http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH,HYDERABAD

       Vs.

RESPONDENT: A.   DHARMA REDDY, MORTHAD

DATE OF JUDGMENT: 19/02/1969

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. RAMASWAMI, V.

CITATION:  1969 AIR  940            1969 SCR  (3) 782  1969 SCC  (1) 580

ACT: Income-tax  Act  (11 of 1922), s. 24(2)(ii)  as  amended  in 1955--Loss  sustained by a partner in a dissolved  firm,  if can be set off against profit earned in another firm in  the subsequent year.

HEADNOTE: The  assessee  carried on two businesses in Bidi  leaves  as partner in two different firms.  The first firm consisted of two partners, and the second of four; both these firms  were assessed  to income tax separately and it was admitted  that the two firms had nothing to do with each other.  The  first firm  sustained  losses  and was  dissolved.   The  assessee claimed  that  the losses sustained by him in  the  previous year (sustained in the first firm) should be carried forward and  set  off  against his profit  in  the  subsequent  year (earned  in  the second firm) under s. 24 (2)  (ii)  of  the Income-tax Act, 1922 as the assessee carried on the business in  Bidi  leaves during that year.  The  Income-tax  Officer rejected  the  claim,  and  his  order  was  upheld  by  the Appellate   Assistant  Commissioner.   But   the   Appellate Tribunal accepted the claim and the question was answered by the  High  Court  in the  assessee’s  favour.   The  Revenue appealed  to this Court and contended that for  getting  the benefit under s. 24(2) (ii) the same concern or  partnership which  carried  on in the previous year should  continue  to function in the year of assessment. HELD : The appeal must be dismissed. In  order  to get the benefit of s. 24 (2) (ii) of  the  Act especially after the amendment made by the Finance Act  1955 it  was not necessary that the assessee should carry on  the same business in the year of assessment.  The change in  the language  of the provision substituted by the  Amending  Act was  significant and all that the assessee had to  show  was that  the  business in which loss was  originally  sustained continued to be carried on by him in the assessment year. If the first partnership was dissolved it did not mean  that his  business  in Bidi leaves came to an end so long  as  he continued  to  do that business either  individually  or  in partnership  with  others.  During the  assessment  year  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

question  he  was carrying on that business  in  partnership with three others.  According to the provisions of s.  24(2) as  they stood before the amendment made by the Finance  Act of  1955 he continued to carry on the same business but  for the  purpose of the present case s. 24(2) (ii) as  it  stood after  the amendment was relevant and on the plain  language of  the aforesaid provision the business in which  the  loss was originally sustained was continued during the assessment year.   The word "business" has been defined in s.  2(4)  of the  Act as including any trade, commerce or manufacture  or any adventure or concern in the nature of trade, commerce or manufacture.  These words are of wide import the  underlying idea  being of continuous exercise of an activity.   In  the present   case,   the  business  did  not  depend   on   the constitution  of  a partnership firm through  which  it  was carried  on  nor  could it come to an end  so  long  as  the assessee carried on the same systematic or organised  course of activity with a set purpose. [786 G--787 C] 783 When  the profits of a registered firm are ascertained,  the assessee for the purpose of paying tax is not the registered firm  but  each partner of that firm.  The identity  of  the business for the purpose of s. 24(2)(ii) does not change  by reason  of the change in persons who carry on that  business since it continues to be carried on by the same  individual. A  set off for loss which had been carried forward from  the earlier  years under the provisions of s. 24 would  only  be available  to  the individual partner who had  suffered  the loss and not to the other partners of the firm or the  firm. [787 F] Narain  Swadeshi  Weaving Mills v.  Commissioner  of  Excess Profits Tax, [1954] 26 I.T.R. 765, 773, Dwarkadas  Leeladhar v.  Commissioner  of Income-tax, Kerala, 47 I.T.R.  619,  S. Narain Singh v. Commissioner of Income-tax, Delhi, 66 I.T.R. 341 and Sitaram Motiram Jain v. Commissioner of  Income-tax, 43 I.T.R. 405, referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1057  of 1966. Appeal  from the judgment and order dated April 17, 1964  of the  Andhra  Pradesh High Court in Case Referred No.  48  of 1962. S.   Mitra,  R.  N.  Sachthey  and B.  D.  Sharma,  for  the appellant. S.   T. Desai and K. Jayaram, for the respondent. The Judgment of the Court was delivered by Grover, J. This is an appeal by certificate from a  judgment of the High Court of Andhra Pradesh answering the  following question  referred to it by the Tribunal arising Out of  the assessment  of the assessee for the assessment year  1956-57 in the affirmative and in his favour :                "Whether  the assessee is entitled under  the               provisions of Section 24(2) of the Act to  set               off his share of unabsorbed loss amounting  to               Rs. 24,532 from the dissolved firm to M/s.  A.               Dharma Reddy, Morthad brought forward from the               assessment  year  1955-56  against  his  other               business income for the assessment year  1956-               57." The  assessee is an individual whose only sources of  income were his shares in several partnership concerns.  Apart from the  firms which carried on other businesses there were  two

