The Commissioner of Income-Tax, Bombay
City II, Bombay Vs. M/S. Jadavji Narsidas & Co.  INSC 285 (12 October
12/10/1962 HIDAYATULLAH, M.
CITATION: 1963 AIR 1497 1963 SCR Supl. (1)
Income Tax-Set-off-Profits of registered firm
and loss incurred in unregistered firm-Findings of Tribunal-When binding on
High Court-Indian Income-tax Act, 1922 (11 of 1922), ss. 24, 66 (2).
The respondent, a firm consisting of four
partners, was registered under the Indian Income-tax Act, 1922. For the
assessment year 1946-47 it claimed to set off a sum of Rs. 1,05,641, as its
share of the loss in respect of certain transactions said to have been carried
on in the name of D by another partnership between it and D, which was not
registered. The income-tax authorities rejected the claim and the Appellate
Tribunal agreed with their decision on the grounds (1) that it being admitted
that the ankdas were in the name of D, there was no satisfactory evidence that
the assessee did business in the joint account, and (2) that, in any case, the
assessee could not claim the set-off as the loss was suffered by an
610 On a reference, the High Court held (1)
that there was no legal admissible evidence to justify the Tribunal's finding
that the transactions in question were not those of the assessee, and (2) that
the assessee firm could claim a set- off in respect of the share of loss in the
unregistered firm "if the income-tax authorities did not proceed to
determine the losses of the unregistered firm and did not bring it to tax as
permitted by s. 23 (5) (b)." Held, that the High Court erred in its view
that the asses- see firm could claim a set-off in respect of the loss incurred
in the unregistered firm.
Held, further (per Kapur and
Hidayatullah,.JJ.) : (1) that if under s. 66 of the Indian Income-tax Act,
1922, a finding given by the Appellate Tribunal is to be considered final, it
is necessary that the reasons for reaching it should be stated by the Tribunal
with sufficient fullness to inform all concerned what they are.
(2) that there could not be a partnership
between D and the registered firm. If there was a partnership it was between D
and the four partners of the assessee firm in their individual capacity, and
under the provisions of s. 24 of the Act the loss of Rs. 1,05,641 could not be
set off against the profits of the registered firm.
Per Sarkar, J.-In view of the decision in
Dulichand Laksh- minarayan v. The Commissioner of Income-tax, Nagpur,  S.
C R. 154, that a firm as such is not entitled to enter into partnership with
another firm or individuals, the assessee firm could not in law enter into
partnership with D, and the questions answered by the High Court did not really
arise in the present case.-
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 545 of 1961.
Appeal from the judgment and order dated
October 23, 1958, of the Bombay High Court in Income-tax Reference No. 23 of
K. N. Rajagopal Sastri and R. N. Sachthey,
for the appellant.
Purushottam Trikamdas, S. N. Andley,
Rameshwar Nath and P. L. Vohra, for the respondent.
611 1962. October 12. The following judgments
The judgment of Kapur and Hidayatullah, jj.
was delivered by Hidayatullah, J., Sarkar, J., delivered a separate judgment.
HIDAYATULLAH J.- This is an appeal by the
Commissioner of Income-tax, Bombay., against the judgment and order of the High
Court of Bombay dated October 23, 1958, by which the High Court answered two
questions referred to it under s. 66 (2) of the Income-tax Act in favour of the
respondent jadavji Narsidas & Co. The High Court certified this case as fit
for appeal to the Supreme Court and hence this appeal.
The facts are simple. The year of account is
the S. Y. 2001 corresponding to October 10, 1944, to November 4, 1945, and the
assessment year is 1946-47. The respondent is a firm consisting of four
partners and was registered under section 26A of the Income-tax Act for the
relevant year. The assessee firm carries on business which is mainly
speculation. In the year of account it claimed inter alia a loss of Rs.
1,05,641 which it was said, arose in speculation in a venture of the assessee
firm with one Damji Laxmidas.
This venture was carried on in the name of
Damji Laxmidas on behalf of an alleged firm in which Damji was said to have a
share of /6/- and the assessee firm the balance. A deed of partnership dated
November 14, 1944, was also produced before the Income-tax Officer. The sum of
Rs. 1,05,641 represented half the losses of the joint venture, the other half
being claimed by Damji in his own individual assess- ment. The so-called firm
of Damji Laxmidas and the assessee firm was an unregistered one. The Income-tax
Officer., Bombay, disallowed these losses and added back this amount along with
some others to convert a loss of Rs. 55,931 declared by the assessee firm into
a profit of Rs. 1,88,575.
This profit was carried by him in accordance
with the share of the partners into their individual assessment.
