D.K Kapur, J.:— In the calendar year 1957, Ram Swarup Gupta was carrying on business both as an individual and as a partner in an unregistered firm known as M/s. Rashtarya Grah Udyog. According to him, this firm was owned by him till 1st September, 1957, when it became a partnership. He had sufferred a loss up to 31st August, 1957 in this business to the extent of Rs. 13,041/-. In his assessment for the year 1958-59, he claimed that this loss of Rs. 13,041/- which was incurred by him before 1st September, 1957, should be deducted from his other business income. The Income Tax Officer disallowed this amount on the ground that the partnership had taken over the assets and liabilities of the business on 1st September, 1957, and the loss was not sufferred by the assessee as a proprietor of the firm.
On appeal to the Appellate Assistant Commissioner, it was held that the assessee had not been able to show that the firm came into existence on 1st September, 1957, or that he was the proprietor of the business before that date. It was observed in the order that the firm and the assessee were separate for the purposes of assessment of the loss of the firm, which besides being not quantified, could not be set off against the profits of the assessee. The assessee appealed to the Income Tax Tribunal. On the basis of the decision of the Bombay High Court in Commissioner of Income Tax, Bombay South, Poona v. Jagannath Narsingdas Umri (1) the Tribunal accepted the appeal and held that the assessee was entitled to adjust the loss claimed while computing his profits and gains from business under Section 10 of the Income Tax Act, 1922. It was also held that the second Proviso to Section 24 (1) of the Act did not apply. The Tribunal directed that the loss allowable in the assessee's hands should be verified fey the Income Tax Officer and should be allowed to the extent of the actual loss incurred after verification.
A reference was sought by the Commissioner of Income Tax, Delhi, and a direction was issued by this Court in Income Tax Case No. 14-D of 1966 calling for a statement of the case on the following question: —
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to set-off his share of loss in a business carried on by an un-registered firm against the profits of his personal business ?”
A statement of the case has been submitted in this Court in furtherance of the said direction and the facts set out above are stated in that case. The assessee had asked for a modification in the question which was disallowed by the Tribunal on the ground that it was not material. The amended question sought to be referred by the assessee is substantially the same as the one actually referred and need not be reproduced here.
The question referred to us appears to have arisen in a large number of reported cases and there appears to be a difference between the High Courts as to whether a partner can adjust his share in the loss of an un-registered firm of which he is a member in his personal assessment against the profits of his individual business.
In Commissioner of Income-Tax, Bombay South v. Jagannath Narsingdas, (1965) 55, I.T.R 128 (1), relied upon by the Tribunal, it was held that Section 24 of the Income-tax Act, 1922 was not applicable to such an adjustment as the same could be made under Section 10 of the Act. The Gujarat High Court took the same view in Commissioner of Income-Tax, Gujarat v. Jethalal Zaverchand Patalia (1966) 61, I.T.R 357 (2). There was a previous decision of the Andhra Pradesh High Court which was reported as Commissioner of Income-Tax, Andhra Pradesh v. Vakati Sanjeeva Setty, (1962) 46, I.T.R 755 (3). In which the same view was taken. The Calcutta High Court had to deal with the same question in Ranjit Kr. Banerjee v. Commissioner of Income-Tax, (1968) 69, I.T.R 32 (4), where the assessee sought to set-off his share in the loss of an unregistered firm against income from other sources like salary, house property and dividends. The set-off was disallowed on the ground that it was hit by the second proviso to Section 24 of the Act. However, the observations of the Gujarat High Court in Jethalal Zaverchand Patalia's Case (2) aforementioned were approved. This case was really different on facts from the present case because the loss which was being sought to be set-off was from a different source of income and could only be set-off under Section 24 (1) of the Act.
The opposite view has been taken by the Patna High Court in Commissioner of Income-Tax, Bihar & Orissa v. Gangadhar Nathmal, (1966) 60, I.T.R 790 (5), by the Allahabad High Court in Raza Sugar Co. v. Commissioner of Income-Tax, (1970), 76, I.T.R 541 (6), and the Mysore High Court in B. Chickotappa and others v. Income-Tax Officer, Central Circle II, Bangalore, (1971) 81, I.T.R 431 (7). I propose to deal with the latter set of authorities first.
