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TMI Blog1965 (11) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The firm of Messrs. Subash Oil Traders filed a return of its income for the assessment year 1957-58 on 2nd May, 1958, showing a loss of ₹ 38,835 but since the return was filed long after the expiration of the time prescribed for the filing of a return under section 22(2), the Income-tax Officer ignored the return and did not proceed to assess the firm and determine the loss sustained by it. The result was that the firm was unregistered and unassessed for the assessment year 1957-58. The assessee's share in the loss of the firm amounted to ₹ 12,448 and the assessee, therefore, in the course of his assessment for the assessment year 1957-58, the corresponding account year being Sam vat year 2012, claimed to adjust such share of the loss against his profits from other businesses. This claim was rejected by the Income-tax Officer and in appeal by the Appellate Assistant Commissioner, but the Tribunal on further appeal upheld the claim and directed that the assessee's share in the loss of the firm should be adjusted against his profits from other businesses in computing his business income under section 10. The Tribunal, in taking this view, followed the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains of business, profession or vocation. Section 10 lays down the rules for computing the income of the assessee under the head Profits and gains of business, profession or vocation. There is no specific provision in the section for adjustment of losses in one or more businesses against profits in other businesses where several businesses are carried on by an assessee. But it is now well-settled by the decision of the High Court of Bombay in Commissioner of Income-tax v. Muralidhar Mathurawalla Mahajan Association [1948] 16 ITR 146, a view which has also received the approval of the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income- tax [1953] SCR 448, that all businesses constitute one head under section 10 and in order to determine what are the profits and gains of business under section 10, an assessee is entitled to show all the profits and adjust against those profits, losses incurred by him under the same head. In other words, while profits or losses of each distinct business may be computed separately, the tax is chargeable under section 10 not on the separate income of every distinct business but on the aggregate of the profits of all the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if we turn for a moment to section 14(2)(a). It is precisely because a partner's share in the net profit of the firm is includible in the computation of his total income that the legislature had to enact section 14(2)(a) in order to avoid double taxation in the case of profits of an unregistered firm. Where an unregistered firm is assessed as an unregistered firm, it is taxed as a distinct assessable entity and the profits made by it are taxed in its hands and but for section 14(2)(a) a partner of an unregistered firm would also be liable to pay tax in respect of his share in the profits of the unregistered firm and this would result in double taxation of the same profits. The legislature, therefore, enacted section 14(2)(a) to grant exemption from tax to a partner of an unregistered firm in respect of his share of the profits of the firm. This provision clearly postulates that a partner's share in the net profits of an unregistered firm is liable to be included in the computation of his total income and if his share in the net profits is so includible, it is difficult to see on what, principle it can be contended that his share in the net loss of the firm where the firm ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the loss in the unregistered firm against his profits whether under the same head or under a different head. The amendments which were relied upon on behalf of the revenue in this connection were those contained in section 16(1)(b), the proviso to section 23(5)(a), section 24(1), second proviso, and section 24(2), proviso (c). Now the assessee agreed that the amendments did effect a change in the position of a partner of an unregistered firm in that after the amendments a partner of an unregistered firm could not adjust his share of the loss in the unregistered firm against his profits under a different head which he could do before but so far as his right to adjust his share of the loss in the unregistered firm against his profits under the same head was concerned, that right, contended the assessee, was not taken away by anything contained in the amendments. It is, therefore, necessary to consider the true scope and effect of the amendments and to see whether the amendments make any difference in the position so far as it concerns the right of a partner in an unregistered firm to adjust his share of the loss in the unregistered firm against his profits under the same head. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the revenue which takes away this right of a partner in an unregistered firm to adjust his share of the loss from the unregistered firm against his profits from other businesses under section 10. Now, when we turn to the proviso to section 16(1)(b) we find that all that it says is that if the share of a partner in a firm, registered or unregistered, computed in accordance with the main provision enacted in section 16(1)(a) is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24. The proviso does not seek to affect the computation of the income of the partner under the head profits and gains of business, profession or vocation or under any other head but makes a provision only in regard to set-off or carry-forward and set-off being matters dealt with in section 24 and provides that the partner's share of the loss may be set off or carried forward and set off in accordance with the provisions of that section. It is, therefore, necessary to refer to section 24 and see what is the set-off or carry-forward and set-off dealt with in that section. Section 24(1) provides for set-off in the following terms : 