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PETITIONER: COMMISSIONER OF INCOME-TAX, U.P.

       Vs.

RESPONDENT: J.   P. KANODIA & CO.

DATE OF JUDGMENT: 28/04/1970

BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR 1588            1971 SCR  (1) 418  1970 SCC  (2)   7

ACT: Income-tax  Act  (11 of 1922), ss. 25(5)  and  24-Registered firm--Partners  and minors entitled to benefits of  partnei- ship--Respective   shares  in  profits--Directions   to   be assessed  as  the  income  of  their  respective   families- validity. Loss  in  speculative transactions-Set off  against  profits from other business anctivities-if permissible.

HEADNOTE: The  respondent is a registered firm of two partners.  Three minors  were  admitted to the benefits of  the  partnership. For  the  assessment year 1957-58,  the  Income-tax  Officer rejected the claim of the firm to set off under s. 24(1) the loss  from certain speculative transactions against  profits from  other  business  and  held  that  since  the   capital contributed  by  the  partners and minors  was  out  of  the capital  of  their respective Hindu  undivided  families  to which they belonged, the profits allocate( to them should be assessed  as the income of their respective  families.   The order  was  confirmed by the Commissioner.   In  a  petition under  Art. 226, the High Court set aside the  direction  to assess  the  shares  of the partners  and  minors  to  their respective   families,  and,  following  the   decision   in Jagannath  Mahadeo Prasad v. Commissioner of Income-tax,  55 I.T.R 501 held that the speculation losses were liable to be set off against the profits in other business in the year of assessment. in appeal to this Court, HELD: (1) Once the Income-tax Officer grants registration of a  firm  he  cannot proceed to inquire  whet-her  the  share allocated  to a partner is beneficially held by  some  other person  or entity that is, whether the partners  represented other  persons.  He must allocate the profits in  accordance with  deed  of  partnership.  Therefore, the  order  of  the Income-tax Officer, in the present case, directing that  the income  of the partners and minors shall be assessed in  the hands of their respective families was withOut jurisdiction. [420 F-H] (2) The decision relied upon by the High Court was  reversed

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by  this  Court in Commissioner of Income-tax  v.  Jagannath Mahadeo  Prasad,  71 I.T.R. 296 (S.C.), and  therefore,  the assessee  was  not entitled to set  off  speculation  losses against profits from other business activities, [321 A-B]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 193 of 1967. Appeal  from the judgment and order dated March 29, 1965  of the Allahabad High Court in S.A. No. 972 of 1964. jagadish  Swarup, Solicitor-General, G. C. Sharma and B.  D. Sharma, for the appellants. M.   V. Goswami, for the respondent. 419 The Judgment of the Court was delivered by  Shah, J. M/s J. P. Kanodia and Company is a firm registered under the Indian Income-tax Act, 1922.  The partners of  the firm were Smt.  Shanti Devi and Badri Prasad.  Three minors- Pradeep  Kumar,  Anand  Prakash  and  Rajendra  Prasad  were admitted to the benefits of the partnership. In proceedings for assessment of tax for the assessment year 1957-58,  the Income-tax Officer rejected the claim  of  the firm  to set off loss from certain speculative  transactions aggregating to, Rs. 22,234/- and computed the income of  the firm  at  Rs. 26,365/-.  The Income-tax Officer was  of  the opinion  that since the capital contributed by the  partners and  the  minors who were admitted to the  benefits  of  the partnership  was out of the capital of the respective  Hindu Undivided  Families  to  which they  belonged,  the  profits allocated  to the partners and to the minors were liable  to be  assessed in the hands of the respective Hindu  Undivided Families to which they belonged. The order passed by the Income-tax Officer was confirmed  in a  revision application by the Commissioner.  The firm  then moved  a petition under Art. 226 of the Constitution  before the High Court of Allahabad.  Two contentions were raised in support  of the petition : (i) that the  Income-tax  Officer erred in directing that the profits allocated to the  shares of the partners and to the minors be assessed as the  income of  the  respective Hindu Undivided Families to  which  they belonged;  and  (ii) that the loss in  speculation  business should  have been Set Off under S. 24(1) of  the  Income-tax Act against profits from other business. Manchanda, J., accepted the first contention, observing that the  order directing assessment of the shares  allocated  to the partners and the minors to the benefits of the  partners "was manifestly without jurisdiction", he quashed that  part of  the order of the Income-tax Officer.  The learned  Judge rejected  the second contention for in his view  the  matter was  covered by the judgment in Jagannath Mahadeo Prasad  v. The Commissioner of Income-tax(1).  He accordingly held that the speculation losses were liable to be set off against the profits  in other business in the year of  assessment.   The order of Manchanda, J., was confirmed in a special appeal by the Division Bench of the High Court.  This appeal is  filed by  the  Commissioner with certificate granted by  the  High Court. (1)  55 I.T.R. 501. 420 Sub-sections  (5) and (6) of s. 23 of the Income-tax Act  as they were in force in the year of assessment read as follows               "(5) Notwithstanding anything contained in the               foregoing sub-sections, when the assessee is a               firm and the total income of the firm has been

