Chinnappa Reddy, J. -
(1.) THESE three cases may be disposed of by a common order as the questions raised are identical. It is sufficient if the facts pertaining to R.C. No. 29/1970 are stated. Abida Khatoon, the assessee concerned in R.C. No. 29/1970, owns a fourteen annas share in M/s. Hyderabad Deccan Cigarette Factory and Salima Khatoon, the assessee concerned in R.C. No. 30 of 1970, owns the remaining two annas share. The Hyderabad Deccan Cigarette Factory was being assessed to income-tax as an association of persons. During the accounting year corresponding to the assessment in year 1966-67 the Hyderabad Deccan Cigarette Factory incurred a loss. Abida Khatoon's share of the loss was Rs. 81,107. She claimed to set off this loss under the head " Business " against her other income of Rs. 37,682 derived from other sources under the heads " Income from house property " and " Income from securities ". Her claim for a set-off was rejected by the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The question now is whether she is entitled to the set-off claimed by her.
(2.) NOW, Section 4 of the Income-tax Act, 1961, enacts that, subject to the other provisions of the Act, income-tax shall be charged in respect of the total income of the previous year of every person. Total income is defined by Section 2(45) as meaning the total amount of income referred to in Section 5 and computed in the manner laid down in the Act. Broadly, Section 5 includes in the total income of a resident all income from whatever source derived which is received or is deemed to be received by him or which accrues or is deemed to accrue to him, etc. Chapter III of the Income-tax Act deals with incomes which do not form part of total income. It is sufficient to say here that income received by a person as his share from an association of persons is not included in Chapter III and, therefore, if is not to be excluded from the person's total income. Chapter IV deals with computation of total income. For the purposes of charge of income-tax and computation of total income, Section 14 (which occurs in Chapter IV) classifies all income under six heads : A.--Salaries, B.--Interest on securities, C.--Income from house property, D.--Profits and gains of business or profession, E.--Capital gains and F.--Income from other sources. Sections 15 to 59 prescribe the rules for the computation of income under each head of income. It has been succinctly stated by the Supreme Court in K. S. Venkataraman and Co. (P.) Ltd. v. State of Madras, that Section 4 charges total income. Section 5 defines its range. Section 14 classifies it. Sections 15 to 59 quantify it. It is elementary that the classification of all income under six heads does not have the effect of making the income under each head separately liable to tax. Income-tax is a single tax on the total income and not a collection of distinct taxes on-the incomes under the several heads or on the incomes from different sources. Vide Karanpura Development Co. Ltd. v. Commissioner of Income-tax, . Since the charge of tax is on the total income, a natural corollary of the principle that income-tax is a a single tax and not a collection of taxes is that a loss from a source under any head in a year may be set off against income from- another source under the same head in that year and so also a loss under any head in a year may be set off against the income under any other head in that year. These are expressly provided by Sections 70(1) and 71(1) of the Income-tax Act respectively. We will refer to these provisions presently in our order.
To proceed with our resume of the relevant provisions of the Act, Section 66 states :
" In computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII."
Chapter VII deals with " Income forming part of total income on which no income-tax is payable ", Section 86 provides that income-tax shall not be paid by an assessee, if he is a partner of an unregistered firm, on any portion of his share in the profits and gains of the firm on which income-tax is payable by the firm, and if he is a member of an association of persons, etc., on any portion of the amount which he is entitled to receive from the association, etc., on which income-tax has already been paid by the association. Section 110 prescribes the method of determining tax where total income includes income on which no tax is payable. It prescribes that an assessee shall be entitled to a deduction from the amount of income-tax chargeable ,on the total income, of an amount equal to the tax calculated at the average rate on the amount on which no tax is payable. The income-tax Act makes a clear distinction between incomes which cannot.be included in the total income (dealt with in Chapter III) and incomes which have to be included iu the total income but on which no income-tax is payable (dealt with in Chapter VII). In the one case the incomes go out of the purview of the Act and do not go through the process of assessment while in the other case they are within the. purview of the Act and must necessarily go through the process of assessment. In the one case the incomes are not "assessable" at all while in the other the incomes are necessarily " assessable " although tax is not payable. This distinction is important.
Earlier we stated that the right to set off a loss from one source or under one head against the income from another source or under another head arose naturally from the principle that income-tax was a single tax and the charge was on the total income. Sections 70(1) and 71(1) of the Income-tax Act accept and give effect to this rule. One therefore need look to Sections 70(1) and 71(1) and not to any general principle to claim a set-off. Section 70(1) is as follows ;
" 70. (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income other than ' Capital gains' is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head."
