- (1.) This is an appeal by the Commissioner of Income-tax, Bombay, against the judgment and order of the High Court of Bombay dated October 23, 1958, by which the High Court answered two questions referred to it under Section 66(2) of the Income-tax Act in favour of the respondent Jadavji Narsidas and Co. The High Court certified this case as fit for appeal to the Supreme Court and hence this appeal.
(2.) The facts are simple. The year of account is the S. Y. 2001 corresponding to October 10, 1944, to November 4, 1945, and the assessment year is 1946-47. The respondent is a firm consisting of four partners and was registered under Section 26-A of the Income-tax Act for the relevant year. The assessee firm carries on business which is mainly speculation. In the year of account it claimed inter alia a loss Rs. 1,05,641 which, it was said, arose in speculation in a venture of the assessee firm with one Damji Laxmidas. This venture was carried on in the name of Damji Laxmidas on behalf of an alleged firm in which Damji was said to have a share of -/6/-and the assessee firm the balance. A deed of partnership dated November 14, 1944, was also produced before the Income-tax Officer. The sum of Rs. 1,05,641 represented half the losses of the joint venture, the other half being claimed by Damji in his own individual assessment. The so called firm of Damji Laxmidas and the assessee firm was an unregistered one. The Income-tax Officer, Bombay, disallowed these losses and added back this amount alone with some others to convert a loss of Rs. 55,931 declared by the assessee firm into a profit of Rs. 1,88,575. This profit was carried by him in accordance with the share of the partners into their individual assessment. In the assessment of Damji, it may be stated here, the loss was not allowed on the ground that having arisen in an unregistered partnership, it could only be considered in the assessment of the unregistered partnership. In rejecting the evidence of the loss of Rs. 1,05,641 in the assessment of the assessee firm the Income-tax Officer gave three reasons (i) that the ankdas were in the name of Damji Laxmidas and not in the name of the unregistered firm or the assessee firm, (ii) that the assessee firm claimed only -/8/- of the losses and not -/10/- according to Its share and (iii) that the assessee firm which was a well-known firm doing extensive business was said, surprisingly enough, to have entered into a partnership with an insignificant person like Damji Laxmidas to carry on this vast business. He held that the assessee firm had purchased these losses from Damji Laxmidas to be able to set them off against its profits to avoid tax. The Appellate Assistant Commissioner dismissed the appeal filed by the assessee firm and so also the Appellate Tribunal. The two members of the Appellate Tribunal gave different reasons. The Judicial Member (Mr. A. R. Aggarwal) observed : "So far as the last Item No. (3) is concerned we are not satisfied that really the loss of Rs. l ,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 (sic) that really the assessee did business in the joint account. Consequently, this claim of the assessee is disallowed". The Accountant Member (Mr. P. C. Malhotra) observed: "I agree with my learned brother in the order which he has passed. I would, however like to add few words: It is not even the assessee's case that loss of Rs. 1,05,641/- was suffered by il. 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 of the loss. It was held that the loss arising to a person in a joint venture cannot be allowed in his personal assessment as the loss is suffered by an unregistered partnership. It can only be carried forward in the account of the unregistered firm".
(3.) The assessee firm applied to the Tribunal asking that a case be stated to the High Court but failed. The assessee firm then moved the High Court under Section 66(2) of the Income-tax Act and under the High Court's direction the Tribunal stated a case on the following questions: "(1) Whether there was any legal admissible evidence to justify the Tribunal's finding that the transaction in question was not the transaction of the assessee. (2) If not, whether the assessee can claim the set-off of such loss although it is the loss of an unregistered partnership". The first question arises out of the observations of the Judicial Member and the second question from those of the Accountant Member. The High Court answered both the questions against the Department. It held that there was no legal admissible evidence to justify the finding that the transactions in question were not those of the assessee firm and further that the assessee firm could claim a set-off in respect of the share of loss in the unregistered firm "if the Income-tax Authorities do not proceed to determine the losses of the unregistered firm and do not bring it to tax as permitted by Section 23 (5) (b)".;