Seth Jamnadas Daga & Ors Vs.
Commissioner of Income-Tax, South Bombay  INSC 291 (12 December 1960)
12/12/1960 HIDAYATULLAH, M.
CITATION: 1961 AIR 1139 1961 SCR (3) 174
CITATOR INFO :
R 1961 SC1259 (3)
Income-tax-Two firms registered and another
unregistered- Income from unregistered firm, if ' can be set off against loss
from registered firms-Losses of the registered firm, if can be carried forward
in subsequent year-Indian Income-tax Act, 1922 (11 Of 1922), ss. 14(2),
16(1)(a) and 24(1).
The appellants were partners of two
registered firms and another firm which was unregistered. Their profit and loss
for the assessment year 1948-49 were as follows:-From registered firms Rs.
11,902 loss, 1,265 loss, total loss Rs. 13,167. Income from the unregistered
firm Rs. 26,110 profit, other income Rs. 262. The income of the unregistered
firm was taxed on the firm. In assessing the amount of Rs. 262 the Income-tax
Officer first determined the total income of each of the appellants by setting
off their share of the profits of the unregistered firm against their share of
the loss of the registered firm. The appeal to the Appellate Assistant
Commissioner being unsuccessful appeals 175 were taken to the Tribunal which
relying on the decisions in Commissioner of Income-tax v. Ratanshi Bhavanji,
22 I.T.R. 82, held that just as loss in an unregistered firm could not be
set off against profits from a registered firm, the profits in an unregistered
firm could not be set off against the loss from a registered firm. On a
reference being made to it the High Court differed from the decision of the
Tribunal, and held that the profit from the unregistered firm could be set off
against the loss from the registered firms to find out the rate applicable to
Rs. 262 which was other income of the assessees. The High Court further held
that the assessees could not carry forward the loss of the registered firms to
the following year, because such loss must be deemed to have been absorbed in
the profits of the unregistered firm. On appeal with a certificate of the High
Court, Held, that the view of the High Court that under ss. 14(2) and 16(1)(a)
the profit and loss had to be set off against each other to find out the total
income, and that although the share of a partner in the profits of an
unregistered firm is exempt from tax, it is included in his total income for
the purpose of rate only, was correct but the High Court erred in holding that
the losses suffered by the registered firms could not be carried forward
because they had been absorbed by the profits of the unregistered firm.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 516 of 1959.
Appeal from the judgment and order dated
September 3, 1957, of the Bombay High Court in Income-tax Reference No. 49 of
J.M. Thakar, S. N. Andley, J. B. Dadachanji,
Rameshwar Nath and P. L. Vohra, for the appellants.
A. N. Kripal and D. Gupta, for the
1960. December 12. The Judgment of the Court
was delivered by HIDAYATULLAH, J.-The three appellants appeal against the
judgment and order of the High Court of Bombay answering, in the affirmative,
the following question:
"Whether the share income of the
assessees from the unregistered firm (which is separately taxed), namely, Rs.
26,110 can be set off against their share loss from registered firms, namely,
Rs. 13,167?" The facts are as follows: Two of the appellants are 176
brothers, and the third appellant is the widow of a third brother, who died
during the pendency of the appeal after certificate had been granted by the
High Court. The three brothers were partners in two registered firms and one
other firm, which was unregistered. The assessment years for the purposes of
the appeal are 1948-49 and 1949-50. For the assessment year 1948-49, the income
of the three brothers was the same, and it was as follows:
From registered firms ... Rs. 11,902 loss
1,265 loss Total loss Rs. 13,167 Income from the unregistered firm Rs. 26,110
profit Other income Rs. 262 The income of the unregistered firm was taxed on
the firm and not in the hands of the partners, as was possible under the
provisions of cl. (b) of sub-s. (5) of s. 23. In assessing the amount of Rs.
262, the Income-tax Officer first determined the total income of each of the
appellants by setting off their share of the profits of the unregistered firm
against their share of the loss of the registered firms. The appellants
contended that, inasmuch as tax had already been assessed on the unregistered
firm, this could not be done, and that as there was loss in the business of the
registered firms, no tax was demandable on Rs. 262. They also contended that
they were entitled to carry forward the, loss amounting to Rs. 12,905 to the
succeeding year under s. 24(2) of the Income-tax Act. These contentions were
not accepted by the Income-tax Officer, to whose order it is not necessary to
refer in detail. The assessment for the assessment year 1949-50 was also done
on similar lines.
The appeal to the Appellate Assistant
Commissioner was unsuccessful, and six appeals were taken to the Tribunal by
the three appellants three for each assessment year. These appeals were
disposed of by a common order. The Tribunal held, relying upon the second
proviso to s. 24(1), that just as loss in an unregistered firm could not be set
off against profits 177 from a registered firm under that proviso, the profits
in an unregistered firm could not be set off against the loss from a registered
firm. It relied upon a decision of the Madras High Court in Commissioner of
Income-tax v. Ratanshi Bhavanji (1), which it purported to follow in preference
to a decision of the Punjab High Court in Banka Mal Niranjandas v. Commissioner
of Income tax (2). The same reasoning was applied to the assessment year 1949-50,
and in the result, all the six appeals were allowed.
The order of the Tribunal involved, in
addition to the point set out above, certain other questions, which were asked
by the assessees to be referred to the High Court for decision under s. 66(1).
