TMI Blog1958 (10) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... he subsequent years have been taken into account while making tip the assessment of the assessee firm for those years. The loss arising from the joint venture with Damji Laxmidas in the accounting year has been disallowed. The assessee produced a deed of partnership, dated 14th November, 1944, which is on requisite stamp paper and that agreement states that the parties had agreed to do forward business in partnership in various markets. Damji Laxmidas filed a statement at the instance of the assessee in which he confirmed the case of the assessee that there was such partnership between them. He stated that the procedure followed was that the accounts of the transactions were maintained in the books of the assessee firm and the ankdas in respect of the speculative business were issued in the name of Damji Laxmidas. In the partnership agreement the shares of the four partners are stated and they aggregate to annas 10 and Damji's share is shown as six annas in a rupee. The loss claimed by the assessee was on the footing of 8 annas share in the partnership with Damji Laxmidas. The Income-tax Officer disallowed the loss and we shall presently examine the data on which he Sid so and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee, that the Tribunal has failed to appreciate the correct position and has decided the matter without there being any evidence to sustain the finding recorded by it on the first question relating to the genuineness of the transactions and the alleged joint venture. The Tribunal had to consider four items, but on this reference we are only concerned with the item of ₹ 1,05,641 which was disallowed by the Income-tax authorities as well as the Tribunal. This is what the Judicial Member has stated in respect of this item: We are not satisfied that really the loss of ₹ 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 evidence we are satisfied that really the assessee did business in the joint account. Consequently, this claim of the assessee is disallowed. The Accountant Member agreed with the Judicial Member and added: It is not even the assessee's case that loss of ₹ 1,05,641 was suffered by it. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annas share as mentioned in the partnership deed. This is what he has stated: It is not also clear in my mind how Messrs. Jadavji Narsidas and Co. one of the biggest brokers in the line had placed such implicit faith in the ability of Mr. Damji Laxmidas to the extent of losing about four lakhs of rupees. Then he has observed that the firm had purchased the losses from Damji Laxmidas to escape taxation to that extent. The Income-tax Officer held that the losses claimed by the assessee firm were not losses genuinely incurred in any business and that the transaction as a whole was no more than purchase of losses from Damji Laxmidas. Now purchase of losses can evidently be after they have been incurred by some party. A statement prepared from the entries in the books of account of the assessee firm showing numerous transactions in various commodities resulting both in profits as well as losses was filed before the Income-tax authorities and is part of the record before us. A cursory perusal of that statement would show that the transactions could not be of the nature of purchase of losses by the assessee firm as found by the Income-tax Officer. We may observe at this stage th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from business. Learned counsel for the other side has not been able to point out to us any provision which makes it mandatory that an unregistered firm must be assessed before any claim for set-off in respect of its losses can arise though, as we shall point out later on, some reliance has been placed by him on the second proviso to section 24. The matter has been argued before us by Mr. Kolah on general principles underlying section 10 and he has also referred to section 23(5) and section 24 and relied on two decisions of this court to which we shall turn a little later in our judgment. The question is res integra and does not appear to have arisen for decision in its present form. Now, the argument of learned counsel for the assessee is that the Act lays down certain provisions as to when the loss of a partner in an unregistered firm cannot be set off against his other income from business and he has urged that the case of the assessee does not fall under any of those provisions. Reference was made in this context to sections 10, 23(5) and 24. The principal argument is that there is authority for the proposition that in the ease of an individual or a registered firm who is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te position, that ought to be allowed provided there is no prohibition against such deduction or allowance or set-off. The levy is on the total income of the assessable entity to be computed in accordance with the provisions of the Act. It is equally firmly established that loss arising from any one source under the head of business may be set off against profits from another source under the same head. This is on general principle-apart from any provision of the Act-since income under each head is to be computed by clubbing or lumping together of the profits of the assessee from various sources under the same head. The levy is on the balance of profits after deducting such losses, and it is not now disputable nor disputed before us that an assessee who carries on a number of businesses is entitled under section 10 to set off his losses in one source under the head of business against his profits in another source under the same head. The arguments of learned counsel for the parties and particularly on behalf of the Revenue have touched section 23(5) and mainly section 24 but we may in passing mention section 16 since we are reviewing the scheme of the Act in the context of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though in fact it is not registered, if it appears to him that such procedure would in the aggregate bring a greater amount to the