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Ranjit Kr. Banerjee v. Commissioner Of Income-Tax .
Concise Analytical Summary — Income-tax Reference (P.B. Mukharji, J.)
Factual and Procedural Background
This Reference arises under the Income-tax Act concerning whether an individual assessee could set off his share of loss from an unregistered firm against his other heads of income. The assessment year was 1955–1956 (accounting year 1954–1955). The assessee was an individual who held a one-half share in an unregistered firm, Messrs S.B. Production. The firm was assessed by the Income-tax Officer and its total loss was computed at Rs. 1,01,174; the assessee's share of that loss was Rs. 50,587.
Separately the assessee had income from salary, house property and dividends totaling Rs. 34,066; after earned income relief his assessed total income was Rs. 31,786. The assessee claimed to set off his Rs. 50,587 share of the firm's loss against his other income. The Income-tax Officer disallowed that claim relying on the second proviso to Section 24(1) of the Income-tax Act, 1922. The Appellate Assistant Commissioner and, on second appeal, the Tribunal affirmed the disallowance. This Court was asked to determine whether the disallowance was correct in law in view of the second proviso to Section 24(1).
Legal Issues Presented
- Whether, on the facts and in the circumstances of this case, the assessee's claim to set off his share of the unregistered firm's loss of Rs. 50,587 against his other income was rightly disallowed under the second proviso to Section 24(1) of the Income-tax Act, 1922.
- (Implied interpretive issue considered by the Court) How the phrase in the second proviso — in particular "where the assessee is an unregistered firm which has not been assessed under the provisions of Section 23(5)(b)" — is to be read and applied in circumstances where (a) the assessment under consideration is of an individual partner and (b) the unregistered firm itself has had its loss computed by assessment.
Arguments of the Parties
Assessee's Arguments (Mr. De)
- Primary contention: The assessment before the Court was of an individual (the assessee) in his personal capacity; the assessee was not an unregistered firm. Therefore, the second proviso to Section 24(1) — beginning "where the assessee is an unregistered firm" — did not apply to the assessee's claim.
- Statutory interpretation point: Proviso must be read in context of the section. The opening words of Section 24(1), "where any assessee sustains a loss", confer a general right to set off losses across heads and the phrase "any assessee" includes any category of assessee defined by the Act; the assessee before the Court was an individual and so entitled to set off.
- Precedential reliance: Relied upon observations of the Supreme Court in Commissioner of Income-Tax v. P.M. Mathuram Chettiar (1962-44 ITR 710; AIR 1967 SC 415) that "the second proviso to Section 24(1) applies only where the assessee is an unregistered firm", and on certain decisions such as the Gujarat High Court decision in Commissioner of Income-Tax, Gujarat v. Jethalal Zaverchand.
Revenue's Arguments (Mr. Pal for the Commissioner of Income-tax)
- Submission that the second proviso must be read as a whole: it applies when both elements are satisfied — that the assessee is an unregistered firm and that the firm "has not been assessed under the provisions of Section 23(5)(b)".
- Practical point on facts: Although the present proceedings are against an individual partner, the unregistered firm (Messrs S.B. Production) had itself been assessed and its loss computed; on the true reading of the proviso and the statutory scheme the individual partner could not set off the firm's loss against his separate heads of income.
