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Commissioner of Income-tax Versus Jethalal Zaverchand Patalia

IT REFERENCE NO. 12 OF 1965 - Dated:- 2-11-1965 - MR. J.M. SHELAT, AND P.N. Bhagwati, JJ For The Respondent : J.M. Thakore for the Applicant. K.H. Haji. JUDGMENT Shelat, CJ.- An interesting question of law arises on this reference. The question is whether a partner of an unregistered firm is entitled to adjust his share of the loss sustained by the firm against his profits from other business in computing his income, profits and gains under section 10 of the Income-tax Act, 1922. The question li .....

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o carried on his own individual business. The firm of Messrs. Subash Oil Traders filed a return of its income for the assessment year 1957-58 on 2nd May, 1958, showing a loss of ₹ 38,835 but since the return was filed long after the expiration of the time prescribed for the filing of a return under section 22(2), the Income-tax Officer ignored the return and did not proceed to assess the firm and determine the loss sustained by it. The result was that the firm was unregistered and unassess .....

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im and directed that the assessee's share in the loss of the firm should be adjusted against his profits from other businesses in computing his business income under section 10. The Tribunal, in taking this view, followed the decision of the Bombay High Court in Commissioner of Income-tax v. Jagannath Narsingdas [1965] 55 ITR 128, which directly covered the point. The Commissioner thereupon applied for a reference and on the application the Tribunal drew up a statement of the case and referr .....

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t binding on this court and it is, therefore, open to us to consider the question on merits. It is, however, necessary to bear in mind the rule which may now be regarded as well established that, in construing an All India statute like the Income-tax Act, uniformity of construction is desirable and the considered opinion of another High Court should be followed unless there are overriding reasons for taking a divergent view. Applying this rule in the present case we find that not only there are .....

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income, profits and gains referred to in section 4(1) computed in the manner laid down in the Act. This definition is an important one since the charge of tax is levied by section 3 on the total income of the previous year of an assessee and it, therefore, runs through almost every section of the Act. Section 4(1) defines the scope of the total income with reference to the factor of residence. Section 6 lays down the heads of income chargeable to income-tax and for each head appropriate rules ar .....

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assessee. But it is now well-settled by the decision of the High Court of Bombay in Commissioner of Income-tax v. Muralidhar Mathurawalla Mahajan Association [1948] 16 ITR 146, a view which has also received the approval of the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income- tax [1953] SCR 448, that all businesses constitute one head under section 10 and in order to determine what are the profits and gains of business under section 10, an assessee is entitled to show al .....

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ax v. Muthuraman Chettiar [1962] 44 ITR 710 (SC). This rule would apply equally whether the profits or losses are derived by the assessee from a business carried on by him alone or in partnership with others. The profits and gains under the head Profits and gains of business, profession or vocation computed under section 10 comprise profits and gains of any business carried on by the assessee. Now, where a business is an individual business of the assessee, it is certainly a business carried on .....

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partnership' is defined by section 4 of the Indian Partnership Act as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. When a firm carries on business, it is a business carried on by the partners of that firm. One partner is the agent of the other in carrying on that business. When a partnership carries on a business each partner thereof carried on that business... The business carried on by the firm in which the .....

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rm is liable to be taken into account in computing his income under section 10 and if such share is a loss, it must be adjusted against his profits from other businesses. This view is considerably strengthened if we turn for a moment to section 14(2)(a). It is precisely because a partner's share in the net profit of the firm is includible in the computation of his total income that the legislature had to enact section 14(2)(a) in order to avoid double taxation in the case of profits of an un .....

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gistered firm in respect of his share of the profits of the firm. This provision clearly postulates that a partner's share in the net profits of an unregistered firm is liable to be included in the computation of his total income and if his share in the net profits is so includible, it is difficult to see on what, principle it can be contended that his share in the net loss of the firm where the firm has suffered a loss is not to be taken into account for the purpose of computation of the to .....