In Commissioner of Income-Tax, Bihar & Orissa v. Gangadhar Nathmal, (1966) 60, I.T.R 790 (5) reliance was placed on the judgment of the Supreme Court in Cit, Bombay City Ii, Bombay v. Jadavji Narsidas & Co. (1963) 48 I.T.R 41 (8) which is a case which has been referred to in every one of the aforementioned cases. It was assumed that there was no difference between the claim of an assessee to adjust losses sufferred by him as a partner in an un-registered firm and the facts in Jadavji Narsidas's case (8). In actual fact, in the latter case, the claim was made by a registered partnership. The Supreme Court expressly left open the question whether the adjustment could be claimed by the partners individually. There is also no reference in the Patna High Court's Judgment to the question whether an adjustment like the one claimed in the present case could have been allowed under Section 10 of the Act.
In Raza Sugar Co. v. Commissioner of Income-Tax, (1970) 76 I.T.R 541 (6), the Allahabad High Court dealt with a case where an unregistered firm was assessed and a loss computed. The aforementioned Bombay and Gujarat decisions were both distinguished on the ground that there had been no assessment of the un-registered firm in those cases. The second proviso to Section 24 (1) was held to apply and hence it was held that the assessee company could not claim a set-off regarding a share of loss in the un-registered firm of which it was a partner. In the present case, the un-registered firm has not been assessed and so the distinction drawn by the Allahabad High Court cannot be made because the facts of the present case are identical with those in the Bombay and Gujarat cases.
In the case before the Mysore High Court, B. Chickotappa and others v. Income-Tax Officer, Central Circle II, Bangalore, (1971) 81 I.T.R 431 (7), there was no reference to all the previous cases mentioned above. It was held that a person, who was a partner of a registered firm and also a partner of an un-registered firm, could not claim to set-off his share of losses in the un-registered firm from his share of the profits in the registered firm. It was observed as follows: —
“The total income of registered and un-registered firms is assessed or computed in the same way but, thereafter, there is a difference in the procedure for levying the tax. The tax is levied on the un-registered firm directly as a distinct unit of assessment; in the case of a registered firm no tax is levied on the firm itself except at specially low rates, but each partner's share of the firm's profits is included in his total income and taxed in his hands.”
It was further stated: —
“Any loss incurred by an un-registered firm may be set off by the firm against its profits of the same year under the same head or any other head and further any unabsorbed loss may be carried forward by the firm and set off against its profits in a subsequent year in accordance with the provisions of Section 24 (2). If the contention of the learned counsel for the petitioners is accepted, partners of un-registered firms stand to gain a double advantage.”
In the same judgment, a reference was made to the decision of the Supreme Court in Commissioner of Income-Tax v. P.M Muthuraman Chettiar, (1962) 44 I.T.R 710 (S.C) (9), in which it had been held that the second proviso to Section 24 (1) of the Income-tax Act, 1922 only applied when the assessee was an un-registered firm and only when a set off was being claimed. These are the cases which support the contentions of the Department before us.
Before dealing with the cases relied upon by the assessee, it is necessary to refer to the two decisions of the Supreme Court which have some bearing on the question we are called upon to answer. In Commissioner of Income-tax v. P.M Muthuraman Chettiar and another, (1962) 44 I.T.R 710 (S.C) (9), the Supreme Court dealt with the question, whether a partner of a firm carrying on business outside India was entitled to set off his share of losses in that firm against the profits and gains of the business in India. It was held that Section 24 (1) did not apply at all to such a case. It was observed: —
“It is worthy of note that 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 businesses carried on by the assessee. It follows from this that 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 we hold that section 24 (1) has no application to the facts of the present cases, the second proviso thereto can also have no application. Moreover, the second proviso to section 24 (1) applies only where the assessee is an un-registered firm. That is not the case here. The assessees before us are, in one case, a Hindu undivided family and, in the other, an individual. It is obvious, therefore, that the second proviso to section 24 (1) can have no application in these cases.”