The Commissioner also asked for a reference in respect of the decision,
substance whereof has been set out above. The Tribunal referred two questions
at the instance of the assessees and one question, which we have already
quoted, at the instance of the Commissioner. In the High Court, the assessees
abandoned the two questions, and the High Court accordingly expressed its
opinion in the judgment and order under appeal, on the remaining question.
The High Court differed from the decision of
the Tribunal, and held that the profit from the unregistered firm could be set
off against the losses from the registered firms to find out the rate
applicable to Rs. 262, which was other income of the assessees. The High Court
also held that the assessees could not carry forward the loss of the registered
firms to the following year, because such loss must be deemed to have been
absorbed in the profits of the unregistered firm. It, however, certified the
case as fit for appeal to this Court, and the present appeal has been filed.
In our opinion, the High Court correctly
answered the question referred to it, but was in error in holding that the
losses of the registered firms could not be carried forward, because they must
be deemed to have been absorbed in the profits of the unregistered firm.
Inasmuch as we substantially agree with the
High (1)  22 I.T.R. 82.
(2)  20 I. T.R. 536.
23 178 Court on the first part of the case,
it is not necessary to examine closely or in detail the reasons on which the
decision of the High Court proceeds. In our opinion, the matter is simple, and
can be stated within a narrow compass.
Under s. 3 of the Income-tax Act, income-tax
is chargeable for an assessment year at rate or rates prescribed by an annual
Act in respect of the total income of the previous year. Section 14 (2)(a),
before its amendment in 1956, provided that the tax shall not be payable by an
assessee, if a partner of an unregistered firm in respect of any portion of his
share in the profits and gains of the firm, computed in the manner laid down in
cl. (b) of sub-s. (1) of s. 16 on which the tax had already been paid by the
The section thus gave immunity from tax to
the share of the assessee as a partner in an unregistered firm in respect of
the share of profits received by him from the unregistered firm and on which
the unregistered firm had already been taxed. Section 16(1)(a), however,
provided that in computing the total income of an assessee, any sum exempted
under sub-s. (2) of s. 14 shall be included. The combined effect of those two
sections was stated by the High Court to be, "that although the share of a
partner in the profits of an unregistered firm is exempt from tax, it is
included in his total income for the purpose of rate only. " We agree that
this is a correct analysis. The Tribunal relied upon the second proviso to s.
24(1), which read as follows:
"Provided further that where the
assessee is an unregistered firm which has not been assessed 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 said 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 and they alone shall be entitled to have the
amount of the loss set off under this section." 179 The Tribunal came to
the conclusion that, "...just as a partner in an unregistered firm which
has suffered loss will not be allowed to set off his share loss in the
unregistered firm against his income from any other source, so it stands to
reason that his loss from other sources cannot also be set off against his
share income from an unregistered firm. " The decision of the Tribunal was
not based upon any specific provision of the Income-tax Act but upon a parity
of reasoning, by which a specific provision about loss was held to apply the
other way round also. The High Court correctly pointed out that all that s. 14,
subs. (2), did was to save the profits of an unregistered firm from liability
to tax in the hands of the partners. It did not affect the computation of the
total income to determine the rate applicable under s. 3, in the light of s.
16(1)(a). Indeed, s. 16(1)(a) clearly provided that any sum exempt under s. 14(2)
was to be included in computing the total income of an assessee, and in view of
this specific provision, the converse of the second proviso to s. 24(1) which
we have quoted above, hardly applied. To this extent, the order of the Tribunal
was incorrect. The error was pointed out by the High Court, and the question
thus raised was properly decided. We see no reason to differ from the High
Court on this part of the case.
The question, however, arose before the High
Court as to whether in view of this decision, the assessees could carry forward
loss from the registered firms in the subsequent year or years. The High Court
came to the conclusion that they could not carry forward the loss. Indeed, the
Tribunal had earlier stated that if the profits from the unregistered firm were
to be set off against the losses of the registered firms, such losses would not
be carried forward to the following year, and that would be contrary to s. 24.
The High Court rejected this ground in dealing with the question as to the rate
applicable to the other income, and pointed out-and in our view, rightly, that
under ss. 14(2) and 16(1)(a) the profits and losses had to be set off against
each other, to find out the total income.
180 The High Court, however, held that once
losses were set off against profits, they were to that extent absorbed, and
that there was nothing to carry forward. This conclusion does not follow.
Section 24 provides for a different situation altogether; it provides for the
carrying forward of a loss in business to the subsequent year or years till the
loss is absorbed in profits, or till it cannot be carried forward any further. That
has little to do with the manner in which the total income of an assessee has
to be determined for the purpose of finding out the rate applicable to his
income, taxable in the year of assessment. To read the provisions of ss. 14(2)
and 16(1)(a) in this extended manner would be to nullify in certain cases s. 24
altogether. Neither is such an intention expressed; nor can it be implied. In
our opinion, though the decision of the High Court on the main issue and on one
aspect of the question posed for its opinion was correct, it was in error in
deciding that the losses of ,the registered firms could not be carried forward
because they had been absorbed by the profits of the unregistered firm.
To this extent, the judgment and order of the
High Court will stand modified. Subject to that modification, the appeal will
be dismissed. In the circumstances of the case, there will be no order as to
Appeal dismissed with modification.