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entity distinct and different from the individual partners of the firm and, consequently, the business carried on by the firm could not be regarded as a business carried on by the individual partners. This argument was rejected by the High Court and on appeal the Privy Council agreed with the view taken by the High Court. Sir George Rankin, delivering the opinion of the Privy Council, pointed out with particular reference to the provision of section 24(2) of the Income-tax Act, as it then stood .....

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hin the meaning of section 6 of the Act or under a different head (in which case only need recourse be had to section 24(1)) . This decision of the Privy Council thus laid down that an assessee in his individual assessment was entitled to adjust his share of the loss in an unregistered firm against his profits under the same head or a different head. But this decision, it was, argued on behalf of the revenue, was given under the Income-tax Act as it stood prior to its amendment by the Amending A .....

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ion were those contained in section 16(1)(b), the proviso to section 23(5)(a), section 24(1), second proviso, and section 24(2), proviso (c). Now the assessee agreed that the amendments did effect a change in the position of a partner of an unregistered firm in that after the amendments a partner of an unregistered firm could not adjust his share of the loss in the unregistered firm against his profits under a different head which he could do before but so far as his right to adjust his share of .....

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head. Turning first to section 16(1)(b), that section consists of a substantive provision and a proviso and is in the following terms: 16. (1) In computing the total income of an assessee................. (b)when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or de .....

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right of a partner in an unregistered firm to adjust his share of the loss in the unregistered firm against his profits from other businesses, actually affirms that right. This provision starts with the words : In computing the total income of an assessee and proceeds to enact how in computing the total income of an assessee, his share in the net profit or loss of a firm in which he is a partner shall be calculated and thus clearly recognizes that whether a firm be registered or unregistered, a .....

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ing of section 10 and the ratio of the decision of the Privy Council in Arunachalam Chettiar's case (supra) must, therefore, still continue to apply even after the amendment of the Income-tax Act by the Amending Act of 1939. The question, however, remains whether there is anything in the proviso to section 16(1)(b) or in any of the other provisions of the Act relied on behalf of the revenue which takes away this right of a partner in an unregistered firm to adjust his share of the loss from .....

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e partner under the head profits and gains of business, profession or vocation or under any other head but makes a provision only in regard to set-off or carry-forward and set-off being matters dealt with in section 24 and provides that the partner's share of the loss may be set off or carried forward and set off in accordance with the provisions of that section. It is, therefore, necessary to refer to section 24 and see what is the set-off or carry-forward and set-off dealt with in that sec .....

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actions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions : Provided further that where the assessee is an unregistered firm, which has not been assessed under the provisions of clause (b) of subsection (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 .....

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f against his income, profits or gains under any other head. Section 24(1) thus deals with set-off between different heads and by the very nature of things it comes into play when income is computed under each of the different heads by applying the appropriate mode of computation and it is found that there is a loss under one or more of the heads and there is a profit under the other heads so that the loss can be set off against the profit in order to arrive at the total income assessable to tax .....

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profits and gains, if any, in any other business consisting of speculative transactions. We are not concerned in this reference with the first proviso and we shall, therefore, say no more about it. The second proviso was however strongly relied on behalf of the revenue and the argument based on the second proviso was that by reason of the rule enacted in that proviso the loss of the unregistered firm could be set off only against the income, profits and gains of the firm and not against the inco .....

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tner in an unregistered firm from claiming to set off his share in the loss of the firm against his profits from other businesses. Now obviously this contention could succeed only if the second proviso were read as a substantive provision applicable not only to set-off of loss under one head against profits under another but also to set-off of loss in one business against profits in another under the same head. But it is now well-settled by the decision of this court Commissioner of Income-tax v .....

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pendent on the main enactment. It must be remembered that the proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment and the effect of the proviso must ordinarily be confined to the subject-matter of the main enactment. The proviso must operate within the sphere occupied by the main enactment and should not ordinarily be extended beyond the main enactment unless the language compels a contrary conclusion as was .....

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ase of set-off as between different heads. The second proviso fits in appropriately with the language of the main enactment so as to be a real proviso and it must be construed as dealing with the subject-matter of the main enactment. So construed it is clear that what the second proviso says is that if any loss under one head cannot be set off against income, profits and gains under any other head as provided in section 24(1) such loss shall be apportioned amongst the partners of the firm and th .....

