1967 (2) TMI 17 - HC - Income Tax

Whether the loss of Rs. 46,619 and Rs. 4,892 determined for the asst. yrs. 1949-50 and 1950-51, respectively, can be set off against the share of income of Rs. 20,414 determined in the asst. yr. 1951-52 - Held, yes

Summary

Issues Involved:
1. Whether the losses incurred by the assessee in the assessment years 1949-50 and 1950-51 can be set off against his share of income in the assessment year 1951-52.

Detailed Analysis:

Identity of the Assessee:
The first issue involves the identity between the assessee who sustained the loss and the assessee who made the profit. Both parties agreed on the existence of this identity, and it was not disputed by the revenue.

Identity of the Business:
The second issue is whether the business in which the loss was sustained is the "same business" in which the profit was made in the subsequent year. The Tribunal observed that merely because the nature of the business at the two material times was the same, it does not lead to the conclusion that the business is the same.

Interpretation of Section 24(2) of the Indian Income-tax Act, 1922:
The judgment focuses on the interpretation of Section 24(2) of the Indian Income-tax Act, 1922, which allows carrying forward and setting off losses against profits from the same business. The section was amended in 1955 to allow setting off losses against any business, provided the original business continued.

Nature of Business:
The court examined whether the nature of the business, which was liquor contracts in all the relevant years, remained the same despite the change in the business structure from individual to partnership. The revenue argued that each liquor contract was a yearly contract and thus different businesses, but the court found no merit in this argument.

Assessment of Registered vs. Unregistered Firms:
The court discussed the difference in tax assessment between registered and unregistered firms. For registered firms, the firm's total income is computed, and each partner's share is taxed individually. Losses in a registered firm can be apportioned among partners, who can then set off their share of losses against their other income or carry it forward.

Principle of Apportionment:
The court emphasized that the principle of apportionment of losses among individual partners should logically extend to allowing a partner to set off losses incurred in an individual capacity against profits from a registered firm. This principle aligns with the provisions of Section 24(1) and Section 24(2).

Case Law and Precedents:
The court referred to various case laws, including the Gujarat High Court decision in Sitaram Motiram Jain v. Commissioner of Income-tax, which supported the view that a business carried on by an individual and later continued in partnership retains its identity. The court also cited the Kerala High Court decision in Dwarkadas Liladhar v. Commissioner of Income-tax, which involved a similar issue.

Conclusion:
The court concluded that the assessee was entitled to set off the losses incurred in the assessment years 1949-50 and 1950-51 against his share of income during the assessment year 1951-52. The question was answered in the affirmative and in favor of the assessee, with costs awarded to the assessee.

Judgment:
The question was answered in the affirmative, allowing the assessee to set off the losses against his share of income for the assessment year 1951-52.