1. An interesting question has been referred to us for decision under Section 66(1), Income-tax Act, by the Income-tax Appellate Tribunal. The question for decision is:
"Whether on the facts and in the circumstances of the case, the taxed share income of Rs. 22,440 from the unregistered firm of Messrs. Dharmashi Bros., could be set off against the loss of Rs. 52,569 sustained by the respondent Hindu undivided family in speculation business for the purpose of determining the loss to be carried forward under Section 24(2)."
The assessee is the kartha of a Hindu undivided family. The kartha was also a partner in an unregistered firm known as Messrs. Dharmashi Brothers. During the assessment year, the assessee received as his share of the profit of the unregistered firm a sum of Rs. 22,440 on which tax was collected from the unregistered firm. His account of the total income of the loss as compiled by the Income-tax Officer is as follows:
Rs. as. P. Rs. as. P.
Business loss in speculation ... 52,569 0 0 Loss-
1. income from commission agency ... 538 0 0
2.Income from money lending ... 2,570 0 0
3.Taxed share income from Messers. Dharmashi Bros. ... 22,410 0 0
25,548 0 0
Other sources ... 94 0 0 25,642 0 0
26,927 0 0
2. It would be seen from this statement that the family incurred a loss of Rs. 52569 in speculation. This loss was set off by the Income-tax Officer--which was affirmed by the Appellate Assistant Commissioner against the profits not only of the joint family but also against the taxed share income of the kartha from Messrs. Dharmashi Bros., which was a sum of Rs. 22,440. The balance of Rs. 26,927 was allowed to be carried forward under Section 24 (2) of the Act. The Appellate Tribunal reversed the decision of the revenue department and held that the loss could not be set off against the taxed share income from the unregistered firm received by the assessee during the year. At the instance of tile Income-tax Commissioner this reference was made to this Court. The question is whether the view taken by the Appellate Tribunal was right or whether the view of the department should prevail.
3. The set-off allowed under Section 24(1) of the Act is in respect of the loss sustained under one head against the profits or gains under one or more heads earned during the accounting year. In the case of unregistered firms, under Section 14, if tax has already been paid by a partner of such firm in respect of any portion of his share in the profits and gains computed in the manner laid down in Clause (b) of Sub-section (1) to Section 16, it shall not be liable to be assessed to tax again, the reason being, as the income had already suffered tax it could not be subjected to double taxation. But under Section 16 the amount so exempted from further taxation is not excluded in computing the total income of the assessee. The result is in fixing the tax payable by the assessee and in order to determine the rate, the income exempted from taxation under Section 14 should also be taken into computation. Under Section 17(2), after arriving at the total amount of the income-tax excluding the supertax which should have been payable on the total income, if no part of it is exempted from taxation, the department has to work out the proportion which the inexempted portion of the total income bears to the total income, and bearing that fraction, in mind arrive at the total amount of tax payable by the assessee. In other words, if the total income is Rs. 10.000 and the exempted portion of the income is Rs. 3000, in order to arrive at the tax payable the total amount of the income-tax should be 7/10ths. It is only for this purpose and for this purpose alone the exempted portion of the income of the assessee enters into consideration in the process of assessing the income of the assessee for the purpose of tax under the Act.
4. The language of Section 24(1) when it speaks of "set off against his income, profits or gains" can only apply to income which has not already suffered tax but income in respect of which tax could be levied and collected. It is against such an income, profits or gains that set-off is allowed. The word used is not "total income" but only 'income" and that is important to bear in mind in order to find out against which income the set-off is allowed. It is not against the total income but only against the income and profits or gains under any other head in that year; that is, in respect of which tax could be collected. The object of the set-off is to reduce the liability of the assessee in respect of the amount of tax payable by him by taking into consideration not only the profits but also the losses; as otherwise it will be inequitable to call upon the assessee to pay the tax on profits earned by him under one head, leaving alone the losses sustained by him under the other leads, even though the losses might exceed the profits or may be equal to the proms or may be lower than the profits.
5. There is the provision introduced in Section 24 by the Amending Act of 1939 permitting the assessee to carry forward the losses to the next year, if the losses could not be set off in the year completely; but subject to the condition that in the succeeding year the loss could be set off only against the profits and gains of the same business in respect of which loss had previously occurred. If the contention urged on behalf of the Commissioner of Income-tax by Mr. Rama Rao Sahib were to be accepted, the effect of carrying forward the loss after allowing the department to set off the sum of Rs. 22,440 would be to reduce the amount of loss that could be carried forward, and in the succeeding year if the assessee earned profits which exceeded the loss that is carried forward, the result would be in effect to subject the sum of Rs. 22,440 to doubts taxation for, by allowing a set-off in the accounting year, the loss was reduced, and the effect of reducing the loss was to increase the profits in the succeeding year which would be available for the purpose of tax after setting off the loss that was carried forward. This in substance is really to subject the sum of Rs. 22,440 to a further tax though it is not actually levied and collected. We think, therefore, that the contention urged on behalf of the Income-tax Commissioner can not be accepted and the question referred to us for decision must be answered in the negative and against the Commissioner of Income- tax. As the Commissioner has failed he must pay the costs of the assessee to be fixed at Rs. 250.