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f against profit under another that the second proviso says that such loss shall be set off only against the profit of the firm and not against the profit of any of the partners of the firm. The second proviso has no application where a partner of an unregistered firm seeks to adjust his share of the loss of the unregistered firm against his profits from other businesses in the computation of his income under section 10. In such a case no question of set-off of loss under one head against profit .....

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have no application to defeat the right of the assessee to adjust his share of the loss against his profits from other business. Section 24(2) relates to carry-forward of losses and, omitting portions immaterial, it provides as follows: (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be .....

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ession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year; provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year ; and (iii) if the loss in either case cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on, but no loss shall be so carried forward for more .....

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...... Strong reliance was placed on behalf of the revenue on proviso (c ) but we fail to see how this proviso can afford any help to the revenue in its present contention. This proviso, in so far as it is material, prescribes, inter alia, that nothing contained in the section shall entitle any assessee, being apartner in an unregistered firm, to have carried forward and set off against his own income any loss sustained by the firm. There can be no dispute about the applicability of this proviso .....

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rward and set off only by the unregistered firm. But this proviso obviously can have no application where what a partner of an unregistered firm seeks to do is to adjust his share of the loss against his profit from other businesses in the same year in computation of his income under section 10. Having examined the provisions of section 24(1), second proviso, and section 24(2), proviso (c), we must go back to the proviso to section 16(1)(b). That proviso declares that if a partner's share in .....

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must, therefore, clearly have reference only to set-off of the partner's share of the loss under one head against his profit under another head and not adjustment of his share of the loss against his profit from other businesses under the same head of section 10. When, therefore, a partner in a firm wants to set off his share of the loss under a particular head against his profit under another head, the proviso says that such set-off can be allowed only if it is permitted by the provisions o .....

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computation of his income under section 10, the proviso can have no application. The proviso therefore does not preclude a partner of an unregistered firm from adjusting his share of the loss of the unregistered firm against his profits from other businesses under section 10. It is undoubtedly true that the result of this interpretation which we are placing upon the various sections of the Act would be that where an unregistered firm suffers a loss in business, it would be entitled to carry for .....

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partner of an unregistered firm has under section 10 and section 16(1)(b) to adjust his share of the loss against his profits from other businesses is taken away by anything contained in those sections. There is in our opinion no express provision which takes away such right nor can any such provision be spelt out by necessary implication. We must therefore reach the conclusion that, even after the amendment of the Income-tax Act by the Amending Act of 1939, a partner's share in the profit o .....

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the profits of the other businesses would be the income under the head profits and gains of business, profession or vocation under section 10. This view which we are taking is supported by a decision of the Madras High Court in Muthuraman Cheltiar v. Commissioner of Income-tax [1957] 31 ITR 61, where in a case arising under the amended Income-tax Act, the Madras High Court held following the decision of the Bombay High Court in Shanti-kumar Narottam Morarji v. Commissioner of Income-tax [1955] .....

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;income from other sources' falling under section 12, and a loss incurred by an assessee as a partner in a firm must, therefore, be deducted in computing his total income under the head 'business' under section 10(2). The learned Advocate-General, however, relied strongly on a recent decision of the Supreme Court in Commissioner of Income-tax v. Jadavji Narsidas & Co. [1963] 48 ITR (SC) 41 and contended that that decision clearly laid down that a partner in an unregistered firm c .....

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le the unregistered firm suffered a loss in speculation. The assessee in its assessment claimed to adjust against its profits the loss of the unregistered firm which came to the share of the four partners of the assessee. Now the assessee being a firm could not be a partner in the unregistered firm and was in fact not such partner and the only partners were the four partners of the assessee and Damji. The assessee could not, therefore, be regarded as having suffered any loss. The loss was suffer .....

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essed and on its own assessment it has shown a profit. It seeks to set off against its profits a loss of ₹ 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 p .....

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hat 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. The learned Advocate-General relied strongly on these observations but these observations must be read in the context of the facts of the case which we have set out above. As a matter of fact the Supreme .....

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