a set-off of this sum against its income front its money lending business in British India. The Income-tax Officer negatived the claim to the set-off, and this order was confirmed by the Appellate Assistant Commission or and by the Tribunal on appeals by the assessee.
5. The reasoning on which this claim was disallowed by the Tribunal was, that though, when an assessee carries on more businesses than one and sustains loss in one of them, the same could be setoff against the income from other businesses under Section 10, that principle was inapplicable where the business carried on by the assessee was one in partnership with others. To such a case the Tribunal held that Section 10 would not apply, and the right to set-off could arise only under Section 24, and that as none of the sub-sections was attracted to the present case, the assessee was 'not entitled to the relief claimed. The question for out consideration is whether this, view is correct.
6. We have had occasion to consider in Parasaram Jethanand v. Commr. of Income-Tax : 29ITR818(Mad) , a closely allied question, whether where an individual carried on business in the taxable territories as well as outside, the loss in-purred by him outside the taxable territories could be set off against income from business in the taxable territories in computing the total income, profits or gains for the purpose of assessment to tax. We held that the assessee was so entitled. After referring to the relevant provisions we pointed out: 'Under Section 10- (1).....the tax is payable by the assessee 'in respect of the profits or gains of any business, profession or vocation carried on by him' ..... It is clear that if one paused here and analysed the concept of income from business, the assessable income cannot be computed without making an allowance for the loss incurred in that business. It is the profit earned by an assessee during the entirety of the accounting year from business that is the subject matter of taxation under Section 3 read with Section 6 (4) and Section 10 (1), and not that in respect of each individual transaction which results in profits a separate computation is made with an independent tax liability.
If, therefore, some of these transactions result in a profit and others result in a loss, all within the accounting year, it is the net result that has to he ascertained to find out whether the assessee had earned profits under the head business, and if so how much. It will also be seen that the geographical location of the business in any particular place would not make any difference, so long as there is a unity of ownership and control. The income or profits from every business carried on in any place is totalled up for the purpose of arriving at the income, profits or gains from the head 'business' under Sections 6 and 10.
Just as there is no distinction between different branches of a business carried on in the taxable territory and between them or any of them and the head office, there is no distinction between the branches of the same assessee located outside the taxable territory. Such income which accrues is still income under the head 'business' and it is the totality of the operations and transactions taking place in every place where the assessee carries on his business that yields the income for the purpose of computation under Section 10......'
We there pointed out that Section 24 (1), which permits a set-off of loss incurred under one head mentioned in Section 6 against the income or profits from other beads in the same year, does not apply to the case of such an assessee. So far there is no dispute.
7. The point, however, that was urged by learned counsel for the department was, that in the present case there was no identity between the unit which derived the income and the units which sustained the loss, and' therefore, there was no possibility of set off under Section 10 which permits the loss incurred by the same unit being set off against the profit derived by it, as was done in : 29ITR818(Mad) . In support of this position, Mr. Rama Rao Sahib referred us to the terms of Section 3, which specified the units which were the subject of assessment as 'individual, Hindu undivided family, company and local authority and of every firm and other association of persons or the partners of the firm or the members of the association individually.'
From this he drew the inference, that a firm as a unit of assessment was entirely distinct from the partners composing it who might themselves be units of assessment in their individual capacity. Based on this he urged that, when an individual or a Hindu undivided family was a partner in a firm, the unit of assessment in regard to the firm's profits or gains is the firm itself, which is a separate entity distinct from the partners composing it, notwithstanding that for the purpose of computing the total income of an individual his share of the profits from the firm is included in his total income.
In this connection he relied on the observations of the Supreme Court in Commissioner of Income-tax West Bengal v. A.W. Piggies and Co. : 24ITR405(SC) (B). The case itself was concerned with the proper interpretation of Section 25 (4) in relation to a firm which underwent several changes in its constitution. Learned counsel however relied upon the following observations of Mahajan J.;
'It is true that under the law/of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners .....
But under the Income-tax Act the position is somewhat different. A firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually.'
After referring to Section 3 of the Act His Lordship proceeded:
'The partners of the firm are distinct assessable entities, while the firm as such is a Separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position.'