Section 71(1) is as follows :
"71. (1) Where in respect of any assessment year the net result of the computation under any head of income other than ' Capital gains ' is a loss and the assessee has no income under the head ' Capital gains ', he shall, subject to the provisions of this chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head."
It is seen that Section 70(1) provides for set-off of loss from a source falling under any head of income against the assessee's income from any other source under the same head while Section 71(1) provides for set-off of a loss under any head of income against his income, if any, assessable under any other head. Thus, both Sections 70(1) and 71(1) refer to heads of income. What is classified under the several heads of income under Section 14 of the Act is the total income of the assessee, that is to say, all incomes which are bound to be included in the total income whether tax is payable on such incomes are not. It follows, therefore, that incomes and losses from sources, the incomes of which are bound to be included in the total income though tax is not payable on such incomes, also come within the sweep of Section 70(1) and Section 71(1). That is the ordinary rule. The legislature, however, has made special provision in, the case of registered and unregistered firms and the partners of such firms. Section 77(2) expressly prohibits a partner of an unregistered firm from setting off his share of the loss from an unregistered firm where the income of the firm is a loss, against his other income as provided by Sections 70 and 71 of the Act. There is, however, no such prohibition in a case where an assessee's share in the income of an association of persons is a loss.
(3.) IN the INcome-tax Act of 1922, as it stood before 1939, there was no provision corresponding to Section 70(1) of the Act of 1961, but there was a provision corresponding to Section 71(1) of the 1961 Act. Section 24(1) of the INdian INcome-tax Act of 1922, as it stood prior to 1939, was as follows:
" Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 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 that year."
There was no provision corresponding to Section 77(2) of the present Act prohibiting a partner of an unregistered firm from setting off his share of the loss from an unregistered firm where the income of the firm was a loss, against his other income. Section 24(2), as it then stood, however, provided that where the assessee was a registered firm and the loss sustained could not be wholly set off under Section 24(1), any member of such firm would be entitled to have set off against any income of the year such amount of the loss not already set off as was proportionate to his share in the firm. IN Arunachalam Chettiar v. Commissioner of INcome-tax, 1936 4 ITR 173 (P.C.) the question arose whether a partner of an unregistered firm could have his share of the loss in the firm set off against the profits and gains made by him in his individual trade. Their Lordships of the Privy Council held that he could. The argument that the unregistered firm and a partner of the unregistered firm were different entities and, therefore, such set off could not be allowed was rejected by the Privy Council. Their Lordships observed :
"......They are of opinion that the learned Chief Justice rightly rejected the contention put forward in that case that an unregistered firm was for income-tax purposes an 'entity' or that the same person as an individual and as a partner of a firm is two separate ' entities ', merely, because the business of the firm is a separate business, and the firm is treated as an assessee. . From Section 24(2) of the INdian INcome-tax Act it would seem that the INdian legislature thought it necessary to anticipate any possible apprehension that a partnership, by being registered. as a registered firm within the meaning of Section 26 of the Act, might be treated as a separate assessee in so absolute a sense as to prevent a partner's share of loss being sot off against his individual profits or gains, IN their Lordships' opinion where a firm is registered or unregistered, partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, whether the set off be against other profits under the same head of income within 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))."
The decision of the Privy Council in Arunachalam Chettiar's case was approved by the Supreme Court in Anglo-French Textile Company Ltd. v. Commissioner of INcome-tax, 1953 23 ITR 82,  S.C.R. 448 (S.C.), Commissioner of INcome-tax v. INdo-Mercantile Bank Ltd., and Commissioner of INcome-tax v. Muthuraman Chettiar, . IN the last of these case the assessee claimed to set 00 against its income from the money-lending business which it was carrying on in British INdia a loss which it had incurred in a foreign business in which it was a partner. The claim of the assessee was negatived by the authorities on the ground that the unit which derived the income and the unit which sustained a loss were different. The High Court decided that the assessee was entitled to the set off and the decision of the High Court was confirmed by the Supreme Court who stated :
"It appears that in the High Court the point urged on behalf of the present appellant was that there was no identity between the unit which derived the income and the units which sustained the loss and on this ground it was urged that there could be no set off under Section 10 which permitted the loss incurred by the same unit being set off against the profit derived by it.... The High Court repelled this argument and, in our opinion, rightly repelled' it in the circumstances of these two cases. A similar argument was considered and repelled by the Privy Council in Arunachalam Chettiar v. Commissioner of INcome-tax. It was observed therein that whether a firm was registered or unregistered, a partner's share of the loss in the firm could be set off against the profits and gains made by him in his individual business. That principle applies in the present cases, even though after the amendment of the INcome-tax Act in 1939, the position of a partner in an unregistered firm may stand on a different footing, a distinction which is not material for the present cases."