612 In the assessment of Damji, it may be
stated here, the loss was not allowed on the ground that having arisen in an
unregistered partnership, it could only be considered in the assessment of the
unregistered partnership. In rejecting the evidence of the loss of Rs. 1,05,641
in the assessment of the assessee firm the Income-tax Officer gave three
reasons (i) that the ankdas were in the name of Damji Laxmidas and not in the
name of the unregistered firm or the assessee firm, (ii) that the assessee firm
claimed only 18/- of the losses and riot /10/- according to its share and (iii)
that the assessee firm which was a well-known firm doing extensive business was
said, surprisingly enough, to have entered into a partnership wit an
insignificant person like Damji Laxmidas to carry on this vast business. He
held that the assessee firm had purchased these losses from Damji Laxmandas to
be able to set them off against its profits to avoid tax. The Appellate
Assistant Commissioner dismissed the appeal filed by the assessee firm and so
also the Appellate Tribunal. The two members of the Appellate Tribunal gave
different reasons. The judicial Member (Mr. A. R. Aggarwal) observed:
"So far as the last item No. (3) is
concerned we are not satisfied that really the loss of Rs. 1,05,641/- was the
loss of the assessee.
It is admitted by the assessee that the
ankdas are in the name of Damji Laxmidas. By no evi- dence we are satisfied
(sic) that really the assessee did business in the joint account.
Consequently, this claim of the assessee is
disallowed." The Accountant Member (Mr. P. C. Malhotra) observed :
"I agree with my learned brother in the
order which he has passed. I would, however, like to add a few words. It is not
even the assessee's case that loss of Rs. 1,05,641/- was suffered by it.
613 According to the assessee it did some
joint venture transactions with Damji Laxmidas.
Damji Laxmidas came in appeal to the Tribunal
in respect of his share of the loss. It was held that the loss arising to a
person in a joint venture cannot be allowed-in his personal assessment as the
loss is suffered by an unregistered partnership. It can only be carried forward
in the account of the unregistered firm." The assessee firm applied to the
Tribunal asking that a case be stated to the High Court but failed. The
assessee firm then moved the High Court under section 66 (2) of the Income-tax
Act and under the High Court's direction the Tribunal stated a case on the
following questions "(1) Whether there was any legal, admissible evidence
to justify the Tribunal's finding that the transaction in question was not the
transaction of the assessee.
(2) If not, whether the assessee can claim
the set-off of such loss although it is the loss of an unregistered
partnership." The first question arises out of the observations of the
judicial Member and the second question from those of the Accountant Member.
The High Court answered both the questions against the Department. It held that
there was no legal admissible evidence to justify the finding that the transactions
in question were not those of the assessee firm and further that the assessee
firm could claim a set-off in respect of the share of loss in the unregistered
firm "if the Income-tax Authorities do not proceed to determine the losses
of the unregistered firm and do not bring it to tax as permitted by s.
23(5)(b)." On the first question the appellant argues that the High Court
has decided the case as an Appeal 614 Court which it was not entitled to do.
This is not a true representation of what the High Court did. Whenever the
question propounded is whether there is any material on which a finding can be
given the discussion savors of an appellate approach but it is not so. The High
Court noticed that the Tribunal had picked up only one reason from the order of
the Income-tax Officer and held that the assessee firm had "'purchased
losses" from Damji Laxmidas but said nothing about the other reasons which
had influenced the Income-tax Officer. The High Court, however, examined all
the reasons given by the Income-tax Officer and reached the conclusion that
there was no evidence to justify the finding which had been given in the case.
Before examining the evidence ourselves to
see which conclusion is justified, we wish to make a few general observations.
