TMI Blog1936 (2) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... of no avail to the appellant. Appeal dismissed. - - - - - Dated:- 27-2-1936 - SIR GEORGE RANKIN.- This is an appeal by the assessee from the decision of the High Court at Madras on a reference made by the Commissioner of Income Tax, Madras, under Section 66(2) of the Indian Income Tax Act (Act XI of 1922). The appellant is the manager of the Hindu undivided family and the order of assessment dated March 11, 1932, was in form an assessment to income tax of the Hindu undivided family. The year of assessment is the year 1931-32 and the year of account is the previous year, viz., 1930-31. The appellant took exception to the assessment made by the Income Tax Officer on March 11, 1932, as aforesaid, but his appeal to the Assistant Commissioner of Income Tax was on December 10, 1932, dismissed and the High Court of Madras has in effect upheld the orders of the income tax authorities. The facts of the case as stated by the Commissioner and as appearing by the orders of the Assistant Commissioner and Income Tax Officer [extracts from these orders being exhibited to the letter of reference] are as follows. The appellant [for this purpose he will be referred to as an individual] car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his cotton partnership. This presumably refers to the loss made in the year 1927-28. It would seem that the appellant in the year of assessment 1930-31 was allowed to deduct for income tax purposes his share of the rest of the partnership losses. In this way 5/8ths of the total losses of the firm have in due course been deducted from his other profits This was doubtless done in accordance with the ruling gived by the Madras High Court in the case of Commissioner of Income Tax, Madras v. Arunachalam Chettiar where it was held that a partner in an unregistered firm which has made a loss in the year of account is entitled to set off his share of the loss against the profits and gains made by him in his individual trade and otherwise. At no time before the year of assessment with which we are now concerned (viz., 1931-32) does it appear that any attempt was made by the appellant to claim that his partner Pillai being unable to meet any share of the firm loss, the appellants, for purposes of income tax could claim to deduct from his other profits any greater share than 5/8ths of the losses of the cotton firm. In particular, although the cotton business was closed at the end of the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade which the petitioner had to bear by reason of the ex-partner being unable to meet his share of loss in the partnership business, can be set off against the petitioner's other income, profits or gains as a loss of profits or gains within the meaning of Section 24 of the Act. Upon this question, so referred as being the real question which arises in the case, the Commissioner gave as his opinion that as Pillai had no capital, the appellant had to meet the loss from the capital contributed by him to the cotton partnership and that the loss claimed to be deducted was a loss of capital and not a loss of profits or gains within the meaning of Section 24. The learned Chief Justice of the High Court at Madras, with whom the other Judges agreed, answered the question referred in the negative, holding that in the books of the cotton business there was nothing to show that the appellant had made any other or further loss in that business than his five-eighths share, and that as the money-lending business never lent any money to Pillai but only to the cotton partnership Pillai never became a debtor of the money-lending business at all. As it is reasonably clear that Pillai, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual partners on the firm's behalf or of the right of one partner to contribution from another complicates the calculation which is based (a) upon the amount of profit or loss made by the firm as a firm, and (b) on the share or fraction attributable to each partner by the agreement of partnership between them. If, however, a partner can claim to deduct against other profits or gains a sum which he has become liable to bear or pay (a) by reason that he has paid or will have to pay on account of the firm more than his share, (b) so as to give him a right of contribution from the other partner, (c) who is insolvent, the character of the investigation to be made is entirely altered. Logically, it may perhaps be said, the whole of the loss of the last year of trading at least is in a case like the present falling upon one partner and not merely his proper share of the loss. But for income tax purposes very different considerations arise. As the appellant on the conclusion of the last year of trading did not in his character of partner formulate any claim to a deduction of more than five-eighths of the loss in the cotton business, it is necessary now, if the question stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. For the present purpose individual partners are not to be considered as trading with or doing business with each other but as having shares in the profit or loss of the firm. On any other principle profits made by the firm may go untaxed and losses made by the firm may be allowed for more than once. The present case may be quite free from complication. But that the claim now in question clashes with the principles of the Indian Income Tax Act will be apparent from an examination of the statute. Under the Act both the firm and the individual partners have to make returns and are assessed whether the firm is a registered firm or not. This principle or practice, for it is both, has sometimes been referred to as the principle of double assessment and was much discussed in the case of In re Neemchand Daga. An unregistered firm is treated as an individual both as regards rate of tax and as regards super-tax. The registered firm on the other hand pays income tax at the maximum rate in all cases independently of the amount of its total profits, but is not assessed to supertax at all. In neither case does the individual partner have to pay again on his share of profits if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and measure to be worked out in the same way. After all, even if a partner is insolvent, he may nevertheless have had in the year of account income from other business or sources against which his share of the firm's loss can be deducted for purposes of income tax. If B may get credit for his share of the loss, there is at least a formidable difficulty in the way of giving credit to A for the whole. That persons without capital should be taken as partners in a business is doubtless, at times both reasonable and desirable, but it is not clear that this would be unduly discouraged merely because in case of loss the capitalist partner might be better off if by the partnership articles in accordance with reality he took the whole responsibility for losses. Their Lordships moreover can give no countenance to a suggestion that upon a dissolution of partnership a partner's share of the losses for several preceding years can be accumulated and thrown into the scale against the income of another partner for a particular year. No principle of writing off a bad debt could justify such a course, whether in the year following the dissolution or, as logic would permit, in some subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to deduct irrecoverable loans before arriving at the profit of money-lending is that to the money-lender, as to the banker, money is his stock in trade or circulating capital : he is dealing in money. But a solvent man can hardly make a loss by lending money to himself even if another be made responsible for the loan as well. And when the loan is in reality but a putting of the hand into the pocket to pay for cotton, it seems desirable to ask what is the real equity between the parties. Their Lordships think that a reference to Section 24 and 44 of the English, and Section 13 and 48 of the Indian, Partnership Acts provides a correct answer and that the true and ultimate right of the appellant against Pillai was a right to contribution in proportion to the latter's share of profits. This is none the less true that the money was not put upon by way of partner's capital. Even if three-fifths of the money can also be regarded as in equity a loan to Pillai, it is very far from being money lent in the course of business as a money lender, as is shown by the equities affecting the right to be repaid. When A purports to lend money to A and B, much may be done with the conse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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