P.B. Mukharji, J
1. This is an Income-tax Reference under Section 66(1) of the Indian Income-Tax Act. Two questions have been referred to this Court for determination. They are as follows :--
'(1) Whether, on the facts and circumstances of this case, the assessee was at all entitled to set off the loss of Rs. 11,875 suffered by it on a joint venture against its other Income?
(2) If the answer to question (1) be in the affirmative, then whether the assessee was entitled to claim a set off of the whole of tide said amount of loss against its profits assessable for the assessment year 1959-60.'
2. The facts giving rise to these two questions must be recorded at the outset. The assessee is Ganga Metal Refining Company (Private) Limited of 43, Strand Road, Calcutta. The status of the assessee is recorded as 'Company'. It is a company incorporated under the Indian Companies Act. The year of assessment is 1959-60. The assessee claimed a deduction of Rs. 11,875/- as its share of loss in a Joint Venture. The assessee company's case is that it entered into a Joint Venture with two other Companies, namely, (1) Binani Brothers Private Limited, Calcutta, and (2) Binani Commercial Company Private Limited, Bombay, for the purchase and sale of certain quantity of White Metal Slag and Dust. 656 Cwt. of those articles were purchased on 31-5-54. Those articles were sold in parts on several dates which the Tribunal records as falling within the accounting years 1955-56, 1956-57, 1957-58 and 1958-59. The last and final sale of these articles took place on the 18th April 3958. The assessee company's case is that the accounts for the joint Venture were maintained in the books of Binani Brothers Private Limited. On the basis of those accounts the final result of tbe Joint Venture was a loss and the assessee's one-third share of that loss amounted to Rs. 11,875/-.
3. Originally those articles were purchased on the 11th May, 1954 by Messrs. M. Gholam Ali Abdul Hussein and Co., in an auction at Kharagpur for Rs. 66,000/-. On or about the 31st May, 1954, tbe said lot was purchased at Rs. 99,900/- by the assessee and the two other said companies. Those purchases according to the agreed statement of facts before this Court were made by these three companies including the assessee in a Joint Venture wherein those three companies agreed to share the profits or losses resulting from the sale of those goods in equal shares. The characteristic features of what are normally associated with a partnership in the facts of this case are equal sharing of profits or losses.
4. It is common ground that there was no written agreement on the basis of which this Joint Venture was carried on. Therefore the Income-tax Officer expressed the view that in the absence of a written agreement the Joint Venture could only be treated as an unregistered firm. Once it is treated as an unregistered firm, the Income-tax Officer necessarily followed up that conclusion by the finding that the loss suffered by an unregistered firm can be carried forward and set off only against the income of that unregistered firm and could not be allocated to the partners and set off against the other incomes earned by them. Therefore, the Income-tax Officer disallowed the loss of Rs. 11,875/- which the assessee in this case claims as a deduction for its share of loss in the Joint Venture.
5. It is also common ground on the agreed statement of facts before this Court that all these three companies who carried on this Joint Venture, one, namely, Binani Commercial Company Private Limited took away its own share of the goods and that since the 6th May, 1957, the sales of the remaining goods were made on behalf of the assessee company and the other company, namely, Binani Brothers Private Limited.
6. In fact it is found by the Appellate Assistant Commissioner that Binani Commercial Company Private Limited took its share of remaining goods after the sale dated 18th October, 1956 and thereafter there were only two partners, the assessee company and Binani Brothers Private Limited. The Appellate Assistant Commissioner took the view that:. ... ... ...... ... ... ...' . . . Even though the purchase price, incidental expenses and sales have been apportioned amongst the partners in the ratio of their shares in the said business it nonetheless shows that the business, at no stretch of imagination can be considered as that of a joint venture. The business was run from 31st May, 1954 to 18th April 1958 and mere entries in tbe books of accounts in a particular way cannot make such a business as that of a joint venture.'