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

firms  which  carried on the business in Bidi  leaves.   The first  was  styled as M/s.  A. Dharma Reddy,  Morthad.   The second  firm was called A. Dharma Reddy &  Co.,  Ditchpally. The  first partnership was dissolved on March 31,  1955  but the second one continued during the assessment year 1956-57. During the assessment year 1955-56 the assessee sustained  a loss of Rs. 30,255 in the first firm. As he was carrying  on several  other businesses, after the necessary set  off  the total  loss  sustained  by him for that  year  came  to  Rs. 24,532.  During the assessment year 1956-57 the 784 assessee’s  profit in the second firm was estimated  at  Rs. 11,853  and  his total taxable income was  assessed  at  Rs. 28,758 for that assessment year.  As the assessee carried on the business in Bidi leaves during that year he claimed that the  loss  sustained  by  him in  the  previous  year  viz., assessment  year 1955-56 should be carried forward  and  set off against his profit in the subsequent year 1956-57  under S. 24(2)(ii) of the Income tax Act 1922, hereinafter  called the "Act".  The Income tax Officer rejected the claim.   His view  was  that  the set off could be allowed  only  if  the business,   profession  or  vocation  in  which   loss   was originally  sustained  continued  to be carried  on  by  the assesssee during the relevant assessment year.  According to him  the business in which the loss of Rs. 30,255  had  been incurred  had ceased to exist because of the dissolution  of that  firm  on  March 31,  1955.   The  Appellate  Assistant Commissioner  in appeal considered the constitution  of  the two  firms.   The first consisted of two partners  in  which originally  the  loss had occurred and which had  ceased  to exist  in  the relevant assessment year.   The  second  firm against  whose  income  the loss was sought to  be  set  off consisted  of  four  partners.  Both  the  firms  had  filed separate  returns  and  were  assessed  separately  for  the assessment  year  1955-56.  The assessee had admitted  in  a latter  dated  September  16, 1960 that the  two  firms  had nothing  to do with each other and there was no material  to show that the business of the dissolved firm was taken  over by  the other firm.  The Appellate  Assistant  Commissioner, therefore, came to the conclusion that the business in which the loss was originally sustained could not be said to  have continued during the assessment year 1956-57.  The  assessee took  the matter to the Income tax Appellate Tribunal  which upheld  the  contention  ’of  the  assessee  that  the  same business  of  Bidi leaves continued during  the,  assessment year.   According to the Tribunal the assessee was  carrying on two businesses in Bidi leaves as partner in two different firms.  One of these firms was dissolved but he continued to carry  on  the  same business in conjunction  with  his  co- partners in the year under appeal.  The High Court  disposed of the matter in a fairly simple way.  It was observed               "When  a  firm carries on business.  it  is  a               business  carried on by the partners  of  that               firm and the individual partners of that  firm               are  assessed to tax.  When the profits  of  a               registered firm are ascertained, the assessee,               for the purpose of paying the tax, is not  the               registered  firm,  but  each  partner  of  the               registered firm.  In the present case, it  was               in  the business in the beedi leaves that  the               assessee  sustained a loss for the  assessment               year 1955-56.  He carried on the same business               in  beedi  leaves during the  accounting  year               1955-56  i.e.,  the  assessment  year  1956-57               though in partnership

