1993 (12) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Circular No. 30 of 1941.
2. Set off of loss from an unregistered partnership against personal income.
3. Interpretation of Section 77(2) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Circular No. 30 of 1941:
The primary issue is whether Circular No. 30 of 1941 is applicable to the assessee's claim for set off of loss from an unregistered partnership against her personal income. The court concluded that the circular does not apply to the assessee's case. The circular addresses the assessment of profits from temporary partnerships of short duration, directing that profits should generally be assessed in the hands of the respective partners. However, it does not deal with the set off of losses from unregistered firms. The court noted that the circular's subject matter does not cover the set off of losses and thus cannot be used to support the assessee's claim.

2. Set off of Loss from an Unregistered Partnership Against Personal Income:
The assessee claimed to set off her share of loss from an unregistered partnership against her personal income. The Income-tax Officer rejected this claim, deeming the agreement not genuine and the loss not genuine. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal both found the agreement genuine and construed it as a partnership. However, the Tribunal allowed the set off based on Circular No. 30 of 1941. The High Court disagreed, stating that the circular does not entitle the assessee to set off the loss from the unregistered partnership against her personal income. The court emphasized that the circular does not address the set off of losses from unregistered firms.

3. Interpretation of Section 77(2) of the Income-tax Act, 1961:
Section 77(2) of the Income-tax Act, 1961, explicitly prohibits the set off of a partner's share of loss from an unregistered firm against their personal income. The court highlighted that this provision applies irrespective of whether the firm has been assessed or not. The court referenced the Supreme Court's judgment in CIT v. Jadavji Narsidas and Co., which held that losses of an unregistered firm could only be set off against the firm's income, not the partners'. The court reaffirmed this principle, stating that Section 77(2) clearly prohibits individual partners from setting off their share of the firm's loss against personal income. The court rejected the assessee's argument that Section 77(2) does not apply if the unregistered firm has not been assessed.

Conclusion:
The High Court answered the question in the negative, ruling that Circular No. 30 of 1941 is not applicable to the assessee's claim for set off of her share of loss from the unregistered partnership against her personal income. The court held that the Tribunal erred in applying the circular and allowing the set off. The court emphasized that Section 77(2) of the Income-tax Act, 1961, explicitly prohibits such set off, and the assessee is not entitled to claim it based on the circular or otherwise. The judgment was thus in favor of the Revenue.