In a reference under s. 66, a finding given by the Tribunal is considered final
and the High Court accepts it without examination of the material. The High
Court does not hear an appeal but answers certain questions of law in the light
of the facts proved. If a finding is final in this way, one does expect that
the reasons for reaching it will at least be stated with sufficient fullness to
inform all concerned what they were. Even if the reasons given by an inferior
Tribunal are not restated, at least a general approval of them, or such of them
as are acceptable, should appear. In the present case, all that is stated is
"It is admitted by the assessee that the ankdas are in the name of Damji
Laxmidas. By no evidence we are satisfied (sic) that really the assessee did
business in the joint account." This, by itself, is hardly a fair disposal
of the question whether the assessee firm did business in a joint account with
one Damji Laxmidas. The solitary ground for rejecting the claim is too
indefinite to 615 warrant this conclusion. It is contended that we should take
into account also the reasons given by the Income-tax Officer which were before
the Income-tax Tribunal and which have also been mentioned in the statement of
the case. The High Court did so and we allowed those reasons to be brought
before us. We would, however, have preferred if the order of the Tribunal in
the appeal filed by the assessee firm had even briefly expressed their approval
of those reasons and not left them to be mentioned in the statement of the
The question, then, is whether there was
evidence to justify the Tribunal's finding that the transactions with Damji
Laxmidas were not the transactions of the assessee firm. In such an inquiry the
Court looks not to the sufficiency of the evidence but whether any evidence
exists at all. Even if there be slight evidence which was believed by the
Tribunal and on which the conclusion can be rested, such question must be
answered in the affirmative. But the finding must not proceed upon conjecture,
suspicion or surmise. If there is not a scintilla of evidence, the finding
cannot be sustained because the proved facts would not then support the
In this connection, the Income-tax Officer
gave three reasons. The most important of which being the ankdas were in the
name of Damji. According to the deed of partnership, which has been produced in
the case, the four partners of the assessee firm and Damji had entered into a
partner-ship to do business together, specifying the shares of the partners of
the assessee firm which shares inter se are in the same proportion as their
interest in the assessee firm.
The new firm was not given a trade name. This
is no doubt an unusual feature. But if no name was given then business could be
carried can only in the name or names of one or more partners. That Damji's
name was chosen, and not any other, does not lead to the inference that
business was not done, If Damji's 616 name was used then it is reasonably clear
that the ankdas would be in his name and that is how the matter stood.
The next reason is that the losses were
claimed on the basis of half and half by the assessee firm and Damji, in their
respective assessments contrary to the proportion of /10/- and /6/- as in the
deed. What ever may be said of the losses claimed by Damji which were in excess
of the agreed share the same cannot be said of the assessee firm which is
claiming a share of losses which is less than the a greed rate. But sometimes
additional responsibility is shouldered by a partner because of some action
taken by him not meeting with the approval of the others. Often enough the
shares are readjusted by agreement. There may be many reasons why the loss
claimed by the assessee firm was less than what it could have really claimed but
this hardly leads to the inference that no business was done. This circumstance
also does not lead to the inference which has been drawn from it.
The third reason is that it is unlikely that
the partners of a big firm like the assessee firm would enter into an agreement
with a comparatively small' man for doing such vast business. It is pointed out
that Damji had at no time paid Income-tax in excess of Rs,. 1,300. The accounts
of the new partnership have been exhibited in the case. They show a long course
of business. The total business done was to the tune of Rs. 9 lacs odd. As
speculative business is made up, almost always, of either loss or profit we
should also look to the extent of the profits made and not merely the losses.
In this case, but 'for one or two transactions which miscarried, Damji would
have made a huge profit. It is possible that he was chosen as a partner In view
of his acumen in these matters rather than his ability to finance the projects.
This is not to say that buying of losses' is not common or that men of straw
are not taken on as partners to give up 617 their losses to equalise profits
elsewhere. The fact remains, as pointed out by the High Court, that losses can
only be bought if they have been incurred and in the present case there is a
long course of business which at certain stages was profitable though
ultimately it showed a loss. it is impossible to say in this case that the
assessee firm took over losses without actually having done business in company
with Damji. There is no foundation, whatever, for the inference that the losses
were purchased by the assessee firm from Damji whether we take the reasons
given by the Income-tax Officer individually or collectively. We are of the
opinion that the High Court did not exceed its powers in examining the evidence
in support of the inference of the Income-tax Officer that no business was done
in company with Damji but the assessee firm took over some of his losses.
The answer of the High Court to the first
question is therefore upheld.
This brings us to the second question and it
is whether the assessee firm can set off the loss of Rs. 1,05,641 against its
other profits from its other business? The High Court has held that it can do
so. In our opinion, and we say it with great respect, the High Court was in
error in reaching this conclusion.
To begin with the assessee firm as a firm
could not enter into a partnership with Damji. Damji could be admitted into the
assessee firm or the members of the assessee firm could enter into a partnership
with Damji in their individual capacity. The assessee firm however could not do
so as a firm. This was held by this Court in Dulichand v. Commissioner of
Income- tax(1). There was thus a partnership between Damji and the four members
of the assessee firm acting for themselves and indeed the deed which has been
produced in this case shows as much. In the affairs of the unregistered firm,
the assessee firm had no locus standi. There were thus two distinct (1) 
29 I. T. R. 535.
618 partnerships. One was the assessee firm
which was registered COnsisting of four partners and the second was an
unregistered firm consisting of five partners of whom the fifth was Damji.
