1970 (4) TMI 13 - SC - Income Tax

Business Profits - while computing the income, profits and gains of the year of assessment under s. 10(1), the assessee is not entitled to set-off speculative losses against profits from other business activities of the same year - order of the ITO directing that the income of the partners and the shares allocated to the minors admitted to the benefit of the partnership shall be assessed in the hands of the respective HUF was plainly without jurisdiction - Revenue s appeal allowed partly

Summary

Issues:
1. Assessment of tax for the assessment year 1957-58 and the rejection of the firm's claim to set off losses from speculative transactions.
2. Allocation of profits to partners and minors admitted to the benefits of the partnership.
3. Jurisdiction of the Income-tax Officer in assessing the income of partners and minors in the hands of their respective Hindu undivided families.
4. Set off of speculation losses against profits from other business activities.
5. Interpretation of sub-sections (5) and (6) of section 23 of the Income-tax Act.

Analysis:

1. The Supreme Court addressed the assessment of tax for the year 1957-58 and the rejection of the firm's claim to set off losses from speculative transactions. The Income-tax Officer had computed the firm's income at Rs. 26,365, rejecting the claim to set off a loss of Rs. 22,234 from speculative transactions. The firm contended that the speculation losses should have been set off against profits from other business under section 24(1) of the Income-tax Act.

2. The issue of the allocation of profits to partners and minors admitted to the benefits of the partnership was raised. The Income-tax Officer had directed that profits allocated to partners and minors be assessed as the income of their respective Hindu undivided families. The High Court held that this direction was without jurisdiction, emphasizing that the profits should be allocated according to the deed of partnership and to the persons admitted to the benefits thereof.

3. The jurisdiction of the Income-tax Officer in assessing the income of partners and minors in the hands of their respective Hindu undivided families was discussed. The court clarified that once a firm is registered, the Income-tax Officer must allocate profits according to the deed of partnership and to the persons admitted to the benefits thereof, without inquiring into whether the share allocated to a partner is beneficially held by another person or entity.

4. Regarding the set off of speculation losses against profits from other business activities, the court referred to a previous judgment that had been overruled. The court held that the assessee is not entitled to set off speculative losses against profits from other business activities in the computation of income, profits, and gains of the year of assessment under section 10(1) of the Income-tax Act.

5. The interpretation of sub-sections (5) and (6) of section 23 of the Income-tax Act was crucial. The court highlighted that once the Income-tax Officer determines the income-tax payable by a registered firm and the total income of each partner, the profits should be allocated according to the deed of partnership and to the persons admitted to the benefits thereof. The court confirmed the High Court's decision to vacate the direction to assess shares allocated to partners and persons admitted to the benefits of the partnership in the profits of the firm to their respective Hindu undivided families.