1964-VIL-30-BOM-DT

Equivalent Citation: [1965] 55 ITR 128 (Bom)

BOMBAY HIGH COURT

Income-tax Reference No. 60 of 1958/Assessment Year: 1953-1954

Dated: 09.04.1964

COMMISSIONER OF INCOME TAX, BOMBAY SOUTH

Vs

JAGANNATH NARSINGDAS

For the Appellant: G.N. Joshi, Adv.

For the Respondent: J.P. Pandit, Adv.

Bench

V.S. Desai and Y.S. Tambe

JUDGMENT

V.S. Desai, J.

1. The question, which arises for consideration on this reference under section 66(1) of the Indian Income Tax Act, at the instance of the Commissioner of Income Tax, is :

"Where the assessee is entitled to claim a set-off of Rs. of 13,831, that being his share of loss in business carried on by an unregistered firm, against the profits of his personal business ?"

2. The few facts necessary to be stated are as follows :

The assessee is an individual carrying on business as commission agents in certain commodities. He also trades on his own account in kapas, which he sells after converting it into lint and cotton seeds. Besides this business, which the assessee was carrying on in his individual capacity, he also carried on some business in kapas in partnership with one Chinna Venkayya Vithoba of Umri. In the relevant assessment year 1953-54 for which the accounting year was the year ending October 18, 1952, the assessee had made a profit of Rs 14,189 in his individual business. In the partnership business, which he had carried on in partnership with Chinna Venkayya, his share of loss came to Rs 13,831. The assessee claimed to deduct this loss from the profits and gains in the individual business. The Income Tax Officer disallowed the same observing that the loss sought to be adjusted was the share of the assessee's loss in the business of an unregistered partnership and it was not capable of being adjusted against his profits and gains in his individual business. The decision of the Income Tax Officer was upheld by the Appellate Assistant Commissioner. In the second appeal before the Tribunal, the Tribunal took the view that that assessee was entitled to adjust the said loss in computing the profits and gains of his business under section I0 of the Income Tax Act and that the second proviso to section 24(1) had no application to the case. It, therefore, allowed the assessee's appeal and directed that the assessee was entitled to adjust the loss in the computation of his income under the head "business". At the instance of the Commissioner of Income Tax, the Income Tax Appellate Tribunal drew up a statement of the case under section 66(1) of the Income Tax Act and referred to this court the question, which we have set out in the beginning.

3. Mr. Joshi, the learned counsel appearing for the revenue, has urged before us that the Income Tax Tribunal has erred in taking the view that the assessee was entitled to a deduction of his loss as a partner in the unregistered firm in the computation of his income from business under section I0 of the Act. His argument is that a loss of a partner in an unregistered firm, whether the firm is assessee or not, can be set off against the profits of the unregistered firm and not against the profits of the partner in his individual business. That this is the position under the Income Tax Act, after its amendment in the year 1939, will be clear on a consideration of the provisions of section 24(1) second proviso, and sub-clauses (c) and (d) to section 24(2) and section 16(1) (b) of the Act. His further argument is that although the second proviso to section 24(1) is drafted as a proviso, it in effect is a substantive provision, which will have to be read as affecting and modifying section I0 of the Act. It is true, says Mr. Joshi that, before the Act was amended in 1939, a view was taken by several High Courts and also by the Privy Council that an assessee, who was also a partner in firms registered or unregistered, was entitled to have his share of loss in the business of the partnership adjusted and taken into account in computing his income under section I0 of the Indian Income Tax Act. This view, according to the learned counsel, is no longer capable of being sustained in view of the changes introduced in the law by the Amending Act of 1939.

