2012 (2) TMI 214 - HC - Income Tax

Set- off of loss partnership on dissolution on 18.09.04 taken over by one partner loss of partnership set off against income earned as individual A.Y. 05-06 Held that -When the assessee took over the business of the erstwhile partnership firm, it was not a case of succession by inheritance. Partnership firm is a separate and distinct unit of assessment and ceased to exist on dissolution on 18.09.04. Income of partnership firm is to be assessed for the period 1.4.2004 to 18.9.2004. After 18.9.2004, business is carried on as a sole proprietor. The income earned by the appellant, as an individual, would include his share of loss as an individual but not the losses suffered by the partnership firm Decided against the assessee.

Summary

Issues: Application for condonation of delay in filing appeal, interpretation of Section 78(2) of the Income Tax Act, 1961, applicability of Section 170(1) in assessing profits and losses.

Analysis:
1. Delay Condonation Application: The judgment begins with an application for condonation of delay in filing the appeal, which was granted due to reasons stated in the application. The delay of 35 days was condoned, and the application was disposed of.

2. Interpretation of Section 78(2): The appeal challenged an order by the Income Tax Appellate Tribunal concerning the assessment year 2005-06. The appellant sought to set off a loss suffered by a partnership firm, of which he was a partner, against his individual income. The appellant relied on Section 78(2) of the Income Tax Act, along with relevant Supreme Court decisions. However, the court ruled that the partnership firm is a separate entity for assessment purposes. After the dissolution of the partnership firm, the appellant continued the business as a sole proprietor, making his income taxable individually.

3. Applicability of Section 170(1): Section 170(1) clarifies the assessment process in cases of business succession. The judgment emphasized that the partnership firm should be assessed for profits and losses until its dissolution date. Post-dissolution, the sole proprietor is liable for assessment. The court highlighted the distinction between the partnership firm and the individual as separate taxable entities under the Act. The judgment emphasized that losses from the partnership firm cannot be set off against the individual's income without a specific provision in the Act.

4. Comparison of Sections 78(2) and 170(1): The judgment addressed the difference between Section 78(2) and Section 170(1). While Section 170(1) deals with business succession and assessment, Section 78(2) focuses on carrying forward losses incurred by a person in business. The court clarified that only the person who incurred the loss is entitled to set it off, with an exception for succession by inheritance. In this case, the appellant could not set off the partnership firm's loss against his individual income as it was not a case of succession by inheritance.

5. Final Decision: The court dismissed the appeal as the appellant could not set off the partnership firm's loss against his individual income. The judgment highlighted that the loss was incurred by the partnership firm before its dissolution, and the appellant taking over the business did not constitute succession by inheritance. No costs were awarded in this matter.