Revenue by way of tax and super-tax. No question arises in any such case of setting-off of any losses of the unregistered firm, it having made profits in the relevant accounting period. The other position would arise when the unregistered firm has made a loss and an individual partner seeks to set off his share of that loss in his individual assessment against his other income from business. Here also the Income-tax Officer may before completing the assessment of the individual partner ascertain the loss incurred by the firm and decide upon the course to be adopted by him. He may decide to treat the unregistered firm as if it were registered and the amount of the share of the loss of the individual partner in such a case would be set off against his other income from business. Of he may determine the amount of loss incurred by the unregistered firm without treating it as a registered firm and in such a case the latter part of the second proviso to section 24 would come into play and the position would be what we shall presently point out after, referri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it as a registered firm. It is in such a case that the second proviso to section 24(1) would come into play and the loss of the unregistered firm can be set off only against the income, profits and gains of the unregistered firm and not against the income, profits and gains of the individual partner who seeks to set off his own share of those losses against his other income from business in his personal assessment. The position so far is quite clear and cannot raise any problem for the assessee partner or the unregistered firm or the Department. But, difficulty and complication is likely to arise, as it has in fact arisen in the case before us, if the Income-tax Officer neither proceeds to treat the unregistered firm as if it were registered and assess the loss nor proceeds to assess the loss of the unregistered firm and simply refuses to recognise the factum and existence of the unregistered firm and holds that the assessee who claims to be a partner in the unregistered firm was not a partner at all in the alleged unregistered firm or that the transactions are not the partnership business. Question must arise in such a case if it turns out and is ultimately held that he was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing the unregistered firm itself in the manner provided in section 23(5)( b). That contention was repelled by the court and it was held that a partner could be assessed in respect of his share of profits in an unregistered firm even though the unregistered firm itself had not been first assessed to tax. The view taken by the court was that it was not a condition precedent to the bringing of the share of a partner in the profits of an unregistered firm in his total income simply on the ground that the unregistered firm had not been first assessed to tax. It was also pointed out in that case that there is no provision of the Income-tax Act which prohibits the assessment of a partner until the firm in which he is a partner is registered. At page 662 of the Report it is observed: Now, as has often been pointed out, the assessable entity under the Income-tax Act is different from a legal entity. The object of the Income-tax Act is to spread its net wide and to include in that net every person and every association of persons, however that association may have been constituted. Therefore we find that what is subjected to tax under section 3 is the total income of the previous ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicant is a registered firm the correct position for the purpose of the present matter is that it is an unregistered firm consisting of four partners. It is urged that a careful scrutiny of the partnership agreement would show that the partnership was not between the assessee firm of Jadavji Narsidas and Damji Laxmidas. It will be convenient to set out the relevant part of that agreement, on which Mr. Joshi has founded the present argument: This Indenture...made between Jadavji Narsidas...of the first part; Parmanand Narsidas...of the second part; Nagindas Jadavji...of the third part; Jasvantrai Jadavji...of the fourth part; all partners in the firm of Messrs. Jadavji Narsidas carrying on business at Masjid Bunder Road, Bombay and Damji Laxmidas of the fifth part... Learned counsel has also drawn our attention to the fact that the shares in the profits and losses of the business were set out in the names of all the five persons. We do not think there is any scope for the fine distinction which Mr. Joshi has tried to make out from the partnership deed. In effect Mr. Joshi is trying to develop a question which is altogether new. Even so we have heard him on that point. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as to the right of a partner to claim a set-off in respect of his share of losses in an unregistered firm which has not been assessed and losses of which should have been assessed. It is not difficult to see that if the law requires that under no circumstances any set-off can be claimed by an individual partner unless the unregistered firm was brought to tax, we must give effect to the same. But the question is: Is there any such requirement of the income-tax law ? We have already referred to sections 23 and 24 and may add that there is no provision of law which requires an unregistered firm to have its losses assessed. Of course, if the unregistered firm does not have its losses determined, does not file a return and get its losses determined, it would not have the benefit of carrying forward those losses. But that is a different matter. In the absence of any express provision in the income-tax law and on general principles we do not see why a partner in an unregistered firm should not be permitted to claim a set-off in respect of his share of loss in an unregistered firm against the profits of his other business simply because the Department does not choose to determine the los ..... X X X X Extracts X X X X X X X X Extracts X X X X
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