Finally the Appellate Commissioner came to the following conclusion :--
'Such a business was essentially operated on by a firm of which the appellant (Assessee Company) was one of the partners. The said firm not being registered under Section 26-A, the loss arising out to appellant from such a firm is essential loss sustained by an assessee from an unregistered firm and as such the same cannot be set off against other income of the appellant.'
7. Therefore, the Appellate Assistant Commissioner decided that the Income-tax Officer was right in disallowing the claim of the assessee for deduction of the said sum of Rs. 11,875/- as its share of loss in the joint venture and agreed with the conclusion of the Income-tax Officer.
8. The Assessee appealed to the Tribunal. The Tribunal records and finds certain facts which are relevant for the purpose of this reference. The Tribunal found that the loss of these goods continued for nearly three years and there was a systematic and organised activity with the said purpose, viz., to realise profits. Therefore, the Tribunal holds the transactions in question to constitute an adventure in the nature of trade. The Tribunal further points out that it was not the assessee's case before the Tribunal that the profits and/or losses arising from these transactions were not taxable. The assessee's contention before the Tribunal was that this being a joint venture, the profit or loss should be apportioned between the partners or the parties talcing part in the venture and taken to their individual assessments. It is on that ground that the assessee claimed to set-off of the said sum of Rs. 11,875 from its other income as a share of loss from a joint venture.
9. The Tribunal dismissed the appeal of the assessee and upheld the orders of the Income-tax Officer and the appellant Assistant Commissioner. The reasons which the Tribunal gave in support of its conclusion may be briefly summarised at this stage. The allocation sought by the assessee company in this case is permissible only under the provisions of the Income-tax Act in case of the partners of a firm under Section 23(5)(a) and (b) of the Income-tax Act. The Joint Venture was in fact a transaction by a partnership firm of which the three participating companies were the partners and that under Section 3 the assessment in respect of a Joint Venture can only be either in the status of a firm or in that of an association of persons. The Tribunal expressed the opinion that it was a Joint Venture amounting to business within Section 2(4) of the Income-Tax Act and could only be assessed in the status either of a firm or of an association of persons. Therefore, the Tribunal says that there is no scope in such an assessment for allocation of the shares of the profit and or loss of the participants in the venture and allow it to be taken to their individual assessments.
10. Mr. De appearing for the assessee has repeated these arguments before us in this reference for his client. He has relied on a number of decisions and authorities to which we shall make reference at the appropriate stage. The substance of his argument is that the same ussessee must be allowed to adjust incomes or losses appearing under different heads for its one total income that is being assessed under the Income Tax Act. In other words, he says that this assessee company certainly carries on business as such company and also carried on a joint venture of the nature indicated above and if it had incurred losses in such Joint venture, it should be allowed to set off such losses against its assessment or against its profits otherwise attributed to it in its normal business as a company.
11. This argument has an apparent force by its very simplicity. Behind its apparent simplicity lies, however, the more dominant question, namely, whether it is the same assessee. No doubt, if the assessee if the same, then there can be computation under the different heads of income or revenue and then the final striking of the balance of profits and losses for the computations of the total income which is to be assessed but then the facts found and the agreed statement of facts are against this contention. It was not this assessee company which qua the assessee and qua the company was earning this income or making or incurring this loss. The facts found are that this was entirely a different assessee for it was a joint venture of 3 separate companies. The fact found also was that it was a partnership of 3 companies but it was an unregistered firm under the Income-tax Act. Therefore, profits or losses from this joint venture belonging to an unregistered firm or even an association of persons under the Income-tax Act could not be adjusted against the income of the assessee as such.
12. The mam reliance which Mr. De placed in support of his argument is an unreported judgment of the Income-tax Bench of this Court of Sen J., and A. C. Sen J., in the I. T. Ref. No. 47 of 1962 under the title. J. K. Alloys Ltd., Calcutta v. Commissioner of Income-tax. West Bengal delivered on June 17, 1965 (Cal). There the assessee was a limited company incorporated under the Indian Companies Act and had also a joint venture with one individual Ram Kumar Benariwalla and where also the joint venture resulted in a loss and the assessee company's share of the loss there was intended to be set off against its other income. The ratio of that decision, without a formal expression therein, is that the assessee was entitled to adjust his share of the loss sustained by an unregistered firm in which he was a partner against the profits made by him in the business carried on by him individually.