4. Now, the Privy Counsel in Arunachalam Chettiar v. Commissioner of Income Tax held that whether a firm is registered or unregistered, a partner's share of the loss in the firm can be set off against the profits and gains made by him in his individual trade and otherwise. An argument was advanced in that case that an unregistered firm was, for Income Tax purposes, an entity distinct and different from the individual partners of the firm and, consequently, the business carried on by the firm cannot be treated as the business of the assessee. The said argument was rejected by the High Court and the Privy Council agreed with the view of the High Court. Referring to the provision of section 24(2) of the Indian Income Tax Act, as it then stood, they pointed out that the Income Tax Act did not treat the partner of a firm as a separate assessee in so absolute a sense as to prevent a partner's share of loss being set off against his individual profits or gains and it was observed that "in their opinion whether a firm was registered or unregistered partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, whether the set-off be against the other profits under the same head of income within the meaning of section 6 of the Act or under a different head (in which case only need recourse be had to section 24(1))." In view of the said decision of the Privy Council, there can be no doubt whatsoever that under the Act of 1922, before its amendment by the amending Act of 1939, an assessee in his individual assessment was entitled to adjust the loss suffered by him in an unregistered partnership business against his profits in the business carried on by him individually under section I0 of the Act. Mr. Joshi's argument, however, is that the position no longer remains the same in view of the amendment of the Income Tax Act and, under the amended Act, the assessee, who is a partner of an unregistered firm, is not entitled to have such adjustments. The amendment of the law, to which he has referred in this connection, are the provisions of section 16(1) (b), the provisions of the second proviso to section the Government of India and the said amount included also 24(1) and sub-section (2) (c) and (d) of section 24. Section 16(1) (b) is in the following terms :

"16. (1) In computing the total income of an assessee - ....

(b) When the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm, in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year :

Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24."

5. Mr. Joshi's argument is that this provision provides that, while computing the total income of the assessee, his share of profits in a firm as computed in the manner provided by this provision is to be included in his total income but if his share in the partnership business as computed under the provision comes to be a loss, it is not capable of being adjusted against his profits in the other business carried on in his individual capacity but only to be considered for the purpose of being set off or carried forward and set off in accordance with the provisions of section 24. Mr. Joshi says that the provision of section 16(1) (b) is drafted so as to cover both registered and unregistered firms and the share of the partner in the firm, whether registered or unregistered, when it amounts to a loss, has got to be dealt with under the provision of section 24. Under the said latter section, in the case of a registered firm the loss suffered by the partner would be capable of being set off against his profits and gains from his individual business. In the case of an registered firm, however, in view of the provision of section 24, according to Mr. Joshi, loss can be set off only against the profits and gains of the firm and not against the income, profits and gains of any the partners of the firm. According to Mr. Joshi, the proviso to section 16(1) (b) and the second proviso to section 24(1), which are amendments effected in the Income Tax Act subsequent to the Privy Council decision in Arunachalam Chettiar v. Commissioner of Income Tax, have changed the position of a partner in an unregistered firm and, consequently, the said decision cannot be applied to cases under the amended Act.

6. Section 24, so far as material for our purpose, is as follows :

"24. (1) where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year :....

Provided further that where the assessee is an unregistered firm, which has not been assessee under the provisions of clause (b) of sub-section (5) of section 23, 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 where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm an they alone shall be entitled to have the amount of the loss set off under this section."

7. Section 24(2), which relates to carrying forward of losses, provides in sub-section (c) thereof as follows :

"24. (2) (c) Nothing herein contained shall entitle any assessee, being a registered firm, to have carried forward and set off any loss which has been apportioned between the partners, under the proviso to sub-section (1), or entitle any assessee, being a partner in an unregistered firm which has not been assessee under the provisions of clause (b) of sub-section (5) of section 23, to have carried forward and set off against his own income any loss sustained by the firm.

(d) Where an unregistered firm is assessee under clause (b) of sub-section (5) of section 23, during any year, its losses shall also be carried forward and set off under this section as if it were a registered firm."

8. Mr. Joshi's argument, based on the provisions above referred to, is that losses sustained by an unregistered firm are not capable of being taken into account and set off by the individual partner of the firm in his individual assessment in any way. Such a loss can be set off by the unregistered firm against its own profits or the unregistered firm may carry it forward under section 24(2), but the individual partner cannot have the advantage of setting off his share of the losses nor is he entitled to carry forward the said losses and set it off against his own income.

9. Now, in our opinion, the provisions referred to by Mr. Joshi do not lead to the result as is contended for by him. Section 16(1) (b) which includes in the total income of an assessee his share of profits from a firm clearly indicates, as pointed out by their Lordships of the Privy Council in Arunachalam Chettiar v. Commissioner of Income Tax, by reference to the provisions of section 24(2) of the unamended Act, that the Income Tax Act does not treat the partner of a firm as separate assessee in so absolute a sense as to prevent his share of the profits in the said partnership business as his income from the business. In P.M. Muthuraman Chettiar v. Commissioner of Income Tax, a Bench of the Madras High Court held :

"The share income of a partner of a firm falls under the head 'profits and gains of business' referred to in section 10 of the Act and is not 'income from other sources' falling under section 12, and a loss incurred by an assessee as a partner in a firm must, therefore, be deducted in computing his total income under the head 'business' under section 10(2)."