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into account except to the extent of the profits and gains, if any, in any other business consisting of speculative transactions. We are not concerned in this reference with the first proviso and we shall, therefore, say no more about it. The second proviso was however strongly relied on behalf of the revenue and the argument based on the second proviso was that by reason of the rule enacted in that proviso the loss of the unregistered firm could be set off only against the income, profits and gains of the firm and not against the income, profits and gains of the partners of the firm and no partner could, therefore, claim to set off his share of the loss of the firm against his profits from other businesses. The revenue relied on the prohibition contained in the second proviso which was in the following words : ... any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm and urged that this prohibition prevented a partner in an unregistered firm from claiming to set off his share in the loss of the firm against his profits from other businesses. Now obviously th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the loss set off under section 24. The last observation in the passage quoted above was of course made in relation to the second part of the second proviso since the case before us was a case of a registered firm but what we have said there must apply equally to the first part of the second proviso which deals with the case of an unregistered firm. It is only where the assessee is an unregistered firm and loss under one head is sought to be set off against profit under another that the second proviso says that such loss shall be set off only against the profit of the firm and not against the profit of any of the partners of the firm. The second proviso has no application where a partner of an unregistered firm seeks to adjust his share of the loss of the unregistered firm against his profits from other businesses in the computation of his income under section 10. In such a case no question of set-off of loss under one head against profits under another head arises and the inhibition contained in the second proviso is not attracted. This view is clearly borne out by the decision of the Supreme Court in Commissioner of Income-tax v. Muthuraman Chettiar [1962] 44 ITR 710 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this proviso can afford any help to the revenue in its present contention. This proviso, in so far as it is material, prescribes, inter alia, that nothing contained in the section shall entitle any assessee, being apartner in an unregistered firm, to have carried forward and set off against his own income any loss sustained by the firm. There can be no dispute about the applicability of this proviso if what a partner of an unregistered firm seeks to do is to carry forward his share of the loss and set it off against his own income in the subsequent years. Just as a partner of an unregistered firm cannot set off his share of the loss under one head against his profits under another, so also he cannot claim to carry forward his share of the loss and to set it off against his own income in the subsequent years. If there is a loss, suffered by the unregistered firm, that loss can be carried forward and set off only by the unregistered firm. But this proviso obviously can have no application where what a partner of an unregistered firm seeks to do is to adjust his share of the loss against his profit from other businesses in the same year in computation of his income under section 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other businesses but that result would follow in the one case by the operation of section 24(2) and in the other case by the operation of section 10 which are two distinct provisions and that would not justify us in reading the sections in such a manner as to reach the conclusion that the right which a partner of an unregistered firm has under section 10 and section 16(1)(b) to adjust his share of the loss against his profits from other businesses is taken away by anything contained in those sections. There is in our opinion no express provision which takes away such right nor can any such provision be spelt out by necessary implication. We must therefore reach the conclusion that, even after the amendment of the Income-tax Act by the Amending Act of 1939, a partner's share in the profit or loss of an unregistered firm is liable to be taken into account in computing his income under the head profits and gains of business, profession or vocation referred to in section 10; if his share is a profit, it would be added to his profits from other businesses subject to section 14(2)(a) and if his share is a loss, it would be adjusted against his profits from other businesses and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the unregistered firm and was in fact not such partner and the only partners were the four partners of the assessee and Damji. The assessee could not, therefore, be regarded as having suffered any loss. The loss was suffered by the four partners of the assessee in their individual capacity and Damji. On these facts the Supreme Court held that the shares of the loss of the four partners of the assessee in the unregistered firm could not be adjusted by the assessee against its profits in speculation in computing its profits under section 10. Hidayatullah J., delivering the majority judgment, observed : What then is the position here ? The unregistered firm has not been assessed. The assessee-firm alone has been assessed and on its own assessment it has shown a profit. It seeks to set off against its profits a loss of ₹ 1,05,641 which, it is said, was incurred by it in partnership with Damji. We have shown above that there can be no partnership between the assessee-firm and Damji. There was, however, a partnership between Damji and the four partners of the assessee-firm in their individual capacity. Now under section 24(1), second proviso, the losses of the unregistered f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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