Patna High Court
Commissioner Of Income-Tax, Bihar & ... vs Gangadhar Nathmal. on 14 December, 1965
Equivalent citations: [1966]60ITR790(PATNA)
JUDGMENT
The assessee and one Bajranglal Kamalia carried on a grain business in partnership for a short time. The partnership was dissolved on the 3rd August, 1955. The profits or gains of the partnership were neither assessed under the Income-tax Act, 1922, hereinafter referred to as "the Act", nor was the partnership registered under it. In the assessment year 1957-58, corresponding to the accounting period from the 24th July, 1955, to the 9th August, 1956, the assessee claimed that it had suffered a loss of Rs. 8,814 towards its share in the unregistered firm and that it should be allowed a set-off against its profits from other businesses in this year. The Income-tax Officer did not allow the set-off, and his view was upheld in appeal by the Appellate Assistant Commissioner. One further appeal by the assessee, the Appellate tribunal felt coerced by the view taken by the Bombay High Court in Jadavji Narsidas & Co. v. Commissioner of Income-tax and decided that the loss should be set off. At the instance of the Commissioner of Income-tax, this reference has been made to this court under section 66(1) of the Act for determination of the following questions of law.
"(1) Whether, on the facts and circumstances of the case, the assessee is entitled to claim set-off of the loss of Rs. 8,814 towards its share in the unregistered firm of M/s. Bhagwandas Santosh Kumar for the assessment year 1957-58 ?
(2) If the answer to the first question is in the affirmative, whether the loss of Rs. 8,814 arising out of the partnership business of M/s. Bhagwandas Santosh Kumar was allowable in the assessment year 1957-58 in the case of the assessee ?"
Section 24 of the Act provides :
"(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 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 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."
On a plain reading of the provisions of the Act, extracted above, it is manifest that the loss incurred by an unregistered firm, which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23, can be set off only against the income, and the profits and gains, of the firm and not against the income and profits and gains of any of the partners of the firm. The argument on behalf of the assessee is that the unregistered firm was not assessed to tax, and it is not the unregistered firm which is claiming a set-off; but the assessee in this case being a person who was a partner of the unregistered firm, which has sustained a loss, is entitled to the set-off under sub-section (1) of section 24 and the proviso does not hit his case. The argument does find support from the Bombay decision, referred to in the order of the Appellate Tribunal. But this very case decided by the Bombay High Court seems to have gone to the Supreme Court and a contrary view has been taken by the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas & Co. It has been said by Hidayatullah J. on almost similar facts :
"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 section 24(1), second proviso, the losses of the unregistered 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 section 23(5)(b). What the High Court has ordered just cannot be done as it is against the provisions of section 24."
In our opinion, the case is fully covered by the decision of the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas & Co. The first question referred for our determination, therefore, must be answered in favour of the Commissioner of Income-tax and against the assessee. We, accordingly, hold that, on the facts and in the circumstances of the case, the assessee is not entitled to claim a set-off of the loss of Rs. 8,814 towards it share in the unregistered firm of M/s. Bhagwandas Santosh Kumar. In the view we have expressed above, it is conceded on all hands, and rightly so, that it is unnecessary to go into and determine the second question referred by the Appellate Tribunal for the opinion of this court.
In the result, the reference is disposed of accordingly. The assessee must pay the costs of this reference; hearing fee Rs. 250 (Rupees two hundred and fifty)