13. If we could have followed that decision, our labour would have been considerably lightened. But Mr. Balai Pal, for the Commissioner of Income-tax, has drawn our attention to certain distinguishing features of the present Reference. In the unreported case of I. T Ref. No. 47 of 1962, D/-17-6-1965 (Cal), the assessee claimed to set off not under Section 24 of the Income-tax Act at all but under Section 10 of the Income-tax Act. Here the assessee's whole claim before us in this Reference is made under Section 24 of the Income-tax Act. Section 10 of the Act with which the Reference in the case of I. T Ref. No. 47 of 1962, D/-17-6-1965 (Cal), was concerned, deals with the tax payable by the assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him. Naturally, there it is the question of the same assessee in the same status but Section 24 which is the only Section with which we are concerned in this Reference on the admitted facts, introduces many other considerations and the major consideration before us is that this joint venture was carried on by an unregistered firm of 3 companies within the meaning of the Income-tax Act. This unregistered firm is a separate legal concept from the Company as an assessee under the Income-tax Act. The company was assessed in the status of a company. Therefore, in that assessment it cannot be permitted to set off a loss which is not of the company in its status as an assessee company but in a totally different status of an unregistered firm of which it was a partner. We are of the opinion that while the different heads of income of business of the same assessee can be adjusted by a set off, there can be no such set-off when the assessees are different as in the present Reference before us. No doubt, this unregistered firm carrying on the joint venture, is not found to have been assessed in this case as an assessee. But that 1s not material because that unregistered firm carrying on such joint venture was within the concept of assessee under the Income-tax Act and as such assessee in its capacity and quality of an unregistered firm, it is distinctly different and separate from the company in which status and capacity it has been assessed and in which assessment it has claimed adjustment. This is really the crucial and significant point of difference between the reference before us and the Reference in I. T. Ref. No. 47 of 1962, D/-17-6-1965 (Cal).
14-17. There is also a second distinction, which Mr. Pal has urged before us. He formulates that difference in tbis way. The venture in J. K. Alloys' case was treated as that of an unregistered firm, but here in the Reference before us, there is the further ground that this can also be an association of persons in this case. The decision in J. K. Alloys' case does not discuss at all the question of association of persons within the meaning of Section 3 of the Income-tax Act. In support of this distinction, it can be said that 3 limited companies incorporated under the Indian Companies Act, even if they carry on a venture jointly, cannot be said to form a partnership within the meaning of the Partnership Act. That is why the great authority of Lindley on Partnership 10th Edn. at p. 100 formulates the law thus:
'There is no general principle of law which prevents a corporation from being a partner with another corporation or with ordinary individuals, except the principle that a corporation cannot lawfully employ its funds for purposes not authorised by its constitution. Having regard, however, to this principle, it may be considered as prima facie ultra vires for an incorporated company to enter into partnership with other persons.'
It follows that this classical authority on the law of partnership is of the view that prima facie a company entering into a partnership with some other person or some other company would be ultra vires and will be against the principle that a particular company or an incorporated body cannot lawfully employ funds for purposes not authorised by its constitution which would be normally the Memorandum and the Articles of Association. This difficulty is recognised in 28 Hals. (Simonds 3rd Edn) P. 499 Article 959. It has been pointed out there that a Corporation if so authorised by its constitution can enter into partnership with an individual person or with another Corporation whatever may be its nationality and wherever it may be situate. Such a partnership however would require very special articles since many of the provisions of the Partnership Act would be difficult to apply.
