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TMI Blog2006 (3) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... (-) 13320 (+) 176200 Date of notice under section 148(1) 17-2-2000 16-2-2000 16-2-2000 Date of letter issued by assessee to regularise the return 18-2-2000 18-2-2000 18-2-2000 Income assessed (+)217006 (+)433520 (+)571710 Interest payment disallowed 537771 479045 395510 3. For the assessment year 1997-98, the return of income was filed on 30-11-1998 on a total income of Rs. 2,84,075. It was processed under section 143(1) on 28-12-1999 accepting returned income. The case was picked up for scrutiny. Notice under section 143(2) was issued. Interest payment of Rs. 3,01,788 was disallowed and income was assessed at Rs. 58,775. 4. Though the assessee had initially challenged the issue of notice under section 148(1) for all these assessment years but during the course of hearing before us, the same was not pressed. Hence the ground relating thereto is treated as rejected. During the course of assessment proceedings, it was claimed before the Assessing Officer that assessee has borrowed money from M/s. Greater Bombay Co-op. Bank Ltd. and invested in the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of the fact that there could be no assessable business income of the appellant, firstly on account of the firm s recurring losses and secondly in view of the exemption of share income under section 10( 2A ) of the Income-tax Act. Therefore, the argument that interest should be allowed against business income does not carry conviction it being without force. Therefore, the claim of interest payment against income from business is totally misconceived and so is the reliance on the case of Smt. Archana R. Dhanwatay ( supra ). There can be no dispute with the proposition that jurisdiction of the Assessing Officer comprises in computing total income liable to charge in accordance with law. Going by the aforesaid ratio it cannot be said that the Assessing Officer has either supported short of exercising his jurisdiction or exceeded it in the present case. In rejecting the claim of interest payment against income from other source, Assessing Officer has only fulfilled his duty in bringing the correct amount to tax. Hence, I find no infirmity in the impugned order on this account. In the circumstances, the disallowance is confirmed (no adjustment being required as regards the quantum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as a normal business loss under the head "Business" and it cannot be picked up to say that it is exempt under section 10( 2A ). Thus, for the purposes of section 10( 2A ) "income" means only positive income and does not include "loss". Thus, once loss is assessable under the head "Business", then interest paid on borrowed capital utilised in that business should be allowed as deduction. The learned counsel for assessee relied on the decision in ITO v. Expo Packaging [1995] 51 TTJ (Ahd.) 174 2 in support of his proposition that under section 10( 2A ), it is only "income" which is covered and not "loss" derived from partnership firm. The learned counsel for assessee also submitted that capital gains on transfer of share of certain companies is exempt by virtue of section 10( 36 ) but long-term capital loss on account of transfer of shares of a company would be eligible for adjustment against other long-term capital gains under section 74. From this point of view, it is only positive income received as share from the partnership firm will be exempt under section 10( 2A ) and not the loss, which is liable to be adjusted against other income under the head "Business". 8. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed that provision of section 14A are substantive in nature and have to be followed. 10. In his rejoinder, the learned AR took another line of argument that it is not that the share of the income from the firm is always exempt. The firm has to pay tax and therefore the income of the partner from the firm has suffered taxation. Taxes have been shifted from the partner to the firm. As firm is a composition of partners, the taxes paid by this firm is in fact taxes paid by the partners. 11. We have considered the rival submissions and perused the material on record, including the authorities relied on by the parties. First issue in the controversy is as to whether is it necessary to have some income before an expenditure can be allowed. It has been answered by Hon ble Supreme Court in Rajendra Prasad Mody s case ( supra ) as under : "The plain natural construction of the language of section 57( iii ) of the I.T. Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57( iii ) requires is that the expenditure must be laid out or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit from the firm can only be considered for allowability under the head "Business" and also under the same source i.e., "share profit from the firm". Section 14 amply clarifies the scheme and intention of the Legislature. There could be no such intention of the Legislature to allow to expenditure relating to income not forming part of total income. Hon ble Supreme Court in Tuticorin Alkali Chemicals Fertilisers Ltd. v. CIT [1997] 227 ITR 172 1 , wherein it is held that interest expenditure in a business not commenced cannot be allowed as expenditure. The claim of expenditure can only be made in accordance with provisions of the Act. The head notes from that decision are : "Under the Income-tax Act, 1961, the total income of a company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads. It is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business of profession is only one of the heads under which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in relation to income which does not form part of the total income. It is assessee s own total income that is to be seen for applying the provisions of section 14A and not that of somebody else. Admittedly by virtue of section 10( 2A ) share income is not includible/included in total income of an assessee partner. In other words by virtue of section 10( 2A ) it does not form part of the total income of partner and, therefore, the expenditure incurred by the partner in earning that income would not be allowable. 14. The share income is now exempt under section 10( 2A ); therefore as a consequence thereof, interest paid on borrowed capital invested in the firm to earn such share income could not be allowed. It cannot be allowed against any other income because borrowed capital was not utilised for earning any other income. This is what is the scheme of Act even without section 14A. The argument of the learned counsel for assessee that firm is taxed and therefore income coming into the hands of the partner is also claimed to have been taxed is not tenable because charge of tax was not on income but on the person. The firm and partners are two distinct entities on which tax is ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. On appeal, the Appellate Tribunal accepted the contention of the respondent raised for the first time that the capital loss of Rs. 28,662 should be carried forward and set off against capital gains, if any, in the future, even though tax was not chargeable under section 12B of the Indian Income-tax Act, 1922, on capital gains derived during April 1, 1948, to March 31, 1956. On a reference, the High Court held that if capital loss was incurred in a year in which capital gains did not attract tax under section 12B such loss would still be loss under the head "Capital gains" and it could be carried forward and set off against capital gains in a subsequent year. On appeal to the Supreme Court by the Commissioner: Held , reversing the decision of the High Court, that the capital loss could not be determined and the respondent was not entitled to the carry forward of the loss of Rs. 28,662. In the relevant previous year and the assessment year or even in the subsequent year, capital gains did not form part of the "total income" of the respondent which could be brought to charge and were therefore not required to be computed under the Act. If the loss is from a source or head of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the total income of the respondent under section 16(3) of the Indian I.T. Act, 1922, for the assessment years 1959-60, 1960-61 and 1961-62, and the question was whether the respondent was entitled under section 24(2) to set off the losses, which were incurred in his individual business in earlier years and brought forward, against the share income of his wife and minor children. In those years, the respondent had continued to carry on business in purchase and sale of groundnut cake and oil on a small scale. The Tribunal held that though the respondent was continuing to carry on business of oil in general in those three years, he was not entitled to the set off, since he could not be said to be carrying on the business out of which the share income of the wife and minor children arose. On a reference, the High Court held that the respondent was entitled to the set off under section 24(2). On appeal to the Supreme Court: Held , affirming the decision of the High Court, that the respondent was entitled under section 24(2) to set off the loss in his individual business which had been carried forward against the share income of the wife and minor children included in his total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm as his share in the profits of the firm bears to such profits. This part of the explanation envisages that income of the firm may be different from the profits of the firm. From the profits earned by the firm, the interest, remuneration paid to the partners are excluded to arrive at assessable income as per section 40( b ). Hence, assessable income may be less than the profits of the firm. In some cases, assessable income may be higher than the profits of the firm by virtue of some disallowance made by the assessee himself or by the Assessing Officer in the assessment of the firm. The share of the partner in the income of the firm will be the same as the share of that partner in the profits of the firm as per partnership deed. Income is therefore, not the same thing as profits. Therefore, profits do not mean and include loss like in the case of the definition of income, which includes loss. Profits, as opposed to loss, are always positive. When we want to indicate negative profits, we refer to it as loss. It has been held in Karamachari Union v. UOI [2000] 243 ITR 143 (SC) that the word profits in the context of section 17 is used only to carry and advantage or g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1918) 2 Ch. 250. Advatange, avail, benefit emolument, expediency, gain, good, improvement, proceeds, receipts, return, returns, service, utility, value. [ Webster s Comprehensive Dictionary , as cited in Karmchari Union, Agra v. Union of India (2000) 3 SCC 335, para 24 : AIR 2000 SC 1226.]" 