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TMI Blog1982 (12) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... rship, this amount had to be returned at the time when the assessee left the firm. Actually, the assessee retired from the firm with effect from April 1, 1971. During the period of three preceding years ending with March 31, 1971, the firm had run into losses. The assessee's share of the losses amounted to Rs. 20,831.28. Under the agreed terms of the retirement of the assessee, the capital contribution of Rs. 15,000 paid by him was returned to him And his share of accumulated loss, namely, Rs. 20,831.28 was also forgone.. The ITO treated this sum of Rs. 20,831 as income derived by the assessee from the firm and subjected it to assessment as part of his assessable profits under the head business. The assessee appealed against the assessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of remission from liability to share the loss. The Tribunal, however, rejected this contention holding that the loss referred to in s. 41 (1) is not the kind of loss which the assessee in this case had to contend with, which was only his share of losses from the firm for the preceding three years. According to the Tribunal, the expression " loss " in s. 41(1) must be read along with " expenditure or trading liability " spoken of in that section and in that sense such a loss can only mean that loss which enters into the computation of the profits under the head " Business " as a deduction or allowance. On the above reasoning, the Tribunal held that the ITO was not right in regarding this sum of Rs. 20,831 as a revenue receipt taxable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er way to understand the nature of the settlement between the assessee and the continuing partners of the firm. A payment towards goodwill must be judged according to the character of the payment and not on the basis of the figure it represents. It is very likely that a retiring partner may not be interested in demanding and obtaining the entire share of goodwill to which he is entitled but might be content to receive some lesser amount which will simply relieve him of his share of losses. Again, if we were free to go into the correctness or otherwise of the very basis of the assessee, we night possibly come to the conclusion that since Rs. 20,831 represents only the assessee's share of goodwill and none the less so for the fact that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r trading liability " by way of remission or cessation of that liability, to the extent the assessee is a gainer or a beneficiary, he shall be deemed to be in receipt of profits and gains to that extent and be liable to be charged to income-tax, on the basis that the value of the benefit or the amount of remission represents the income of that subsequent year. On the words of this provision, it is not sufficient that an allowance or deduction had been granted in assessment to the assessee in an earlier year, but that the allowance or deduction so granted must relate to a loss, expenditure or trading liability. The claim of the Department in this case is that the assessee's accumulated share of losses in the firm for the last three years amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or under any accountancy principle. That loss is a computed loss, not a loss incurred. If it is regarded in a loose sense, as a loss incurred, it is a loss incurred in the carrying on of the business as a whole, which is the result of a year's trading. Itemised losses incurred in this or that item of business transaction would come in for deduction or allowance in the computation of business results for the year as a whole which may happen to result in net loss or a net profit for the year. Where itemised losses incurred by an assessee are allowed or deducted by the Income-tax Department in any given assessment year, then such a loss would properly enter into consideration for the purpose of application of s. 41(1) in any subsequent year s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with is a loss which is a matter of computation of a year's trading. In the computation of the firm's trading results for a year there might be items of profits as well as items of losses. When a partner's share in the ultimate trading result of a firm is computed, then it is the net loss or the net profit which would come in for allocation. Under s. 67 of the Act, it is enacted that in computing the total income of a partner of firm, the net result of the computation of the total income of the firm, whether it is a net profit or a net loss, must be computed first and then his share must be ascertained therefrom . This shows that any share of partner, whether it be a share in the net profit or net loss of the firm, cannot be dissected to d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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