18. In the world of precedents one frequently comes across many mythologies growing round certain decisions. One such decision is that of the House of Lords in Hugh Stevenson and Sons Ltd. v. Akt. Fur Carton-nagen-Indus-tries, reported in 1918 AC 239, which is described in many text books and commentaries as laying down the law that a company can be a partner with another company and two companies incorporated can form a partnership. Scanning the speeches of the learned Law Lords of the decision I find no warrant for such a mythical proposition claimed in favour of the decision. That point was never in issue before the House of Lords in that case nor was it discussed nor was it decided. Therefore following Lord Halsbury's dictum in 1901 AC 495 at p. 506 that a case is only an authority for the proposition it decides and not for the proposition that was either assumed or seemed to follow from such decision, we do not think that this authority is of any help on this proposition.
19. On the other hand the decision in In re: European Society Arbitration Acts--ex parte Liquidators of the British Nation Life Assurance Association, (1878) 8 Ch D 679 is a more relevant and telling authority on the proposition that we are considering. The observations of Lord Justice lames at p. 704 make the law on this point abundantly clear. It is observed there:
'The association was formed for the purposes mentioned in Article 3 of their deed of settlement, such purposes to be carried out into effect and the business to be managed by board of directors and by general meetings in manner there prescribed. Prima facie there is nothing more inconsistent with the whole scope and character of such a body than that it should enter into a contract of partnership with any other person or persons in any other business whatever. It would require very clear powers to enable a man's partner or partners, or, in a joint stock company, his delegated officers, or the majority of his co-shareholders, to make him a partner with any other person or a shareholder in any other society. But if the society in its quasi corporate character could take shares in another partnership or body, it would in effect be to make every shareholder a partner or shareholder in such partnership or body. ...... But in truth the more or less similarity of the objects or even absolute identity of the objects does not affect the principle. It is the entering iato a new contract of partnership with new persons under a new constitution which is absolutely ultra vires and void, unless specially provided for and authorised.'
20. There is no special provision and authorisation in the present reference before us saying that the assessee company or the two other companies who were its partners, were specially authorised by Articles of Association and Memorandum of Association to enter into such partnership. Be it noted here that mere implication will not help but there has to be in such a case express and special authorisation, according to the authorities which we have just discussed.
21. It will not be a digression at this stage but an imperative necessity to bear in mind the very specific provisions of the Partnership Act. Section 4 of the Partnership Act says that 'Partnership is 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. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm', and the name under which their business is carried on is called the 'firm name'. Notionally and juristically if two incorporated companies under the Indian Companies Act enter into a partnership, then each company becomes agent for the other and agrees to share the profits. This will create many problems for the two incorporated companies. The two companies will have to be, therefore, agents for each other in a manner which may not be permissible at all by their own charters, articles and Memorandum. It would be difficult to apply the very specific rights and obligations as between partners in the case of Companies as partners such as in Chap. III (Sections 9 to 17), Chap. IV (Sections 18 to 30), and Chap. VI (Sections 39 to 55) of the Partnership Act. Then there is need also for the registration of firms and the companies as such partners in a partnership will have to, therefore, obey two masters, the Registrar of firms and Registrar of Companies. The access of each partner to the other partner's books of accounts will mean that one incorporated company would be entitled to get into the fields of the accounts of the other incorporated company which is its partner. This will make nonsense of the Companies Act. Strangers then will have access to the books, accounts and papers of the companies whereas under the Companies Act, they are only limited to their own members and shareholders.
22. Therefore, the regular concept of partnership under the Partnership Act cannot really be applied to say that an incorporated company under the Companies Act can enter into a partnership with another incorporated company in the regular and technical sense. No doubt, there could be such partnership in the loose sense of the term between two incorporated companies for the purpose of Income-tax Act. Instances are not rare and that has been so here. For instance, the Supreme Court decision in Steel Brothers and Co., Ltd. v. Commissioner of Income-tax : 33ITR1(SC) . There it is held that relationship brought into existence by agreement between 3 companies, A, B and C was a relationship between partners and that the partnership consisted of these 3 partners A, B and C but ber cause the Deed of Partnership did not specify their respective shares and as the application for registration under Section 26-A was not signed by all 3 companies, the partnership was not entitled to registration under that Section. That decision has to be understood in relation to partnership of firms or registration of firms under the Income-tax Act and not under the formal concepts of the Indian Partnership Act or under the Indian Companies Act.
