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Issues:
1. Interpretation of section 77(2)(b) regarding carrying forward and setting off losses of an unregistered firm against the income of a partner of a registered firm. 2. Validity of revisionary order under section 263 of the Income-tax Act regarding the set off of losses. Analysis: 1. The primary issue in this judgment revolves around the interpretation of section 77(2)(b) of the Income-tax Act concerning the permissibility of carrying forward and setting off losses of an unregistered firm against the income of a partner of a registered firm. The case involved an unregistered firm, Sawan Films, where one partner retired, leading to a change in the firm's constitution. The Income-tax Officer initially allowed the carry forward of losses to be set off against the partner's income. However, the Commissioner of Income-tax contended that such set off was prohibited under section 77(2)(b) against the partner's own income. The Tribunal reversed the Commissioner's decision, leading to the current reference case. The main argument was whether the loss of an unregistered firm could be set off against the income of a partner in a registered firm, with conflicting interpretations from both sides. 2. The judgment extensively analyzed precedents and legal provisions to resolve the issue. The court noted that section 77(1) of the Income-tax Act did not specify whether the set off should be against the income of a registered or unregistered firm, using the term "firm" inclusively. Relying on decisions like Excel Productions v. CIT, B. S. Dall Mills v. CIT, and Sunil Theatre v. CIT, the court concluded that the loss of an unregistered firm could indeed be carried forward and set off against the income of a partner in a registered firm. The court emphasized the importance of specific language in the law and highlighted the relevance of section 75 of the Income-tax Act in such scenarios. Contrary judgments cited by the Revenue were deemed inapplicable to the present case due to differing factual contexts. 3. The court distinguished cases like Todi Paharmal v. CIT and Sadhana Nayar v. CIT, where the set off against partner income was prohibited under section 77(2)(b) for unregistered firms. The judgment in Jadavji Narsidas and Co. v. CIT was also deemed irrelevant due to differing circumstances. By aligning with the interpretations of various High Courts, the court affirmed that the loss of an unregistered firm could be carried forward and set off against the income of a partner in a registered firm, subject to the provisions of the Income-tax Act. Consequently, the court answered the first question in the affirmative, supporting the assessee, and the second question in the negative, favoring the assessee's position. The reference was resolved accordingly, providing clarity on the application of tax laws in such scenarios.
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