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             assessed  under sub-section  (1),  sub-section               (3) or sub-section (4) as the case may be,               (i)   the  income-tax  payable  by  the   firm               itself shall be determined :               (ii)  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 sums  payable               by  him on the basis of such assessment  shall               be determined."                 . .    .     .      .     .    ."               "(6)  Whenever the Income-tax Officer makes  a               determination    in   accordance   with    the               provisions of sub-section (5), he shall notify               to the firm by an order in writing the  amount               of the total income on which the determination               has  been based and the apportionment  thereof               between the several partners." In the case of a registered firm the Income-tax Officer  has to determine the income-tax payable by the firm and also  to determine  the total income of each partner of the firm  and the sum payable by him on the basis of such assessment.   He has  then  to certify the determination in  accordance  with sub-s. (6) and the apportionment thereof among the partners. Once the Income-tax Officer has granted registration of  the firm,  be  cannot  proceed  to  inquire  whether  the  share allocated  to a partner is beneficially held by  some  other person or entity.  The Income-tax Officer must allocate  the profits   in  accordance  with  the  deed   of   partnership registered  by  him  and  to the  persons  admitted  to  the benefits  thereof according to their respective shares.   He cannot  at that stage hold an inquiry whether  the  partners represented  other  persons.  The order  of  the  Income-tax Officer  directing that the income of the partners  and  the shares  allocated to the minors admitted to the benefit  ’of the  partnership  shall  be assessed in  the  hands  of  the respective  Hindu  Undivided Families  was  plainly  without jurisdiction. On  tile second contention not much need be said.  The  High Court purported to follow the judgment in Jagannath Mahadeo 4 2 1 Prasd’s  case(1),  but  that  judgment  has  been  expressly overruled by this Court in Commissioner of Income-tax,  U.P. v. Jagannath Mahadeo Prasad(-).  This Court held disagreeing with  Jagannath  Mahadeo  Prasad’s  case  (2)  that  in  the computation of the income, profits and gains of the year  of assessment  under s. 1O ( 1 ) of the Indian Income-tax  Act, the  assessee is not entitled to set off speculative  losses against  profits from other business activities of the  same year. The  appeal  is partially allowed.  The order  of  the  High Court setting aside the order of the Commissioner of Income- tax  refusing  to  allow the set  off  of  speculation  loss against profits from ready business is set aside.  The order of  the  High  Court vacating the direction  to  assess  the shares allocated to the partners and persons admitted to the benefits  of the partnership in the profits of the  assessee firm  to  the respective Hindu Undivided Families  to  which they  belonged is confirmed.  There will be no order  as  to costs. V.   P.   S.                                          Appeal partly allowed. (1)  55 I.T.R. 501. (2)  71 I.T.R. 296 LI 2Sup.CI/70 -13.

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