This conclusion must be read in the light of the observations made earlier in this judgment with respect to the judgment of the Privy Council in Arunachalam Chettiar v. Commissioner of Income-Tax, (1936) 4 I.T.R 173 (P.C) (10), where it was stated: —
“Whether a firm was registered or unregistered, a partner's share of the loss in the firm could be set off against the profits and gains made by him in his individual business. That principle applies in the present cases, even though after the amendment of the Income-tax Act in 1939, the position of a partner in an unregistered firm may stand on a different footing, a distinction which is not material for the present cases.”
In Cit, Bombay City Ii, Bombay v. Jadavji Narsidas & Co. (1963) 48 I.T.R 41, (S.C) (8) a registered partnership consisting of four partners had incurred losses in a joint venture with one Damji Laxmidas. The firm claimed a deduction from its profits from other business in respect of this loss. The Bombay High Court had held that it was entitled to claim such a deduction. The Supreme Court reversed this decision. It was held that the registered partnership and Damji Laxmidas constituted an unregistered partnership and that loss could only be set off under the second proviso to Section 24 (1) against the losses of the unregistered firm constituted by those five partners. It was observed: —
“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.
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 Annachahm Chettiar v. Commissioner of Income-Tax, (1936) 4 I.T.R 173 (P.C) (10) (a point almost conceded before us) is not a matter on which we need pronounce our opinion.”
The observations in these two cases have been elaborately considered by both the Bombay and the Gujarat High Courts which support the contentions of the assessee before us.
In the Bombay high Court decision in Commissioner of Income-Tax, Bombay South v. Jagannath Narsingdas, (1965) 55 I.T.R 128, (1) it was held that the second proviso to Section 24 (1) did not apply because, the assessee was not an unregistered firm but an individual partner. It was also observed that the second proviso to Section 24 (1) could not be read as an independent provision, but had to be read as a proviso. It was observed: —
“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 a proviso but of an independent provision.”
Reference was also made to the observations of the Supreme Court in Muthuraman Chettiar's case, (9) aforementioned, and it was held that the second proviso to Section 24 (1) only applied when the assessee was an unregistered firm. The decision in Anglo-French Textile Co. Ltd. v. Commissioner of Income-Tax (1953) S.C.R 338, (11) was also referred to in support of the view that Section 24 (1) only applied when loss under one head of income was sought to be adjusted against the profits from another head. Thus, the High Court held that the assessee being an individual could claim adjustment under Section 10 without making any reference to Section 24 (1) of the Act.
The reasoning of the Gujarat High Court in Commissioner of Income-Tax, Gujarat. v. Jethalal Zaverchand Patalia, (1966) 61, I.T.R 357 (2) was on similar lines to that in the Bombay decision. It was pointed out that a partner's share in the net profit or loss of a firm was to be added to his total income for the purposes of Section 10 of the Act subject to the provisions of Section 14 (2) (a) of the Act.
These are the authorities and we have to choose between the two views expressed. The provisions of Section 24 (1) relevant to the present case are: —
“24. Set-off of loss in computing aggregate income.
(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 the facts of the present case, the assessee is a partner of an unregistered firm which has not been assessed under Section 23 (5) (b) of the Act. In fact, it has not been assessed at all. Does this mean that the partner cannot claim his share of the loss as a deduction or adjustment when computing his profits and gains from business under Section 10 of the Act ? For the purposes of the Act, a firm and an individual are separate assessees. However, there may be cases in which the un-registered firm is not assessed at all. This may be because the un-registered firm does not have an assessable income, or it makes a loss. In such a case, the question of the partnership claiming a set off does not arise because the partnership is not an assessee. Moreover, one must keep the two entities, i.e, an unregistered partnership and the individual partner as separate for the purpose of computing their incomes. An individual partner's income, is his income from his individual business plus the income he gets from being a partner in either a registered partnership or in an unregistered partnership. Under Section 14 (2) (a) an exemption is granted to an assessee in respect of his share of the profits and gains of an unregistered firm in which he happens to be a partner. That provision reads as follows: —
“The tax shall not be payable by an assessee —
“(a) 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 clause (b) of sub-section (1) of section 16 on which the tax has already been paid by the firm.”