21. Thus a combined reading of all those observation of the Courts and dictionary meaning we are of the considered view that profits means only positive profits and not loss. It is other than income, which would include loss. 22. Now the question comes is as to whether main section 10(2A) can be read in isolation. The true meaning of explanation is discussed by Hon ble Kerala High Court in CIT v. Kerala Electric Lamp Works Ltd. [2003] 261 ITR 721 1 (Ker.) as under : "The label Explanation is not decisive of the true meaning and scope of the provision. Ordinarily the purpose of an Explanation in a statute is to clarify or explain or settle any doubt or ambiguity or controversy. It may even widen the scope of the main provision in rare cases. The words used alone can reflect the true intent and they should be construed on their own terms." 23. In CIT v. Orissa Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An explanation may be added to include something within or to exclude something from the ambit of the main enactment or the connotation of same words occurring in it." 26. Thus in our considered view though the main enactment 10( 2A ) deals with exemption of income of the partner from the firm and it would mean both positive income and negative income but explanation restricts the scope to income, which is arrived at from the positive profit of the firm. In other words this section 10( 2A ) would not be applicable where loss of the partner is arrived at from the loss of the firm i.e., when the parties share the loss of the firm in loss sharing ratio as per partnership deed (in contrast to sharing profits of the firm as per profit sharing ratio as per partnership deed). 27. The next issue which arises for consideration is whether a partner to whom loss is allotted by the firm which has suffered the loss is entitled to get it assessed in his hands and then set of this loss against his income from other sources and/or under other head after the amendment made by Finance Act, 1992. This is relevant because unless a partner has share of loss assessable in his hands under the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under other sources or under other head. Section 70 also does not make any distinction between a firm or any other assessee i.e., firm is treated like any other assessee to set off its losses against other income in the same year or is allowed to carry forward to subsequent years to be set off against income of that year. Thus, a partner will not be entitled to get losses from the firm for setting it off against its other income either from another source or under other head. Thus where there is no loss available from the firm as share to the partner, he cannot increase this loss by expenses incurred thereon, such as payment of interest on borrowed capital or say salary paid to an employee to look after the affairs of partner in the firm. Even if it is done for accounting purposes; he will not be entitled to set off such loss or for that matter enhance loss (by adding interest on borrowed capital) against its individual income from other sources. This is so, because there is no specific provision in this behalf, to set off loss of the partner from the firm against his other income. 29. On the other hand intention of legislation is against such set off and carry forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc., thereby implying that both set off and carry forward and set off, as envisaged in these sections, are permissible. 4. The Board has, therefore, decided that the set off envisaged under sections 70 and 71 may be allowed for the assessment year 1993-94 in the hands of the firm in respect of the unabsorbed losses brought back to the firm. 5. This may be brought to the notice of all Assessing Officers working in your region. (Sd.) Pravin Kumar, Under Secretary, ITA-II, Central Board of Direct Taxes." 30. Thus, we hold that share of loss from the firm cannot be allowed to be set off against other income of the partner and also cannot be allowed to be carried forward to subsequent years. Once this is so, no expenditure incurred on earning share of loss can be allowed and added to the loss and be allowed to be set off against other income or allowed to be carried forward in the hands of the partner. 31. However the situation would be different if a partner is allotted salary/interest from the firm if such partner is a working partner. Then interest/remuneration received from the firm will be assessable in the hands of the partner under the head "Business" under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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