COMMISSIONER OF INCOME TAX Vs. BHARAT ENGINEERING AND CONSTRUCTION CO
LAWS(KAR)-1966-10-8
HIGH COURT OF KARNATAKA
Decided on October 04,1966

COMMISSIONER OF INCOME-TAX, MYSORE Appellant
VERSUS
BHARAT ENGINEERING AND CONSTRUCTION CO. Respondents


Cited Judgements :-

VISHWANATH SETH VS. COMMISSIONER OF INCOME TAX [LAWS(ALL)-1983-11-36] [REFERRED TO]
EXCELL PRODUCTIONS VS. COMMISSIONER OF INCOME TAX [LAWS(KER)-1970-11-26] [REFERRED TO]
ADDL COMMISSIONER OF INCOME-TAX VS. VISAKHA FLOUR MILLS [LAWS(APH)-1976-1-12] [REFERRED]


JUDGEMENT

Hegde, J. - (1.)THIS is a reference under section 66 (1) of the Indian Income-tax Act, 1922, to be hereinafter referred to as the "Act", at the instance of the Commissioner of Income-tax. The question of law referred for the opinion of this court is :
"Whether, having regard to clause (e) of the proviso to section 24 (2), the assessee, an unregistered firm, was entitled to carry forward the whole of the loss including the share of the loss of the two retiring partners ?"

(2.)THE question of law arising for decision in this case, we were told, is not covered by any decision either of the Supreme Court or any of the High Courts.
The assessee is an unregistered firm by name "The Bharat Engineering and Construction Company, Udipi". It carries on business as engineering contractors. The firm in question was constituted as per the partnership deed dated 25th September, 1950. During the assessment years 1956-57, 1957-58 and 1958-59, it incurred losses. The losses so incurred amounted to Rs. 1,41,180. But, during the assessment year 1959-60, it earned Rs. 25,103 as profits. It claimed that it should be permitted to set of its earlier losses towards the profits earned during the assessment year 1959-60. But, even before the commencement of the assessment year 1959-60, there had been a change in the constitution of the firm, two of its partners having left the firm earlier, Originally, the firm had four partners, namely, (i) U. Srinivasa Rao, (ii) Rosario Mathew Andrade, (iii) P. Sripati Acharya, and (iv) N. V. Shanbogue. U. Srinivasa Rao and Rosario Mathew Andrade retired from the partnership on April 3, 1958, and April 4, 1958, respectively.

One further fact needs to be noted that during the assessment year 1956-57, the assessee-firm was registered under section 26A of the "Act" and assessed as such but during all the other assessment years it was assessed in the status of an "unregistered firm."

(3.)THE question before the Income-tax Officer was, whether in determining the loss to be carried over by the firm, he should exclude the share of loss of the partners that had retired or whether the firm was entitled to carry forward the entire loss incurred by it during the previous years. THE Income-tax Officer held that, in view of section 24 (2) (c) read with section 26 (1) of the "Act", the firm is not entitled to set off so much of the loss proportionate to the share of the retired partners computed in accordance with law. Dealing with that aspect this is what the Income-tax Officer observed :
"Since the unabsorbed loss of Rs. 1,41,168 (correct figure is Rs. 1,41,180) has to be carried forward and set off, there will be no taxable income for 1959-60. During the year of account, there was a change in the constitution of the firm in that two of the partners, Sri U. Srinivasa Rao and Rosario Mathew Andrade, were released on April 3, 1958, and April 4, 1958. THErefore, the share of profits of each partner will be computed proportionately in accordance with the proviso to section 26 (1) for the purpose of setting off the unabsorbed loss of previous years under section 24 (2). In accordance with clause (e) of the proviso to section 24 (2), so much of the loss proportionate to clause (e) of the proviso to section 24 (2), so much of the loss proportionate to the share of the retired partners cannot be carried forward and set off against the profits of the subsequent years.

Aggrieved by the order of the Income-tax Officer, the assessee went up in appeal to the Appellate Assistant Commissioner. That Officer differing entitled to carry forward the entire loss despite the fact that there was change in its constitution. He took the view that in the case of an unregistered firm, the assessee is the firm and not its partners and, therefore, the change in its constitution is immaterial for the purpose of assessment. He was of the opinion that clause (c) of this proviso to section 24 (2) governs the provisions contained in clause (a) of the said proviso. He further thought that from the scheme of the "Act", the assessee, who is an unregistered firm, is entitled to claim set off in respect of the entire loss incurred by it during the previous years. The view taken by the Appellate Assistant Commissioner was affirmed by the Income-tax Appellate Tribunal. We have now to see whether that is the correct view of the law.

Section 24 deals with set off of loss in computing the aggregate income of an assessee. Sub-section (1) of that section is not relevant for our present purpose as that deals with set off of loss or profits or gains in any year under any of the heads mentioned in section 6 against the assessee's income, profits by section 24 (2), which provides that, 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 wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year. But, that right is subject to the provisions contained in the proviso. We are not now concerned with clauses (i) to (iii) of section 24 (2). Nor are we concerned with any of the clauses in the proviso, excepting clauses (c) and (e). Clause (c) to the extent material for our present purpose says :

"Nothing herein contained shall entitle any assessee,...... being a partner in an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23... to have carried forward and set off against his sown income any loss sustained by the firm."



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