23. It will be convenient here at this stage to refer to some of the cases cited at the Bar. In Subba Rao v. Commissioner of Income-tax, Madras, reported in : 30ITR163(SC) it is laid down that it is the intention of the Income-tax Act that a firm should be given the benefit of Section 23 (5) (a) only if it is registered under Sec. 26-A of the Income-tax Act in accordance with conditions laid down in that Section and the rules framed thereunder. And as the rules required the application to be signed by the partner in person, the signature by an agent on his behalf was held to be invalid. The principle we have just indicated was clearly mentioned by the Supreme Court at p. 171 of the Report (ITR): (at p. 611 of AIR) where the following observations appear :--
'Under the common law of England, a firm is not a juristic person, the firm name being only a compendious expression to designate the various partners constituting it. But as pointed out by this Court in Dulichand Laxminarayan v. Commissioner of Income-tax, Nagpur, : 29ITR535(SC) , inroads have been made by statutes into this conception, and firms have been regarded as distinct entities for the purpose of those statutes. One of those statutes is the Indian Income-tax Act, which treats the firm as a unit for purposes of taxation.'
The entity known as partnership under the Income-tax Act is not the same entity of partnership strictly within the limits of the Indian Partnership Act.
24. We may notice here a few more of the authorities cited at the bar. In the case of Arunachalam Chettiar v. Commissioner of Income-tax Madras, reported in , the Privy Council had occasion to discuss this very point of the Income-Tax 'entity' of a partnership under the Income-tax Act as will be clear from the observations of Sir George Rankin delivering the judgment of the Privy Council at pages 178 and 179 of the report (ITR): (at p. 136 of AIR). There the Privy Council expressed the view at p. 179 (of ITR): (at p. 136 of AIR):
'In their lordship's 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).' It is therefore essential always to keep clear in the mind that the Income-Tax entity of partnership under the Income-Tax Act is a concept in Income-tax law separate from the concept of partnership under the Partnership Act. Income-Tax entity of partnership under the Income Tax Act may not satisfy the legal requirements of a partnership within the strict meaning of the Partnership Act.
25. The Supreme Court in Jamnadas Daga v. Commissioner of Income-Tax, reported in : 41ITR630(SC) had occasion to discuss this problem in the context of an assessee who was a partner in two registered firms and an unregistered firm. The question, therefore, arose if the assessee could carry forward loss of the registered firms in the subsequent year or years. Hidayatullah J., who delivered the judgment of the Supreme Court at page 635 of the report (of ITR): (at p. 1141 of AIR) expressly makes this point clear by the following observations:
'The High Court however held that once tosses were set off against profits they were to that extent absorbed and that there was nothing to carry forward. In our opinion this conclusion does not follow. Section 24 provides for a different situation altogether; it provides for the carrying forward of Toss in business to the subsequent year or years till the loss is absorbed in profits or till it cannot be carried forward any further. That has little to do with the manner in which the total income of an assessee has to be determined for the purpose of finding out the rate applicable to his income, taxable in the year of assessment.'
The Supreme Court although confirmed the decision of the High Court on the main issue held that the High Court was in error in deciding that the losses of the registered firms could not be carried forward because they had been absorbed by the profits of the unregistered firm.
26. The Supreme Court case however was concerned with Section 14 (2) read with Section 16 (1) (a) and Section 3 of the Income-Tax Act.
