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TMI Blog1972 (12) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... t August, 1957, in this business to the extent of Rs. 13,041. In his assessment for the year 1958-59, he claimed that this loss of Rs. 13,041 which was incurred by him before 1st September, 1957, should be deducted from his other business income. The Income-tax Officer disallowed this amount on the ground that the partnership had taken over the assets and liabilities of the business on 1st September, 1957, and the loss was not suffered by the assessee as a proprietor of the firm. On appeal to the Appellate Assistant Commissioner, it was held that the assessee had not been able to show that the firm came into existence on 1st September, 1957, or that he was the proprietor of the business before that date. It was observed in the order that the firm and the assessee were separate for the purposes of assessment of the loss of the firm, which besides being not quantified, could not be set off against the profits of the assessee. The assessee appealed to the Income-tax Tribunal. On the basis of the decision of the Bombay High Court in Commissioner of Income-tax v. Jagannath Narsingdas, the Tribunal accepted the appeal and held that the assessee was entitled to adjust the loss claimed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividends. The set-off was disallowed on the ground that it was hit by the second proviso to section 24 of the Act. However, the observations of the Gujarat High Court in Jethalal Zaverchand Patalia's case aforementioned were approved. This case was really different on facts from the present case because the loss which was being sought to be set off was from a different source of income and could only be set off under section 24(1) of the Act. The opposite view has been taken by the Patna High Court in Commis- sioner of Income-tax v. Gangadhar Nathmal , by the Allahabad High Court in Raza Sugar Co. v. Commissioner of Income-tax , and the Mysore High Court in B. Chickotappa v. Income-tax Officer, Central Circle II, Bangalore. I propose to deal with the latter set of authorities first. In Commissioner of Income-tax v. Gangadhar Nathmal , reliance was placed on the judgment of the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas Co. , which is a case which has been referred to in every one of the aforementioned cases. It was assumed that there was no difference between the claim of an assessee to adjust losses suffered by him as a partner in an unregistered firm an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent year in accordance with the provisions of section 24(2). If the contention of the learned counsel for the petitioners is accepted, partners of unregistered firms stand to gain a double advantage. " In the same judgent, a reference was made to the decision of the Supreme Court in Commissioner of Income-tax v. P.M. Muthuraman Chettiar, in which it had been held that the second proviso to section 24(1) of the Indian Income-tax Act, 1922, only applied when the assessee was an unregistered firm and only when a set-off was being claimed. These are the cases which support the contentions of the department before us. Before dealing with the cases relied upon by the assessee, it is necessary to refer to the two decisions of the Supreme Court which have some bearing on the question we are called upon to answer. In Commissioner of Income-tax v. P. M. Muthuraman Chettiar, the Supreme Court dealt with the question, whether a partner of a firm carrying on business outside India was entitled to set off his share of losses in that firm against the profits and gains of the business in India. It was held that section 24(1) did not apply at all to such a case. It was observed : " It is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-firm. It makes no difference that the department has not assessed the unregistered firm or taken action under section 23(5)(b). What the High Court has ordered just cannot be done as it is against the provisions of section 24. Whether the partners in their individual assessments would be able to take advantage of section 16(1)(b) and the decision of the Privy Council in Arunachalam Chettiar v. Commissioner of Income-tax (a point almost conceded before us) is not a matter on which we need pronounce our opinion. " The observations in these two cases have been elaborately considered by both the Bombay and the Gujarat High Courts which support the contentions of the assessee before us. In the Bombay High Court decision in Commissioner of Income-tax v. Jagannath Narsingdas , it was held that the second proviso to section 24(1) did not apply because the assessee was not an unregistered firm but an individual partner. It was also observed that the second proviso to section 24(1) could not be read as an independent provision, but had to be read as a proviso. It was observed : " It is prima facie a proviso and it will have to be regarded as a proviso, as it purports to be, unle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim his share of the loss as a deduction or adjustment when computing his profits and gains from business under section 10 of the Act ? For the purposes of the Act, a firm and an individual are separate assessees. However, there may be cases in which the unregistered firm is not assessed at all. This may be because the unregistered firm does not have an assessable income or it makes a loss. In such a case, the question of the partnership claiming a set-off does not arise because the partnership is not an assessee. Moreover, one must keep the two entities, i.e., an unregistered partnership and the individual partner as separate for the purpose of computing their incomes. An individual partner's income is his income from his individual business plus the income he gets from being a partner in either a registered partnership or in an unregistered partner- ship. Under section 14(2)(a) an exemption is granted to an assessee in respect of his share of the profits and gains of an unregistered firm in which he happens to be a partner. That provision reads as follows : " The tax shall not be payable by an assessee- (a) if a partner of an unregistered firm, in respect of any portion of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislature could not have envisaged. It may be mentioned that this point was very much in the mind of the Mysore High Court when it decided B. Chickotappa's case aforementioned. Regarding this point, it is important to note that the unregistered firm is a separate entity for the purpose of tax at the option of the Income-tax Officer. If an unregistered partnership is assessed under section 23(5)(b) of the Act, it has to pay a rate of tax which is quite different from the rate which would be payable by the individual partner. It would, therefore, follow that if the unregistered partnership did claim a set-off under section 24(2) in a subsequent year, it would not at all affect the assessment of the individual partner. As far as the partners themselves are concerned, their individual assessments would be wholly unaffected, because the Income-tax Officer could refuse to assess the income of the unregistered partnership because of the option contained in section 23(5)(b) in which case the previous loss could not be adjusted by the partnership firm. To illustrate this, it is only necessary to refer to the loss in the present case. If this loss is claimed as an adjustment under section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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