There is one other decision of the Supreme Court to which we would like to make a reference. It is that of Seth Jamna Das Daga v. Commissioner of INcome-tax, . IN that case the share of the assessee in the profit of an unregistered firm was Rs. 26,110 and his share of the loss in a registered firm was Rs. 13,167. He had a small income of Rs. 262 from other sources. The assessee claimed that his share of income in the unregistered firm should be ignored in computing the total income while the department claimed that his share of loss in the registered firm should be set off against his share of income in the unregistered firm and tax should be levied on Rs. 262 at the rate applicable to Rs. 13,205. The Supreme Court upheld the department's view regarding set-off and observed :
" IN our opinion, the matter is simple and can be stated within a narrow compass. Under Section 3 of the INcome-tax Act (corresponding to section 4 of the present Act), the income-tax is chargeable for an assessment year at rate or rates prescribed by an annual Act in respectof the total income of the previous year. Section 14(2)(a), before its amendment in 1956 (corresponding to Section 86 of the present Act), provided that the tax. shall not be payable by an assessee, if a partner of an unregistered firm, in respect of any portion of his share in the profits and gains of the firm computed in the manner laid down in Clause (b) of Sub-section (1) of Section 16 on which the tax had already been paid by the firm. The section thus gave immunity from fax to the share of the asseseee as a partner in an unregistered firm in respect of the share of profits received by him from the unregistered firm and on which the unregistered firm had already been taxed. Section 16(1)(a) (corresponding to Section 67 of the present Act), however, provided that in computing the total income of an assessee, any sum exempted under Section 14(2) shall be included."
One of the arguments which was advanced was that the second proviso to Section 24(1) (corresponding to Section 77(2) of the present Act) provided that an assessee could not set off his share of loss in an unregistered firm against his other income and on a parity of reasoning losses of an assessee in other business could not be set off against his share of income from an unregistered firm. The argument was repelled by the Supreme Court, who said:
"The High Court correctly pointed out that, all that Section 14(2) did was to save the profits of an unregistered firm from liability to tax in the hands of the partners. It did not affect the computation of the total income to determine the rate applicable under Section 3, in the light of Section 16(1)(a). INdeed, Section 16(1)(a) clearly provided that any sum exempt under Section 14(2) was to be included in computing the total income of an assessee and, in view of this specific provision, the converse of the second proviso to Section 24(1), which we have quoted above, hardly applied."
Later again while dealing with the question of carrying forward of loss (with which we are not concerned), they observed :
'"The High Court... pointed out--and, in our view, rightly--that under Sections 14(2) and 16(1)(a), the profits and losses had to be set off against each other to find out the total income."
These decisions of the Privy Council and the Supreme Court recognize the existence of a general rule of set off of loss against income, a rule derived from the principle that income-tax is a single tax on total income, a rule expressly enacted by Section 24(1) of the 1922 Act in the case of incomes and losses under different heads, a rule recognised, though not expressly enacted, in the case of incomes and losses from different sources under the same head. The general rule of set off, in both cases, is now enacted by Sections 70(1) and 71(1) of the INcome-tax Act of 1961. The learned counsel for the department urged that those were all cases where the set-off claimed was of losses against incomes under the same head and not set off of losses under one head against incomes under another head. We do not see that it makes any difference. Section 70(1) and Section 71(1) expressly provide for the two situations and the result is one which can be arrived at by the operation of Sections 4, 5 and 14 and in the case of partners of unregistered firm and members of associations of persons by the further operation of Sections 67 and 86. Of course in the case of a partner of an unregistered firm Section 77(2) expressly prohibits him from setting off his share of the loss in an unregistered firm against his other income. There is, however, no such statutory prohibition in the case of a member of an association of persons.
The learned counsel for the department urged that an association of persons and a member of an association of persons were distinct " entities " for purposes of taxation and, therefore, a member of an association of persons was not entitled to claim a set-off of his share of loss in an association of persons against his other income. It was precisely such an argument that was repudiated by the Privy Council in Arunachalam Chettiar's case and by the Supreme Court in Muthuraman Chettiar's case. We do not think that the argument is still open to the department. The learned counsel urged that Section 71(1) provided for set off of loss under one head against "assessable income" under other heads. Therefore, he urged that the loss too must be from a source whose income or part of whose income was " assessable " in his hands. We do not think that this argument presents any difficulty. We have already pointed out that all income which is included in total income is assessable income whether tax is paid on it or not. We have pointed out the important distinction between incomes which do not form part of the total income and incomes which have to be included in the total income though tax is not payable on such incomes and how the former are not assessable while the latter are " assessable ". Any amount received by an assessee from an association of persons of which he is a member has to be included in the assessee's total income under Section 67, though no income-tax is payable on it. It is " assessable " income.;