Thus, if an unregistered partnership firm makes a profit, the partner is entitled to get an exemption under this provision only if the profits have been taxed in the hands of the unregistered firm. If they have not been taxed, then the partner has to pay tax himself. The position regarding an unregistered partnership seems to be quite plain. Either the profits of the unregistered firm can be taxed in the hands of the firm, or, they can be taxed in the hands of the partner. This is provided in Section 23 (5) (b) of the Act. If the profits have been taxed in the hands of the unregistered firm, then the partner doss not have to pay the tax because of the exemption contained in Section 14 (2) (a). If the profits have not been taxed, then the partner has to pay tax on his share of that profit just as he has to pay on any other profit gained from his individual business. Thus, if the partnership in the present case had gained a profit, the assessee would have had to pay tax on his share of the profit in his individual income unless the unregistered firm had been taxed under Section 23 (5) (b). If this is so; why should it make any difference if the unregistered firm makes a loss. If the amount of profit has to be added to the individual income of a partner, it follows that the loss has also to be deducted. It is only if the loss is under a different head from the other income that the question of set off under Section 24 (1) arises. In such a case, a partner cannot claim any set off because of the second proviso to Section 24 (1) of the Act. In such a case, the loss can only be carried forward by the partnership itself.
It is now necessary to note that the conclusions of the Bombay and the Gujarat High Courts are challenged by Mr. B.N Kripal, learned counsel for the Department on the ground that the loss of the unregistered firm can also be adjusted against its future profits under section 24 (2) and hence, an anomalous situation arises because an individual partner can claim an adjustment in the same year under Section 10 and the partnership firm can claim an adjustment in a subsequent year under section 24 (2) with respect to the same loss. This is claimed to be a double advantage which the Legislature could not have envisaged. It may be mentioned, that this point was very much in the mind of the Mysore High Court when it decided B. Chickotappa's (7) case aforementioned. Regarding this point, it is important to note that the unregistered firm is a separate entity for the purpose of tax at the option of the Income-Tax Officer. If an unregistered partnership is assessed under Section 23 (5) (b) of the Act, it has to pay a rate of tax which is quite different from the rate which would be payable by the individual partner. It would, therefore, follow that if the unregistered partnership did claim a set off under section 24 (2) in a subsequent year, it would not at all effect the assessment of the individual partner. As far as the partners themselves are concerned, their individual assessment would be wholly uneffected because the Income-tax Officer could refuse to assess the income of the unregistered partnership because of the option contained in Section 23 (5) (b) in which case the previous loss could not be adjusted by the partnership firm. To illustrate this, it is only necessary to refer to the loss in the present case. If this loss is claimed as an adjustment under section 24 (2) by the partnership in some subsequent year, the Income-tax Officer has merely to say that he declines to assess the amount in the hands of the partnership because of the provisions of Section 23 (5) (b), in which case the profits in question would have to be assessed in the hands of the partners without making any adjustment for the carry forward loss. It would, therefore, follow that there is no real anomaly in this case. Assuming that there is a double advantage flowing from the Act, that does not seem to be a sufficient reason to disregard the provisions of the Income-tax Act as far as individual partners are concerned. If a profit from an unregistered firm has to be added to the income of an individual partner and he has to pay tax on that amount subject to the provisions of Section 14 (2) (a) of the Act, there does not seem to be any reason why the same should not be held true of a loss.
In this view of the matter, we would follow the judgments of the Bombay and the Gujarat High Courts and answer the question in the affirmative in favour of the assessee and against the Department. The assessee will be entitled to his costs.
Reference answered in the negative