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PETITIONER: SETH JAMNADAS DAGA AND OTHERS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, SOUTH BOMBAY

DATE OF JUDGMENT: 12/12/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. SHAH, J.C.

CITATION:  1961 AIR 1139            1961 SCR  (3) 174  CITATOR INFO :  R          1961 SC1259  (3)

ACT: Income-tax-Two  firms registered and  another  unregistered- Income from unregistered firm, if ’  can be set off  against loss from registered firms-Losses of the registered firm, if can be carried forward in subsequent year-Indian  Income-tax Act, 1922 (11 Of 1922), ss. 14(2), 16(1)(a) and 24(1).

HEADNOTE: The  appellants  were partners of two registered  firms  and another firm which was unregistered.  Their profit and  loss for  the  assessment  year  1948-49  were  as  follows:-From registered firms Rs. 11,902 loss, 1,265 loss, total loss Rs. 13,167.   Income  from  the  unregistered  firm  Rs.  26,110 profit,   other   income  Rs.  262.   The  income   of   the unregistered  firm was taxed on the firm.  In assessing  the amount  of Rs. 262 the Income-tax Officer  first  determined the  total income of each of the appellants by  setting  off their share of the profits of the unregistered firm  against their share of the loss of the registered firm.  The  appeal to  the Appellate Assistant Commissioner being  unsuccessful appeals 175 were taken to the Tribunal which relying on the decisions in Commissioner  of Income-tax v. Ratanshi  Bhavanji,  [1952]22 I.T.R.  82, held that just as loss in an  unregistered  firm could not be set off against profits from a registered firm, the  profits  in an unregistered firm could not be  set  off against  the  loss from a registered firm.  On  a  reference being  made to it the High Court differed from the  decision of  the  Tribunal,  and  held  that  the  profit  from   the unregistered firm could be set off against the loss from the registered firms to find out the rate applicable to Rs.  262 which  was  other income of the assessees.  The  High  Court further held that the assessees could not carry forward  the loss of the registered firms to the following year,  because such  loss  must  be deemed to have  been  absorbed  in  the profits  of  the  unregistered  firm.   On  appeal  with   a certificate of the High Court, Held,  that the view of the High Court that under ss.  14(2)

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and  16(1)(a) the profit and loss had to be set off  against each  other to find out the total income, and that  although the  share  of a partner in the profits of  an  unregistered firm is exempt from tax, it is included in his total  income for the purpose of rate only, was correct but the High Court erred in holding that the losses suffered by the  registered firms  could  not be carried forward because they  had  been absorbed by the profits of the unregistered firm.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 516 of 1959. Appeal from the judgment and order dated September 3,  1957, of  the Bombay High Court in Income-tax Reference No. 49  of 1957. J.M.  Thakar, S. N. Andley, J. B.  Dadachanji,  Rameshwar Nath and P. L. Vohra, for the appellants. A. N. Kripal and D. Gupta, for the respondent. 1960.  December 12.  The Judgment of the Court was delivered by HIDAYATULLAH,  J.-The  three appellants appeal  against  the judgment and order of the High Court of Bombay answering, in the affirmative, the following question:               "Whether  the  share income of  the  assessees               from   the   unregistered   firm   (which   is               separately  taxed), namely, Rs. 26,110 can  be               set   off  against  their  share   loss   from               registered firms, namely, Rs. 13,167?" The facts are as follows: Two of the appellants are 176 brothers,  and the third appellant is the widow of  a  third brother,  who died during the pendency of the  appeal  after certificate  had been granted by the High Court.  The  three brothers were partners in two registered firms and one other firm, which was unregistered.  The assessment years for  the purposes  of  the appeal are 1948-49 and 1949-50.   For  the assessment  year 1948-49, the income of the  three  brothers was the same, and it was as follows: From registered firms    ... Rs. 11,902 loss                                   1,265 loss                    Total loss Rs. 13,167 Income from the unregistered firm Rs. 26,110 profit Other income                            Rs.     262 The  income of the unregistered firm was taxed on  the  firm and not in the hands of the partners, as was possible  under the  provisions  of  cl.  (b) of sub-s. (5)  of  s.  23.  In assessing  the  amount of Rs. 262,  the  Income-tax  Officer first determined the total income of each of the  appellants by   setting  off  their  share  of  the  profits   of   the unregistered  firm  against their share of the loss  of  the registered  firms.  The appellants contended that,  inasmuch as  tax had already been assessed on the unregistered  firm, this  could not be done, and that as there was loss  in  the business  of the registered firms, no tax was demandable  on Rs.  262.   They also contended that they were  entitled  to carry  forward  the,  loss amounting to Rs.  12,905  to  the succeeding year under s. 24(2) of the Income-tax Act.  These contentions were not accepted by the Income-tax Officer,  to whose  order  it is not necessary to refer in  detail.   The assessment for the assessment year 1949-50 was also done  on similar lines. The  appeal  to  the Appellate  Assistant  Commissioner  was unsuccessful, and six appeals were taken to the Tribunal  by the three appellants three for each assessment year.   These

