1972 (12) TMI 18 - HC - Income Tax

Set Off - Whether, on the facts, and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to set off his share of loss in a business carried on by an unregistered firm against the profits of his personal business? - question iis answered n the affirmative, in favour of the assessee and against the department - If a profit from an unregistered firm has to be added to the income of an individual partner and he has to pay tax on that amount subject to the provisions of section 14(2)(a) of the Act, there does not seem to be any reason why the same should not be held true of a loss.

Summary

Issues Involved:

1. Whether the assessee was entitled to set off his share of loss in a business carried on by an unregistered firm against the profits of his personal business.

Issue-wise Detailed Analysis:

1. Entitlement to Set Off Losses:

The primary issue was whether the assessee could set off his share of loss in an unregistered firm against his personal business profits. The Income-tax Officer initially disallowed the loss claim, stating that the partnership had taken over the business's assets and liabilities on 1st September 1957, and thus, the loss was not incurred by the assessee as a proprietor. The Appellate Assistant Commissioner upheld this decision, noting that the assessee failed to prove the firm's existence date and his proprietorship before that date.

The Income-tax Tribunal, however, accepted the assessee's appeal, relying on the Bombay High Court's decision in Commissioner of Income-tax v. Jagannath Narsingdas. The Tribunal held that the assessee was entitled to adjust the loss while computing his business profits under section 10 of the Indian Income-tax Act, 1922, and that the second proviso to section 24(1) did not apply. The Tribunal directed the Income-tax Officer to verify and allow the actual loss incurred.

A reference was made to the court on whether the Tribunal was correct in allowing the assessee to set off his share of loss in an unregistered firm against his personal business profits. The court noted that various High Courts had differing opinions on this issue.

2. Judicial Precedents and Interpretations:

The court examined several precedents:

- Bombay High Court in Commissioner of Income-tax v. Jagannath Narsingdas: Held that section 24 was not applicable to such adjustments, which could be made under section 10.
- Gujarat High Court in Commissioner of Income-tax v. Jethalal Zaverchand Patalia: Supported the view that a partner could adjust his share of loss in an unregistered firm against his personal business profits.
- Calcutta High Court in Ranjit K. R. Banerjee v. Commissioner of Income-tax: Disallowed the set-off against income from other sources, stating it was hit by the second proviso to section 24.
- Patna High Court in Commissioner of Income-tax v. Gangadhar Nathmal: Relied on the Supreme Court's judgment in Commissioner of Income-tax v. Jadavji Narsidas & Co., which left open the question of individual partners claiming adjustments.
- Allahabad High Court in Raza Sugar Co. v. Commissioner of Income-tax: Distinguished cases where unregistered firms were assessed and held that the second proviso to section 24(1) applied.
- Mysore High Court in B. Chickotappa v. Income-tax Officer: Held that a partner could not set off losses in an unregistered firm against profits in a registered firm.

3. Supreme Court Decisions:

The court also considered two Supreme Court decisions:

- Commissioner of Income-tax v. P. M. Muthuraman Chettiar: Held that section 24(1) did not apply to setting off losses from businesses outside India against profits in India.
- Commissioner of Income-tax v. Jadavji Narsidas & Co.: Held that losses in an unregistered joint venture could not be set off against a registered partnership's income.

4. Conclusion:

The court concluded that the assessee, being an individual partner, could claim adjustment under section 10 and not under section 24(1). The court followed the judgments of the Bombay and Gujarat High Courts, noting that if profits from an unregistered firm are added to an individual partner's income, losses should also be deducted. The court found no real anomaly in allowing such adjustments, even if it provided a double advantage.

Final Judgment:

The court answered the question in the affirmative, in favor of the assessee and against the department, allowing the set-off of the loss claimed. The assessee was entitled to costs.