In our opinion, though learned counsel for the department is right in his submission, that the Income-tax Act regards a firm as a unit of assessment, this by itself cannot lead to the result which he desires to achieve. If a person who is resident carries on business as an individual and is also a partner in a business carried on in the taxable territory (whether this firm is registered or unregistered does not for the present purpose make any difference) it is not disputed that the share loss sustained by him as a partner could be set off against his profits from his individual business as well as his share income from partnerships which return a profit. If this were so where all the firms concerned are ordinarily resident, does it make any difference that some of these firms are non-resident, and the income of the firm as such cannot be brought to charge under the provisions of the Income-tax Act.
8. Learned counsel for the Commissioner urged that it did and referred us to certain provisions of the Income-tax Act to which we shall immediately advert. Under Section 14 (2),
'the tax shall not be payable by an assessee--(a) if a partner of an unregistered firm in respect of any portion of his share in the profits and gains of the firm computed in the manner laid down in Clause (b) of Sub-section (1) of Section 16 on which the tax has already been paid by the firm. Section 16 (1) (b) runs thus:
'16 (1). In computing the total income of an assessee.....
(b) when the assessee is a partner of a firm, then, 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 firm 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 by any partner in respect of the previous year:
Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of Section 24.'
Section 23 (5) runs thus:
'(5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under Sub-section (1), Sub-section (3) or Sub-section (4), as the case may be,--
(a) In the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment, shall be determined:
Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of Section 24:
Provided further that when any of such partners is a person not resident in the taxable territories his share of the income, profits and gains of the firm shall be assessed on the firm at the rates which would be applicable if it were assessed on him personally and the sum so determined as payable shall be paid by the firm:
Provided also that if at the time of assessment of any partner of a registered firm, the Income-tax Officer is of opinion that the partner is residing in Pakistan, the partner's share of the income, profits and gains of the firm shall be assessed on the firm in the manner laid down in the preceding proviso and that the sum so determined as payable shall be paid by the firm; and
(b) in the case of an unregistered firm, the Income tax officer may instead of determining the sum payable by the firm itself proceed in the manner laid down in Clause (a) as applicable to a registered firm, if in his opinion the aggregate amount of the tax including super tax if any payable by the partners, under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm.'
In our opinion these provisions do not assist learned Counsel for the department in sustaining his contention. Taking for instance, Section 23 (5), it will be seen, that it applies only to a case where the assessment is against the firm as such. The fact that there can be an assessment of a firm as such and also against a partner of a firm in regard to his share income does not throw any light on the character of the income derived by the assessee as a partner in a firm. No doubt when there has been an assessment of a firm and tax has been collected from that entity in the case of unregistered firms, the individual partner who is in receipt of that income is not again made to pay tax on his share of the profits (Section 14 (2) (a). Section 16(1)(c) does not militate against the construction which learned counsel for the assessee invites us to adopt.
9. Mr. Rama Rao Sahib further urged that the department had an option to assess either the firm or the individual and that it could not be compelled to assess the individual, and that unless the individual was assessed, his share of the loss could not be determined. In the present case, the firms themselves being non-residents and not being in receipt of taxable income have not been assessed under the Indian Income-tax Act; there was no question of assessing the firms.
It was further suggested that the departmental authorities were not desirous of assessing the individual either in regard to his share from these firms, with the resultant position that the share of the loss could not be taken into computation in determining the total income of the assessee. We are unable to accept this reasoning as leading to the inference, that the departmental authorities are entitled to ignore the logs sustained by the assessee in his foreign business.
Under the Indian Income-tax Act what is brought to charge is the total world income of every assessee. It is not denied that if instead of a loss, the business had yielded a profit, the share income of the assessee would have to be included in the computation of the total income of the assessee. If the income thus included is brought to charge under the head 'business'', that is a business carried on by the assessee, though in conjunction with others, it would follow that the loss sustained by him in such business could be set off against income under the same head in computing the total income from businesses within Section 10 of the Act.