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appeals  were disposed of by a common order.   The  Tribunal held, relying upon the second proviso to s. 24(1), that just as loss in an unregistered firm could not be set off against profits                             177 from a registered firm under that proviso, the profits in an unregistered firm could not be set off against the loss from a registered firm.  It relied upon a decision of the  Madras High  Court  in  Commissioner  of  Income-tax  v.   Ratanshi Bhavanji (1), which it purported to follow in preference  to a   decision  of  the  Punjab   High  Court  in  Banka   Mal Niranjandas  v.  Commissioner of Income tax (2).   The  same reasoning was applied to the assessment year 1949-50, and in the result, all the six appeals were allowed. The order of the Tribunal involved, in addition to the point set out above, certain other questions, which were asked  by the assessees to be referred to the High Court for  decision under s. 66(1).  The Commissioner also asked for a reference in  respect of the decision, substance whereof has been  set out  above.   The  Tribunal referred two  questions  at  the instance  of the assessees and one question, which  we  have already quoted, at the instance of the Commissioner.  In the High  Court, the assessees abandoned the two questions,  and the  High  Court accordingly expressed its  opinion  in  the judgment and order under appeal, on the remaining  question. The  High Court differed from the decision of the  Tribunal, and  held that the profit from the unregistered firm  could be  set off against the losses from the registered firms  to find  out  the rate applicable to Rs. 262, which  was  other income of the assessees.  The High Court also held that  the assessees could not carry forward the loss of the registered firms  to  the  following year, because such  loss  must  be deemed  to  have  been  absorbed  in  the  profits  of   the unregistered  firm.  It, however, certified the case as  fit for  appeal to this Court, and the present appeal  has  been filed. In  our  opinion,  the High  Court  correctly  answered  the question  referred to it, but was in error in  holding  that the  losses  of the registered firms could  not  be  carried forward,  because they must be deemed to have been  absorbed in the profits of the unregistered firm. Inasmuch as we substantially agree with the High (1)  [1952] 22 I.T.R. 82. (2) [1951] 20 I. T.R. 536. 23 178 Court on the first part of the case, it is not necessary  to examine  closely  or  in detail the  reasons  on  which  the decision  of the High Court proceeds.  In our  opinion,  the matter is simple, and can be stated within a narrow compass. Under  s. 3 of the Income-tax Act, income-tax is  chargeable for  an  assessment year at rate or rates prescribed  by  an annual Act in respect   of the total income of the  previous year.   Section  14 (2)(a), before its  amendment  in  1956, provided  that the tax shall not be payable by an  assessee, 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 cl. (b) of sub-s. (1) of s.  16 on which the tax had already been paid by  the  firm. The section thus gave immunity from tax to the share of  the assessee as a partner in an unregistered firm in respect  of the  share of profits received by him from the  unregistered firm  and  on which the unregistered firm had  already  been taxed.    Section  16(1)(a),  however,  provided   that   in computing the total income of an assessee, any sum  exempted

