1969 (2) TMI 6 - SC - Income Tax

Partnership firm - business in which the loss had been sustained by the assessee when he was a partner of the first firm which was dissolved on March 31 1955 continued to be carried on by him in partnership with three other persons during the assessment year 1956-57 - assessee is entitled under the provisions of section 24(2) of the Act to set off his share of unabsorbed loss - Revenue appeal dismissed

Summary

Issues:
1. Interpretation of section 24(2) of the Indian Income-tax Act, 1922 regarding the set-off of unabsorbed loss from a dissolved firm against other business income.
2. Determination of whether the business in which the loss was originally sustained continued to be carried on by the assessee during the relevant assessment year.
3. Application of statutory provisions post-amendment by the Finance Act of 1955 in the context of carrying forward losses for set-off.

Detailed Analysis:
The judgment dealt with an appeal regarding the interpretation of section 24(2) of the Indian Income-tax Act, 1922, concerning the set-off of unabsorbed loss from a dissolved firm against other business income. The assessee, an individual with income from partnership concerns, sought to set off a loss from a dissolved firm against profits in another partnership during the assessment year 1956-57. The Income-tax Officer initially rejected the claim, stating that the business in which the loss was incurred had ceased to exist due to the dissolution of the firm. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal disagreed, allowing the set-off based on the continuity of the business activity by the assessee.

The High Court's decision revolved around the interpretation of the term "business" in section 24(2)(ii) and whether the same business needed to be carried on by the assessee in the relevant assessment year. The High Court held that the business activity, not the constitution of the partnership, was crucial for determining continuity. It emphasized that the business in which the loss was originally sustained continued to be carried on by the assessee, even if in partnership with different individuals. The judgment highlighted the wide import of the term "business" under the Act, focusing on the systematic and organized course of activity with a set purpose.

The judgment further analyzed relevant statutory provisions post-amendment by the Finance Act of 1955. It discussed the computation of a partner's share in firm profits under section 16(1)(b) and the treatment of losses under section 23(5) for registered firms. Citing precedents from various High Courts, the judgment underscored that the identity of the business for set-off purposes remains intact despite changes in partnership composition. The court referred to cases where losses incurred in a business were allowed to be set off against profits from the same business, even if carried on in a different partnership or individual capacity.

Ultimately, the Supreme Court upheld the High Court's decision, emphasizing that the continuity of the business activity by the assessee was the determining factor for allowing the set-off of losses. The judgment affirmed that the mode of carrying on the business, whether individually or in partnership, did not affect the entitlement to set off losses against subsequent profits. The court dismissed the appeal and upheld the High Court's ruling, emphasizing the continuous nature of the business activity for the purpose of determining set-off eligibility.