- Reliance on earlier case law (Bombay High Court and Supreme Court decisions cited in the judgment) which were argued to support restricting inter-head set-off in the circumstances described.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax v. P.M. Mathuram Chettiar, 1962-44 ITR 710; AIR 1967 SC 415 | The observation that "the second proviso to Section 24(1) applies only where the assessee is an unregistered firm" and that if Section 24(1) has no application, the second proviso cannot apply. | Relied on by the assessee's counsel (Mr. De). The Court noted the decision but observed it was not a case of an unregistered firm and therefore the factual differences limited its application here. |
| Re Ganga Metal Refining Co. (P.) Ltd. v. Commissioner of Income-tax, West Bengal, Income Tax Ref. No.112 of 1962 (AIR 1967 Cal 429) | Principle that a claim to set off which attempts to conflate different capacities/entities (e.g., firm vs. individual partner) is impermissible — i.e., one cannot confuse different assessment capacities for set off. | The Court followed its own earlier decision on this point and applied it to hold that the present claim was an attempt to set off between different capacities/entities and therefore was not permissible. |
| Arunachalam Chettiar v. Commissioner of Income-Tax, Madras, 1936-4 ITR 173; AIR 1936 PC 133 | Discusses the position prior to the amendment that introduced the second proviso to Section 24(1). | The Court stated it was not necessary to discuss this leading Privy Council case in detail given the statutory amendment and the second proviso; the case related to the pre-amendment position. |
| Commissioner of Income-Tax, Gujarat v. Jethalal Zaverchand, 1966-61 ITR 357; AIR 1967 Guj 141 | Held (on its facts) that a partner of an unregistered firm was entitled to adjust his share of the firm's loss against profits from his other business (computing his income under Section 10); contained observations on reading the second proviso with the main section. | The Court noted the Gujarat High Court's findings and observations but held the case did not help the assessee on the facts before this Court. The Court also observed that some of the Gujarat Court's observations must be read subject to the main section, and that certain conclusions there were consistent with the view taken by this Court. |
| Commissioner of Income-Tax Bombay South v. Jagannath Naraingdas, (1965) 55 ITR 128 (Bom) | Decision concerning set off issues (as relied upon by the Revenue). | Relied upon by the Commissioner (Mr. Pal). The Court noted it had discussed this decision in an earlier unreported judgment and treated it as supporting the Revenue's position. |
| CIT, Bombay City II, Bombay v. Jadavji Narsidas & Co., (1962) 48 ITR 41; AIR 1963 SC 1497 | Supreme Court authority on related set off and assessment issues (invoked by the Revenue). | Relied upon by Revenue counsel; the Court recorded that it had considered this decision previously and treated it as supporting the Revenue's approach on the statutory construction issue. |
Court's Reasoning and Analysis
The Court undertook a textual and contextual reading of Section 24(1) and its provisos. The analytic steps set out in the opinion are as follows:
- The Court began with the general principle that a proviso must be read in the context of the section in which it appears; the second proviso derives its meaning from the subject-matter of Section 24(1).
- It noted that the opening words of Section 24(1), "where any assessee sustains a loss", confer a general right to have a loss set off against income under another head; "any assessee" should be understood in the broad statutory sense (the Court cited Section 2(2) of the Income-tax Act on the definition of "assessee").
- The Court then turned to the second proviso. It observed that the phrase "where the assessee is an unregistered firm" in that proviso means that the general right of set off given by the opening words will not avail where the assessee (in the proceedings) is an unregistered firm; in such a case the loss shall be set off only against the income of the firm and not against the income of the partners.
-
The Court considered the assessee's contention that because the present proceedings were an assessment of an individual partner (and not of the unregistered firm as assessee) the proviso would not apply. The Court rejected that argument for multiple reasons it identified in the text:
- Allowing the partner's construction would enable every partner to nullify the object and effect of the second proviso by pointing to the individual status of proceedings, effectively repealing the proviso introduced by amendment.
- The claim for set off before the Court was an attempt to set off losses between different capacities and different entities (an individual in his personal assessment vs. a partnership's loss). The Court considered such conflation impermissible.
- The Court relied on its prior decision in Re Ganga Metal Refining Co. (P.) Ltd. which held that such confusion of capacities is not permissible; the Court followed that precedent.
- The Court addressed the factual detail that the unregistered firm had itself been assessed and its loss computed. The Revenue's argument (as described) was that, read as a whole, the proviso required both elements to be considered and that, on the facts, the Revenue's construction prevented the claimed set off. The Court accepted the Revenue's position in effect and held that the assessee's attempt to set off his share of the firm's loss in his individual assessment was not permissible.
- The Court considered relevant authorities cited by both sides (including the Supreme Court and various High Courts), distinguished some authorities on their facts (for example, Mathuram Chettiar was not a case of an unregistered firm), and observed that the Gujarat High Court decision cited by the assessee did not assist on the specific facts of the present case.
Holding and Implications
Core Ruling: Answered in the affirmative — the Court held that the assessee's claim to set off his share of the unregistered firm's loss (Rs. 50,587) against his other income was rightly disallowed under the second proviso to Section 24(1) of the Income-tax Act, 1922.
Direct consequences:
- The assessee's claimed set off was rejected and the assessments below (Income-tax Officer, Appellate Assistant Commissioner and the Tribunal) were effectively upheld on this point.
- There will be no order as to costs.