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under  sub-s. (2) of s. 14 shall be included.  The  combined effect of those two sections was stated by the High Court to be,               "that  although the share of a partner in  the               profits of an unregistered firm is exempt from               tax,  it is included in his total  income  for               the purpose of rate only.  " We  agree  that this is a correct  analysis.   The  Tribunal relied  upon the second proviso to s. 24(1), which  read  as follows:               "Provided  further that where the assessee  is               an  unregistered  firm  which  has  not   been               assessed under the provisions of clause (b) of               sub-section  (5)  of section 23 ...  any  such               loss shall be set off only against the income,               profits and gains of the firm and not  against               the  income, profits and gains of any  of  the               partners  of  the  said firm;  and  where  the               assessee is a registered firm, any loss  which               cannot  be  set  off  against  other   income,               profits  and  gains  of  the  firm  shall   be               apportioned  between the partners of the  firm               and  they alone shall be entitled to have  the               amount   of  the  loss  set  off  under   this               section."               179               The Tribunal came to the conclusion that,               "...just as a partner in an unregistered  firm               which has suffered loss will not be allowed to               set  off  his share loss in  the  unregistered               firm against his income from any other source,               so  it  stands to reason that  his  loss  from               other  sources cannot also be set off  against               his share income from an unregistered firm.  " The decision of the Tribunal was not based upon any specific provision  of  the  Income-tax  Act but  upon  a  parity  of reasoning, by which a specific provision about loss was held to apply the other way round also.  The High Court correctly pointed out that all that s. 14, subs. (2), did was to  save the profits of an unregistered firm from liability to tax in the   hands  of  the  partners.   It  did  not  affect   the computation  of  the  total income  to  determine  the  rate applicable under s. 3, in the light of s. 16(1)(a).  Indeed, s.  16(1)(a) clearly provided that any sum exempt  under  s. 14(2) was to be included in computing the total income of an assessee,  and  in  view of  this  specific  provision,  the converse  of  the second proviso to s. 24(1) which  we  have quoted above, hardly applied.  To this extent, the order  of the  Tribunal was incorrect.  The error was pointed  out  by the  High Court, and the question thus raised  was  properly decided.  We see no reason to differ from the High Court  on this part of the case. The  question,  however, arose before the High Court  as  to whether in view of this decision, the assessees could  carry forward  loss  from the registered firms in  the  subsequent year  or years.  The High Court came to the conclusion  that they could not carry forward the loss.  Indeed, the Tribunal had earlier stated that if the profits from the unregistered firm were to be set off against the losses of the registered firms,  such  losses  would not be carried  forward  to  the following  year, and that would be contrary to s.  24.   The High Court rejected this ground in dealing with the question as  to the rate applicable to the other income, and  pointed out-and  in  our  view, rightly, that under  ss.  14(2)  and 16(1)(a)  the profits and losses had to be set  off  against

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each other, to find out the total income. 180 The High Court, however, held that once losses were set  off against profits, they were to that extent absorbed, and that there  was nothing to carry forward.  This  conclusion  does not follow.  Section 24 provides for  a different  situation altogether; it provides for the  carrying forward of a  loss 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.  To read the  provisions of  ss. 14(2) and 16(1)(a) in this extended manner would  be to  nullify in certain cases s. 24 altogether.   Neither  is such an intention expressed; nor can it be implied.  In  our opinion,  though the decision of the High Court on the  main issue  and  on  one aspect of the  question  posed  for  its opinion  was correct, it 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. To  this  extent, the judgment and order of the  High  Court will  stand  modified.  Subject to  that  modification,  the appeal will be dismissed.  In the circumstances of the case, there will be no order as to costs.             Appeal dismissed with modification. 181