10. In our opinion, therefore, the question really turns on whether or not under the scheme of the Income-tax Act the share income of a partner in a firm is brought to charge under the head 'business' falling within Section 10. If the answer is in the affirmative, the income derived by the assessee under the head 'business' would be the profits or gains, less the losses incurred in the businesses carried on by the assessee in the several places.
Realising the importance of this approach, Mr. Rama Rao Sahib contended that share income which a partner derived from a business was not 'income from business' within Section 10 but was 'profit' from other sources falling within Section 12. On this basis he urged that the share income fell under head (v) of Section 6, while the income derived by the unit and by its sole exertion in the way of business fell under head (iv), and that consequently unless the case fell within Section 24 there could not be a set off.
We are clearly of the opinion that learned counsel for the assessee is well founded in his argument, that the share income of a partner is income from business within Section 10. In this connection learned counsel for the assessee invited our attention to a passage in the judgment of Chagla C.J. in Shantikumar Narottam Morarji v. Commr. of Income-tax, Bombay City, : AIR1955Bom234 (C), which Occurs at page 76 (of ITR): (at p. 23.6 of AIR), where the learned Chief Justice said:
'.....the first question that we have to consider is whether Section 10 has any application to the case of an assessee who is a partner of a registered firm. Mr. Joshi's contention is that Section 10 has no application at all because Section 10 deals with the profits of a business carried on by the assessee and according to Mr. Joshi the business in this case is not carried on by the assessee but is carried on by the assessee along with a partner or partners. Mr. Joshi says that a firm under ' the Indian Income-tax Act is an assessable entity and therefore a distinction must be made between a business carried on by a firm and a business carried on by an individual Although a firm is an assessable entity under the Indian Income-tax Act a firm is not a. legal entity.
In the eye of the law a firm is a compendious expression used to indicate that several persons constituting that firm are carrying on a business. But that compendious expression cannot be given to the firm a legal entity or a legal existence. In law it is only the partners who exist and who carry on the business...... Therefore the contention that Section 10(1) cannot apply to a partner in a registered firm is untenable because he does carry on the business although that business happens to be a partnership business and therefore if any profits and gains are derived by the assessee from the business carried on by him, those profits and gains must be brought to tax only under this head, viz, the head falling under Section 10(1) which is the head of business.'
11. We are in entire agreement with the view pressed by learned Chief Justice in this passage.
12. In addition there is a direct decision of the Nagpur High Court in Mohanlal Hiralal v. Commr. of Income-tax, C. P. and Berar, Nagpur. , where an identical question arising in this reference came up for consideration and was decided in favour of the assessee. No doubt the points urged by learned counsel for the Commissioner do not appear to have been urged before that High Court, but the learned Judges have considered all the relevant provisions of the Act, and we are in agreement with the conclusion reached by them. We therefore answer the question referred to us in Case Refd. No. 66 of 1953 in the affirmative and in favour of the assessee. The assessee will be entitled to the costs of the reference. Counsel's fee Rs. 250.
13. Case Refd. No. 80 of 1953: The question referred to us for decision under Section 66 (2) of the Income-tax Act is:
'Whether on the facts and circumstances of the case, the share of the assessee's loss out of the sum of Rs. 43,969 cannot be set off against the profits of the assessee's business in arriving at the total asses-Gable income?'
The assessee who is a resident and ordinarily resident carried on business in the manufacture and sale of lunghies. This business was carried on; inter alia, at Rangoon in the accounting year by him in partnership with two other persons. The assessee was the capitalist partner, while the other two were the working partners in charge of the management of the business. During the account year relevant to the assessment year the Rangoon business sustained a loss of Rs. 43,969. In the books maintained by the assessee at Madras this sum was adjusted, and in the return filed by the assessee he claimed that this loss from the Rangoon firm should be allowed as a set off.
The Income-tax authorities negatived the claim relying on the provisions of Section 16 (1) (b) and the second proviso to Section 24 (1). The Tribunal sustained this disallowance on, appeal by the assessee. In our opinion, the point involved in this reference has to be answered in favour of the assessee in view of our decision in case referred No. 66 of 1953. This reference is also answered in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 250.