10. In taking that view they followed the decision of this court in Shantikumar Natottam Morarji v. Commissioner of Income Tax. It was argued in the said Madras case that in view of the proviso to section 16(1) (b) and in view of the provisions of section 24, so far as the share of loss of the partner in the unregistered firm is concerned, they could not be adjusted in the computation of his profits and gains from business under section 10. The argument was negatived and the learned judges took the view that there was nothing in section 16(1) or in section 24, which prevented the assessee from adjusting the said losses in his individual assessment. In view of the said decision, therefore, Mr. Joshi's argument that the provisions of section 16(1) (b) and the provisions of section 24 referred to by him bring about a change in the law so as to make the principle of the Privy Council decision in Arunachalam Chettiar v. Commissioner of Income Tax inapplicable, does not appear to be correct. The proviso to section 16(1) (b) no doubt says that the share of the losses may be set off or carried forward and set off under section 24, but that is only for the purpose of setting off the losses or carrying forward of the losses under the said section. It does not says that the losses are not capable of being taken into account in the computation of the profits of the business under section 10. When we go to section 24 what we find is that the provision of that section relates to set-off of losses under one head of income against the profits and gains of any other head of income in that year. Section 24 has no application where the set-off is not of loss under one head against profits under another head, but is a case of adjustment and set-off between the profits and losses under the same head. The adjustment of losses and profits under the head of business is to be done not under section 24 but under section 10. That such is the position under the Income Tax Act is made abundantly clear by several decided cases. Thus, in Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, the Supreme Court observed :

"... a set-off under section 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course, the loss can be deducted but that is done under section 10 an not under section 24(1)."

11. Similarly, in Commissioner of Income Tax v. Muthuraman Chettiar, it was held :

"Though the profits of each distinct business may have to 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 business carried on by the assessee. Therefore, where the assessee carries on several businesses, he is entitled under section 10, and not under section 24(1), to set off losses in one business against profits in another. If section 24(1) has no application, the second proviso thereto can also have no application."

12. The treatment of the losses under section 24 will only be for the purpose of setting off losses under different heads. Where the partner of an unregistered firm seeks a set-off or a carry forward and set-off of his losses under one head against profits under another head, no doubt, he will have to be governed be section 24 and also by the second proviso to that section. In view of the second proviso, his share of the losses in the unregistered partnership will not be capable of being set off against his income from any other head, but so long as the adjustment that he seeks is in his income under the same head, viz., "business", there is nothing in the provisions of section 24 which would preclude him from seeking that adjustment under section 10 of the Indian Income Tax Act.

13. Coming to the second proviso to section 24(1) itself, in the first place, it applies to the case where the assessee is an unregistered firm, and not where the assessee is not an unregistered firm, but an individual partner. In the second place, the unavailability of the losses of the firm against the income, profits and gains of the partner in the case of an unregistered firm, is for the purposes mentioned in the main provision of section 24, viz., for the purpose of being set off against income, profits and gains under other heads. The provision contained in the second proviso being in the nature of a proviso to the main section must be governed with reference to what is contained in the main provision. Mr. Joshi's argument is that, although the second proviso has been added as a proviso to section 24(1), it is in effect an independent provision, which has got to be read along with section 10 of the Act. Mr. Joshi says that the mere circumstance that it comes in as a proviso would not prevent the court from regarding it as an independent provision if it is intended to be such by the legislature. He has in that connection invited our attention to a decision of this court, which has taken the view that, so far as the first proviso of section 24 is concerned, it was not merely a proviso but an independent provision, which has got to be taken into account in computing the income under section 10.

14. Now, the circumstance that the first proviso has the effect of being an independent provision will not necessarily mean that the second proviso is also a substantive provision. It is prima facie a proviso and it will have to be regarded as a proviso, as it purports to be, unless there is very good and strong reason to hold that its scope is not merely that of proviso but an independent provision.