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

             785               with  others.  Entering into partnership  with               another  in one case and three others  in  the               other  case,  was only the  mode  of  carrying               business;   but  the  business  is  the   same               business  viz.,  trade  in  beedi  leaves.               Section 24 (2) (ii) does not require that  the               business should be continued to be carried  on               for  the  assessment year in question  by  the               same concern or partnership or firm as in  the               previous  year  when the loss  was  originally               sustained by the assessee.  The only condition               prescribed  by  that clause is that  the  same               business must be continued to be carried on by               "him" (the assessee)".               In order to dispose of the contentions of  the               learned    counsel   for   the   Income    tax               Commissioner who is the appellant before us it               is necessary to set out the relevant statutory               provisions.  Before the amendment made by  the               Finance  Act of 1955 s. 24(2), was as  follows               :-               "(2)  Where  any assessee sustains a  loss  of               profits or gains in any year, being a previous               year  not earlier than the previous  year  for               the assessment for the year ending on 31st day               of March, 1940, in any business, profession or               vocation,  and the loss cannot be  wholly  set               off under sub-section (1), so much of the loss               as  is not so set off or the whole loss  where               the assessee had no other head of income shall               be  carried forward to the following year  and               set off against the profits and gains, if any,               of  the  assessee  from  the  same   business,               profession or vocation of that year..........               Sub-section (2) of s. 24 was substituted by S.               16 of the aforesaid Finance Act.  The material               portion was in the following terms :-               "(2)  Where  any assessee sustains a  loss  of               profits or rains in any year, being a previous               year  not earlier than the previous  year  for               the assessment for the year ending on the 31st               day of March 1940, in any business, profession               or vocation, and the loss cannot be wholly set               off  under sub-s. (1), so much of the loss  as               is  not  set off or the whole loss  where  the               assessee had no other head of income shall  be               carried forward to the following year, and               (i)   ..............................               786               (ii)where the loss was sustained by him in any               other  business,  profession or  vocation,  it               shall  be  set  off against  the  profits  and               gains, if any, of any business, profession  or               vocation  carried  on  by him  in  that  year;               provided  that  the  business,  profession  or               vocation  in  which the  loss  was  originally               sustained continued to be carried on by him in               that year." The  arguments of the learned counsel for the appellant  are based mainly on the fact that the partners of the two  firms were  different although the assessee was a partner of  both the  firms.  It is contended that since the first  firm  was dissolved  on March 31, 1955 it could not be said  that  the business  in  which the loss was sustained continued  to  be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

carried on by the assessee during the assessment year  1956- 57  within  the  meaning of s.24(2)(ii)  of  the  Act.   For getting the benefit under that section it was essential that the  business  in  which the loss was  sustained  should  be continued  to  be  carried on for  the  assessment  year  in question.   This means that the same concern or  partnership which  carried on the business in the previous  year  should continue to function in the year of assessment. There  is  no  warrant for the proposition  put  forward  on behalf of the appellant that in order to get the benefit  of s. 24(2) (ii) of the Act especially after the amendment made by  ’the Finance Act 1955 the assessee should carry  on  the same  business partnership in the year of  assessment.   The channge in the language of the provision substituted by  the Amending Act is significant and all that the assessee has to show  is  that  the business in which  loss  was  originally sustained  continued  to  be  carried  on  by  him  in   the assessment  year,  Now, in the present  case,  the  assessee carried  on  the business in bidi leaves  apart  from  other businesses.  This business he was doing in partnership  with another  person.   Nevertheless the business was  of  taking contracts  in  respect of or dealing in  bidi  leaves,  This business  he could do either individually or in  partnership with some one else.  If the first partnership was  dissolved it did not mean that his business in bidi leaves, came to an end  so  long as he continued to do  that  business  either individually  or  in partnership with  others.   During  the assessment  year in question he was admittedly  carrying  on that  business in partnership with three others.   It  could well  be  said that even according to the  provision  of  s. 24(2)  as  they  stood before the amendment  made  by  the Finance  Act  of  1955 he continued to  carry  on  the  same business  but for the purpose of the present case it  is  s. 24(2) (ii) as it stood after the amendment which is relevant and  we fail to see on the plain language of  the  aforesaid provision  how it could be held that the business  in  which the loss was originally sustained was not con- 787 tinued  during  the  assessment  year  1956-57.   The   word "business"  has  been  defined in s. 2 (4)  of  the  Act  as including   any  trade,  commerce  or  manufacture  or   any adventure  or  concern in the nature of trade,  commerce  or manufacture,  These words are of wide import the  underlying idea  being  of  continuous exercise  of  an  activity.   As pointed  out  by S. R. Das, J. (as he then  was)  in  Narain Swadeshi  Weaving  Mills v. Commissioner of  Excess  Profits Tax(1), the word ",business" connotes, some real substantial and  systematic or organised course of activity  or  conduct with  a set purpose.  The systematic or organised course  of activity of the assessee, in the present case, consisted  of dealings  or  taking  of  contract  in  bidi  leaves.   That business did not depend on the constitution of a partnership firm through which it was carried on nor could it come to an end  so long as the assessee carried on the same  systematic or organised course of activity with a set purpose. The  computation of a partner’s share in the firm’s  profits is  dealt  with by s. 16(1) (b).  The proviso  thereto  lays down that if his share was computed as a loss such loss  may be set off or carried forward and set off in accordance with the provision of s. 24. Under s. 23 (5) when the assessee is a registered firm and the     total  income of the firm  has been assessed under sub-ss. (1), (3)    or  (4) as the  case may  be,  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