Broader implications: The Court emphasized that the second proviso restricts the general right of set off in situations implicating unregistered firms and that permitting partners in individual assessments to set off the firm's loss would subvert that proviso. The Court followed its earlier decision on the incompatibility of conflating different capacities for set off. The opinion does not purport to lay down any novel principle beyond the statutory interpretation and application explained above.
Answered accordingly. (Laik, J. agreed.)
P.B Mukharji, J.:— In this Income-tax Reference the following question is for determination by this Court:—
“Whether on the facts and in the circumstances of the case the assessee's claim to set off his share of the loss of Rs. 50,587 from the unregistered firm separately assessed to tax, was rightly disallowed in view of the second proviso to Section 24(1) of the Indian Income-tax Act, 1922.”
2. The facts giving rise to the above question lie within a very small compass. The assessee is an individual. The assessment year is 1955–1956. The relevant accounting year is the financial year 1954–1955 During the relevant accounting year the assessee was a partner in an unregistered firm Messrs S.B Production having one-half share therein. The Income-tax Officer had assessed this unregistered firm and computed its total loss at Rs. 1,01,174. Thus the assessee's share of loss comes to Rs. 50,587. Apart from this partnership in this unregistered firm, this assessee had income from other sources like salary, house property and dividends. The total income from these other sources came to Rs. 34,066. After deducting the earned income relief allowable in his case the assessee's total income was assessed at Rs. 31,786. Now the assessee claimed to set off of the loss in the unregistered firm amounting to Rs. 50,587 against his income from salary, property and other sources.
3. The Income-tax Officer refused this claim on the ground that the loss suffered in the unregistered firm could be set off only against the income, profits and gains of such firm under the second proviso of Section 24(1) of the Income-tax Act. In an appeal the Appellate Assistant Commissioner affirmed the order passed by the Income tax Officer. On second appeal the Tribunal also confirmed the order of the Income-tax Officer and held that the second proviso of Sec. 24(1) was an exception to the general rule provided in Sec. 24(1) for set off of losses under one head against income under any other head mentioned in Section 6 of the Income-tax Act.
4. That in brief represents the relevant facts.
5. Mr. De who argued the case for the assessee with ability relied on the short point of interpretation arising on the language of Section 24 of the Income-tax Act and particularly on the words “where the assessee is an unregistered firm” appearing in the second proviso to Section 24(1) of the Act. According to him this was an assessment of an individual in his individual capacity and the assessee was not an unregistered firm. Therefore, the application of the second proviso of Section 24(1) of the Act was entirely misconceived in the facts and circumstances of the case of his client.
6. Proviso to a Section in an Act or Statute naturally must have to be read in the context of that particular section and not divorced from it the second proviso of Section 24(1) of the Act has necessarily to take colour and meaning from the main subject matter of Section 24(1) of the Act. The opening words of Section 24(1) of the Act uses the expression “where any assessee sustains a loss” of profits or gains in any year under any of the head mentioned in Sec. 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 the year the words “any assessee” imply an assessee without any qualification and must therefore include an assessee within the definition of the Income-tax Act. According to Section 2(2) of the Income-tax Act an assessee means a person by whom Income tax or any other sum is payable under the Act and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustained by him or of the amount of refund due to him”. It is the general rule of set oil which has been given by these opening words of Sec. 24(1). It gives “any assessee” a right to have the amount of loss set off on the terms laid conditions stated there. “Any assessee”, therefore, here does not mean only an assessee who is either an individual or a company or an Association of persons or a Hindu undivided family or only a partnership, registered or unregistered or any other group of persons. It Includes any assessee within the meaning of the Income-tax Act.
7. This is followed by the first proviso with which this reference is not concerned for fee simple reason that proviso deals only with loss sustained in “speculative transactions” which are in the nature of business and this Reference is not concerned with such speculative transactions. The second proviso which is material for our purpose then follows with these relevant words:—
“Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of Section 23(5)(b) 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.”
8. What thereafter follows relates to the registered firm with which again we are not concerned in this reference.
9. The expression “where the assessee is tax unregistered firm” in the second proviso of Section 24(1) of the Act means this that the general right of setting off loss under the opening words in fee first paragraph of Section 54(1) of the Act will not avail where the assessee is an unregistered firm. In other words, if the assessee is an unregistered firm fee loss shall only be set off against the income sf the unregistered firm, and not against the Income of the partners of the unregistered firm.