15. Now, we do not see any such strong reason for holding that it is an independent provision. In Mohanlal Hiralal v. Commissioner of Income Tax, a Bench of the Nagpur High Court held that the second proviso to section 24(1) cannot be regarded as an independent provision. It is only an exception to the general rule provided in section 24(1) for set-off of losses under one head against income under any other head mentioned in section 6. It also held that the proviso applied only to cases where the assessee was an unregistered firm or a partner in a registered firm. In Commissioner of Income Tax v. Muthuraman Chettiar, the Supreme Court observed :

"If section 24(1) has no application, the second proviso thereto can also have no application. Further, the second proviso to section 24(1) applies only where the assessee is an unregistered firm."

16. In view of these decisions, it is not possible to accept the contention of Mr. Joshi that the second proviso to section 24(1) can be regarded as an independent provision affecting the computation of the income of the assessee under section 10 of the Income Tax Act. Moreover, even if it were to be assumed that the proviso is an independent provision, in view of the observations of the Supreme Court in Commissioner of Income Tax v. Muthuraman Chettiar, to which we have already made a reference, the said proviso will have application only where the assessee is an unregistered firm. In the present case, the assessee is not an unregistered firm. As a matter of a fact, the unregistered firm has not been assessee at all. The assessee is an individual and the question is with regard to the computation of the income of that individual under section 10 of the Indian Income Tax Act.

17. In our opinion, therefore, the contentions urged by Mr. Joshi cannot be sustained.

18. Mr. Joshi has referred to us the case in Commissioner of Income Tax v. Jadavji Narasida & Co. In that case the assessee was a registered firm consisting of four partners, which dealt in speculation in a joint venture with another individual under an agreement. The assessee, a registered firm, had suffered a loss in a joint venture and claimed to set off that loss against its profits from the business carried on by itself. It was held by the Supreme Court that the losses sought to be set off by the assessee-firm could not be allowed to be set off because they were the losses of the unregistered firm and could only be set off against the income of that unregistered firm. Mr. Joshi has sought to press into service the said decision of the Supreme Court for the view contended by him that the losses suffered by a person in an unregistered partnership cannot be sought to be adjusted by him in computing his income from business under section 10.

19. Now, it appears to us that the case does not support the proposition set up by Mr. Joshi. The position in that case was that the assessee was a registered firm consisting of four partners. The unregistered firm consisted of the four partners of the registered firm and a stranger. The partners of the unregistered firm were five individuals and the registered firm was not a partner by itself. The loss suffered in the business of the unregistered firm went to the share of the five individual partners and they were their losses in the partnership business. They could not be regarded as the losses in business suffered by the registered firm because the registered firm by itself was not a partner in the partnership firm. It was in these set of facts that the Supreme Court held that the share of the losses of the four partners of the registered firm in the unregistered firm could not be availed of by the registered firm in the computation of its profits and gains from business. Their Lordships observed :

"The unregistered firm has not been assessee. The assessee-firm alone has been assessee and on its own assessment it has shown a profit. It seeks to set off against its profits a loss of Rs 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 firm of Damji and these four can only be set off against the income, profits and gains of the unregistered firm and not those of its partners. The loss of Rs 1,05,641 could be set of against the income, profits and gains (if any) of the unregistered firm of five persons and not of the partners. In the same manner the loss, if not absorbed, could be carried forward to be set off against further income, profits and gains of the same unregistered firm of five persons. The High Court was thus in error in holding that those losses could be set off against the income of the assessee-firm. It make no difference that the department has not assessee the unregistered firm 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."

20. Their Lordships then went on to observe :

"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 conceded before us) is not a matter on which we need pronounce our opinion. That question does not arise for our consideration."

21. In view of these observations, which we have referred to above, it seems to us that the decision of the Supreme Court in that case does not lay down the proposition that a partner in an unregistered partnership in his individual assessment cannot adjust the share of the losses suffered by him in the unregistered partnership, which has not been assessee, in computing his profits and gains from business. That question, as we see from the last observations referred to above, was not decided by their Lordships in that case.

22. Mr. Joshi, therefore, cannot press into service the said decision of the Supreme Court in Commissioner of Income Tax v. Muthuraman Chettiar for the proposition which he has contended.

23. In the result, therefore, in our view, the decision of the Income Tax Appellate Tribunal in the appeal preferred before it by the assessee is correct and the question, which has been referred to us on the present reference, must therefore, be answered in the affirmative. We answer it accordingly. The department will pay the costs of the assessee.

24. Question answered in the affirmative.