The provisions which bear upon the question
are many and need not be set out at length. The gist of the relevant sections
will be stated by us in this judgment. Under s. 24(1) an assessee sustaining a
loss of profits in any year under any of the heads mentioned in s. 6 is
entitled to have the amount of the loss set off against his income, profits or
gains under any other head in that year. From April 1, 1953, loss sustained in
speculative transactions can only be set off against profits arising in the
same kind of business. In the present case, both the profits of the assessee
firm and the loss in the transactions with Damji arose out of speculation and
no difficulty arises. By assessee in the section is meant the person by whom
tax is paid and in every instance it is necessary to find out who that assessee
is. In this case the assessee is a registered firm of four partners and these
partners did business resulting in profits as members of the assessee firm and
also as members of another unregistered firm which led to a loss.
Now the 'assessment of firms is done
differently accordingly as they are registered or unregistered. Section 23 (5)
states that when the assessee is a firm the total income of the firm must be
assessed but if the firm is a registered firm the tax payable by the firm is
not to be determined but the total income is to be carried to the assessment of
the partners in accordance with their shares and the profits or losses, as the
case may be, must be assessed as part of their other income. But when the
assessee is an unregis- tered firm, the assessment is of the firm itself unless
the Income-tax Officer finds that by assessing the unregistered firm as a
registered firm more tax is likely to result. The assessment otherwise is of
the unregistered firm and not of the partners in their 619 private assessment.
This is the gist of the rule contained in the fifth sub-section of s. 23.
There are, however, other provisions which
must also be noticed. The first provision to notice is s. 16 (1) (b) which says
that when the assessee is a partner of a firm, then whether the firm has made a
profit or loss, his share (whether a net profit or a net loss) is to be
computed in the stated manner and 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 s. 24.
Section 24 then provides for the set off of
the loss as well as the carrying forward of the loss. The second proviso deals
with the question of set off in relation to both registered and unregistered
firm. It says that when the assessee is an unregistered firm (not assessed as a
registered firm) the loss can only be set off against the income., profits and
gains of the firm and not those of partners, but if the assessee is a
registered firm, the loss which cannot be set off against the income, profits
and gains of the firm shall be apportioned among the partners and they alone
shall be entitled to have the amount of loss set off under the section. Shortly
stated, the losses incurred by an unregistered firm can be set off only against
its own profits while the net losses of a registered firm are apportioned among
the shareholders and they alone are entitled to set them off.
Then come the provisions with regard to the
carrying forward of the losses under section 24 (2). Here also there is a
difference between registered and unregistered firms. The difference continues
the distinction made by the proviso to sub-s. (1) which we have just noticed.
Proviso (c) deals with a registered firm and partners in unregistered firms in
the same manner as the proviso to sub-s. (1) above analysed.
It says that (a) a registered firm is not
entitled to carry forward and set off any loss apportioned between the partners
and (b) partners in unregistered firms assessed as such are likewise not
entitled to carry forward and set off against their own income losses sustained
by the firm. An unregistered firm assessed as a registered firm comes under (a)
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 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 s. 24 (1) 2nd Proviso the losses of
the unregis- tered firm of Damji and these four partners 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 off 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
makes no difference that the Department has not assessed the unregistered firm
or taken action under s. 23 (5) (b). What the High Court has ordered just
cannot be done as it is against the provisions of s. 24.
Whether the partners in their individual
assessments would be able to take advantage of s. 16 (1) (b) and the decision
of the Privy Council in Arunachalam Chettiar v. Income-tax Commissioner (1) (a
point almost conceded before us), is not a matter on which we need pronounce our
opinion. That question does not arise for our consideration. The answer of (1)
(1936) L. R. 63 I. A. 233.
621 the High Court to the second question is
set aside and the question is answered in the negative. In view of the equal
success parties will bear their own costs here and in the High Court.
SARKAR., J.-The respondent, a firm registered
under the Income-tax Act, 1922, claimed in its assessment to that tax for the
year 1946-47, a set off for a sum of Rs. 1,05,641/- as its share of the loss of
another partnership said to exist between it and one Damji Laxmidas and which,
for convenience, I will call the bigger partnership. The Income-tax Officer
refused to allow the set off on the ground that the existence of the bigger
partnership had not been established.
The respondent firm's appeals, first to the
Appellate Commissioner and then to the Appellate Tribunal from the order of the
Income-tax Officer failed. Thereafter pursuant to an order obtained by the
respondent firm from the High Court of Bombay, two questions were referred by
the Tribunal to that Court for decision. Both these questions were.
answered by the High Court against the
Department and the Commissioner of Income-tax has thereupon filed the present
The first of these questions is,
"Whether there was any legal admissible evidence to justify the Tribunal's
finding that the transaction in question was not the transaction of the
assessee". Now it has been held by this Court in Dulichand Lakshminarayan
v. The Commissioner of Income tax, Nagpur (1) that eta firm as such is not
entitled to enter into partnership with another firm or individuals". The
respondent firm, therefore, as a firm could not in law have entered into any
partnership with Damji. It would hence be to no purpose to enquire whether
there was evidence to justify the finding that such a partnership existed or in
other words, to enquire whether the evidence showed that an agreement of
partnership (1) S.C.R. 154,163.