by him on the basis of such assessment shall be  determined. There  is  a proviso which says 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  S. 24.  The High Court was right  in  saying that  when the profits of a registered firm are  ascertained the  assessee for the purpose of paying the tax is  not  the registered firm but each Partner of that firm.  In a  number of  decided cases it has been held that the identity of  the business for the purpose of s. 24(2)(ii) does not change  by reason  of the change in persons who carry on that  business since it continues to be carried on by the same  individual. The Kerala High Court in Dwarkadas Leeladhar v. Commissioner of Income tax, Kerala (2)  held that where a registered firm which  was working at a loss was dissolved and one  of  the partners continued the same business as a sole proprietor he Was  entitled to set off his share of the loss  incurred  by the  firm  against  the profits accruing  to  him  from  the business  as a sole proprietor.  The Delhi High Court in  S. Narain Singh v. Commissioner ’of Income tax, Delhi(3) had to deal with a case where an assessee had taken certain  liquor contracts  and carried on the business of sale of liquor  in his’ individual name and sustained losses.  Subsequently (1) [1954] 26 1,T.R. 765, 773.        (2) 47 T.T.R. 619, (3)66 I.T.R. 34 1, 788 he  carried on the same business with 10 other  persons  and sought  to set off the previous losses against  the  profits made  in the accounting year.  Referring to the meaning  the construction  of the words "same business" as they stood  in S.  24(2)  before the amendment made by the Finance  Act  of 1955,  it was held that the assessee was entitled  to  carry forward  the losses for the previous year and have them  set off  against the share of his income of the registered  firm during  the assessment year because the business’  in  which the loss was sustained was the same business. In  both the above cases reference was made to the  decision of  the  Gujarat  High  Court in  Sitaram  Motiram  Jain  v. Commissioner of Income-tax(1).  In that case an assessee had incurred losses in a business carried on by him as the  sole proprietor  and a registered firm of which he was a  partner took over that business as a running concern.  The  question was whether he could have the losses incurred by him in  the business which he carried on as the sole proprietor  carried forward and set off against his share of the profits of  the registered firm.  After referring to s. 24(2) (ii) and s. 23 (5)  it was observed, what has to be determined in the  case of a registered firm is the total income of each partner  in the firm as the individual partners are assessed to tax ’and not  the  firm as such.  A set off for loss which  had  been carried forward from the earlier years under the  provisions of  s. 24 would only be available to the individual  partner who  had suffered the loss and not to the other partners  of the firm or the firm. In  our judgment there could be no manner of doubt that  the business  in  which  the  loss had  been  sustained  by  the assessee  when he was a partner of the first firm which  was dissolved  on March 31, 1955 continued to be carried  on  by him  in  partnership  with three other  persons  during  the assessment  year  1956-57, the business, as  stated  before, being of dealing in or entering into contracts in respect of bidi  leaves.  The mode in which he carried on the  business in bidi leaves was one of taking other persons as partners’. He  did not stop doing that business in the assessment  year in question.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

The  view taken by the High Court, in the present  case,  is unexceptionable and must be upheld.  The appeal fails and it is dismissed with costs. Y.P. (1) 43 I.T.R. 405, Appeal dismissed. 789