10. Mr. De made full use of the following observations of the Supreme Court in The Commissioner of Income-Tax v. P.M Mathuram Chettiar, 1962-44 ITR 710 at p. 714; (AIR 1967 SC 415 at p. 417).
“Moreover, the second proviso to Section 24(1) applies only where the assessee is on unregistered firm”
Mathuram Chettiar's case, however, was not a case of unregistered firm at all. The assessees in that case were a Hindu undivided family and an individual. In fact, the Supreme Court in that case said at pp 713 and 714 of that Report (ITR): (at p. 417 of AIR):—
“If as we hold that Section 24(1) has no application to the facts of the present case, the second proviso thereto can also have no application.”
11. Mr. De, however, is faced with an insuperable difficulty on the facts in the present case. In the present case a fact found is feat this unregistered firm of Messrs S.P Production had not only been assessed to tax, but its loss had been computed. Therefore, Mt. Pal, for the Commissioner of Income-tax has urged that even, technically speaking, the requirement of the expression, “where the assessee is an unregistered firm” is satisfied in this case. His argument proceeds to assert that the words in fee second proviso of Section 24(1) do not stop with the expression “where the assessee is an unregistered firm”, but go on to say, “which has not been assessed under fee provisions of Section 23(5)(b)”. Therefore, under this proviso both the requirements must have to be satisfied. No doubt the assessee in the present proceedings is not the unregistered firm of Messrs S.B Production but it has otherwise been assessed. If feat be so, then such loss cannot be set off having regard to the clear language used in the second proviso to Section 24(1) of the Act. Therefore the assessee can never really get any help from the argument which Mr. De advanced.
12. Looking at fee point from another angle. Mr. De's argument creates a situation feat, if the assessee is not an unregistered firm in the sense in which he wanted this Court to interpret that language of the second proviso, then every partner of such unregistered firm will be in a position to nullify the whole object, purpose and effect of the second proviso, on the ground then that the assessee in fee proceedings is a partner and not fee unregistered firm itself. That interpretation which Mr. De for the assessee suggests would really lead to a repeal of fee second proviso to Section 24(1) of the Act which was introduced by way of amendment. Thirdly, the set off, which the assessee in this case is claiming, is really in essence an attempt to set off between different capacities and different entities. The assessment in this case was the assessment of an individual. What the present claim to set off wants to do is to set off the loss of a partnership in which he was a partner. These two capacities and status cannot in our view be confused in this manner. This was a point which we have already decided in our judgment in the Income Tax Ref. No. 112 of 1962, Re Ganga Metal Refining Co. (P.) Ltd. v. Commissioner of Income-tax, West Bengal on 5th August, 1966. (AIR 1967 Cal 429). We follow our own decision on this point.
13. It will not therefore, be necessary to discuss fee leading case of Privy Council, Arunachalam Chettiar v. Commissioner of Income-Tax, Madras, 1936-4 ITR 173 : (AIR 1936 PC 133) dealing with the point as it stood before amendment and introduction of the second proviso, and which is also discussed in our other unreported judgment.
14. Since our decision there has been a decision of Gujarat High Court in Commissioner of Income-Tax, Gujarat v. Jethalal Zaverchand, 1966-61 ITR 357 : (AIR 1967 Guj 141) to which Mr. De made a reference. That case does not help him because that was a case where fee partner of an unregistered firm was held to be entitled to adjust his share of loss sustained by the firm against the profits from his other business in computing his income under Section 10 of the Act. The observations there to the effect that the second proviso to Section 24(1) cannot be construed as an independent enactment, must be read subject to the provisions of the main section and that its conclusion that the right to set off loss under one head against the profits from another head is in accord with the view that we have taken. See the observations of Gujarat High Court in the Report, specially at pp. 365 and 370.
15. Mr. Pal for the Commissioner of Income-Tax relied on Bombay High Court decision in Commissioner of Income-Tax Bombay South v. Jagannath Naraingdas, (1965) 55 ITR 128 (Bom), and the Supreme Court decision in Cit, Bombay City Ii, Bombay v. Jadavji Narsidas & Co. , (1962) 48 ITR 41 : (AIR 1963 SC 1497) both of which have already been discussed in our previous unreported judgment mentioned above.
16. For these reasons we answer the question in the affirmative. There will be no order as to costs.
Laik, J.:— I agree.
CK/VSD/G.G.M
17. Answered accordingly.
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