622 which in law could not be made had in
fact been made. That which the law does not recognise does not for a court of
law exist. I think therefore that the first question does not really arise and
no answer to it need be given.
The second question which was referred to the
High Court was, "If not, whether the assessee can claim the set off of
such loss, although it is the loss of an unregistered partnership." As
framed, this question is posed only if the first question is answered in the
negative. As in my view the first question does not arise at all, I will
consider this question independently of the first. The High Court , s answer to
this question was that the respondent firm can claim the set off and this
answer was based on the assumption that a partnership between a firm and an
individual is permissible, an assumption which must be held to be unwarranted
in view of the decision in Dulichand's case.(1) It must be held that no
partnership in which the respondent firm as such is a partner, exists. If the
partnership does not exist, the respondent firm cannot have suffered any loss
as a partner in it and there is therefore no loss for which it can claim a set
The sections of the Act dealing with set off
would not justify a set off in such circumstances. Thus under s. 10 an assessee
is entitled to set off the loss incurred by him in one business against the
profits made by him in another business : see Anglo French Textile Co. Ltd. v.
Commissioner of Income-tax (2). It is hardly necessary to point out that in the
case of a single business its profits can only be ascertained after its losses
have been taken, into account.
If this also is to be called a set off, I
suppose it may also be justified under s. 10. It is clear that the set off
contemplated by this section is of a loss suffered by the assessee himself.
That is not the position in the present case. The assessee, the respondent
firm, has no interest in the bigger partnership (1)  S. C. R. 154, 163.
(2)  S. C. R. 448,453.
623 and, therefore, no concern with its
losses. Sub-section (1) of s. 24 also provides for set off by an assessee of a
loss suffered by him under one head of income against the profits earned by him
under another head. This section would not assist the respondent firm or the
same reason as in the case of. 10 and also because it applies when two heads of
income are being considered while in the present case we have only one head of
income, namely., business. The second proviso to sub-sec. (1) of s. 24 provides
for certain rights of set off in the case of assessment of unregistered and
registered firms. That part of this proviso which deals with an unregistered
firm cannot obviously apply to the present case which is one of the assessment
of registered firm. The other part of the proviso dealing with a registered
firm would not assist the respondent firm either though it is a registered
firm, because the right of set off that it gives is only to the partners of a
registered firm and not to the registered firm itself and in the present case
we are not concerned with a claim of set off by any partners of the respondent
firm. No other section of the Act dealing with set off has been brought to our
The second question should therefore be
answered in the negative. Strickly speaking, this question also does not arise.
As the bigger partnership does not exist, no question of its being registered
or otherwise can arise.
Learned counsel for the respondent firm
however contended that the bigger partnership was really between Damji and the
partners of the respondent firm. I will assume that to have been so. It may be
that in such a case the individual partners of the respondent firm in their
respective assessments may claim a set off of their shares of the loss of the
bigger partnership but with such assessments of individual partners this case
is not concerned. The question here is whether the respondent firm can claim a
set 624 off in its own assessment. I venture to say that it does not follow
that because the partners of the respondent firm may in their individual
assessments be able to claim the set off, the respondent firm itself can do so
they are different assessees each with a separate and independent right of set
off. One cannot claim a set off basing such claim on the other's right to it,
But it was said that in the present case the real assessees were the partners
of the respondent. I am entirely unable to accept that contention. Section
23(5) of the Act contemplates a registered firm as an assessee though it did
not have to pay any tax itself as the law stood prior to April 1, 1956. The
whole proceedings in the present case have been conducted on the basis that the
respondent firm was the assessee. The questions raised in this case were framed
on that basis and we are not called upon by them to say whether the partners of
the respondent firm had any right of' set off. The assessees in the present
case were not the partners of the respondent firm. If they were, we would have
found the respective incomes of the individual partners from other sources
being considered but this was not what had happened. It seems to me to be
impossible to contend in the present case that the assessees were the partners
of the respondent firm.
I would allow the appeal with costs here and
By COURT : In view of the opinion of the
majority the answer of the High Court to the first question is upheld and the
answer to the second question is set aside. The parties will bear their own
costs here and in the High Court.