27. The point of set off again came up for discussion before the Supreme Court in Commissioner of Income-tax v. P. M. Mathuraman Chettiar reported in : 44ITR710(SC) . S. K. Das, J., delivering judgment of the Supreme Court expounded the principle at pp. 713-14 of that report (ITR): (at p. 417 of AIR) in the following terms:--
'It is worthy of note that though the profit of each distinct business may have to be computed separately the tax is chargeable under Section 10, not on the separate income of every distinct business, but on the aggregate of the profits of all the business carried on by the assessee. 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 that Section 24(1) has no application to the facts of the present cases the second proviso thereto can also have no application. Moreover the second proviso to Section 24 (1) applies only where that assessee is an unregistered firm. That is not the case here. The assessees 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.'
It follows from this observation and on a parity of reasoning that if in the facts of this reference the joint venture between the assessee and two other limited companies was not the Income-tax entity of an unregistered firm or partnership under the Income-Tax Act then in that case these three limited companies could only be regarded as an association of persons under Section 3 of the Income-Tax Act and in which event Section 24 (1) would not be applicable.
28. It is essential to. point out that set off can be regarded both on general principles as well as on the terms of any special statute or legislation. The general principles of set oif are inherent in every accounting of the same assessee. Such general principles of set off are, what the Supreme Court said, applicable where the assessee carries on several businesses so that under Section 10 of the Income-tax Act he is entitled to set off losses in one business against the profit in another in computing the total income of the same assessee. That is the reason why the Supreme Court in this case expressly said that this set off was not a set off under Section 24 (1) when the assessees are not the same. In the present reference before us also the assessee company is not the same as the assessee in the joint venture which was either an unregistered firm or an association of persons. In either event it is not the same assessee and therefore on such general principles set off cannot be permitted. Again, set oif may be the creature of a statute, as indeed it is, for instance, under Section 24 of the Income-Tax Act, specially and expressly providing for a set off of loss in computing aggregate in-come.
29. The Andhra Pradesh High Court in Commissioner of Income Tax v. V. Sanjeeva Setty, reported in : 46ITR755(AP) came to the conclusion that an assessee who was a partner in registered firm is entitled in his assessment as an individual to have the loss incurred by him as a partner of the firm set off against his income, even though the firm has not been assessed to tax.
30. In a recent case of the Commissioner of Income Tax, Bombay City v. Jadavji Narsidas and Co., reported in : 48ITR41(SC) , the Supreme Court had again to consider this point and came to the conclusion that the loss on the facts of that case could not be set off against the income of the assessee firm on the ground that the losses of the unregistered firm could only beset off against the income of the unregistered firm and it made no difference that the Department had not assessed the unregistered firm or taken action under Section 23(5)(b). The point is made clear there in the observations of Hidayatullah J., delivering the majority judgment at pp. 47-49 (of ITR): (at pp. 1500-1501 of AIR).
31. In a recent decision of the Bombay High Court in Commissioner of Income-tax v. Jagannath Narsingdas, reported in : 55ITR128(Bom) , the point is clearly indicated and decided by Desai J., that Section 24 has no application where the set off is not of loss under one head of income against profits under another head but it is a case of adjustment and set off between profits and losses under the same head and that the adjustment of profits and losses under the head of business is to be done not under Section 24 but under Section 10 of the-Income-tax Act.
32. In this view of the matter, we hold that the assessee is not entitled to set off against its other income the loss of Rs. 11,875 suffered by it in its joint venture with two other limited companies. We accordingly answer the first question in the negative. Having regard to this answer, question No. 2 does not arise for determination and we do not propose to express any opinion thereon. We need only record that the assessee's Counsel's statement before the Tribunal that in the assessment of Binani Brothers Private Ltd., and Binani Commercial Company Private Limited, the losses from this joint venture have been allowed as a set off and which was mentioned by the Tribunal, was a wrong statement by the learned Counsel and the original records of assessment of Binani Brothers Private Limited, Calcutta, were produced before the Court to show that the statement was wrong. That fact may be recorded.
33. There will be no order as to costs.
34. I agree.