BERI, C. J. - (1.) THE Income-tax Appellate Tribunal (Delhi Bench 'c') has, at the instance of the Commissioner of Income-tax, Rajasthan, Jaipur, referred this case to us u/s. 66 (1) of the Income-tax Act, 1922 (hereinafter called "the Act") for answering the following question: "whether on the facts and in the circumstances of the case, the assessee was entitled to set off his share of loss from the firm M/s Gan a THEatre, Bikaner, against his other income?"
(2.) THE Assessee is an individual. He is also a partner in the firm of Ganga THEatre, Bikaner. THE assessment relates to the years 1960-61 and 1962 for which the relevant previous years ended on 31-10-1959 and 31-10-1960 respectively Messrs Ganga THEatre, Bikaner, filed its returns of loss for both the years in question, but as the returns were filed beyond the statutory period as laid down under sec. 22 (2a) of the Act, the Income-tax Officer did not consider them and the result was that no assessment was made on that firm. THE applications made by the firm seeking registration were also shelved. THE assessee in his returns for the aforesaid years claimed to set off the share of his losses in the two relevant years in the said unregistered firm. THE Income-tax Officer held that the income of the firm shall be treated as "nil", subject to rectification under sec. 154 of the Act, and disallowed the assessee's claim for the set off arising from the loss. THE assessee appealed and the Appellate Assistant Commissioner accepted his contention in respect of both the assessment years and directed the Income tax Officer "to compute the loss of the firm of M/s. Ganga THEatre, Bikaner and set off the appellant's share of loss from the said firm against the other income of the appellant. " THE department was dissatisfied and it preferred an appeal before the appellate Tribunal. THE Tribunal upheld the directions given by the Appellate Assistant Commissioner, but at the instance of the Commissioner of Income-tax, referred the question mentioned above, for our answer. Mr. S. K. Mal Lodha, learned counsel for the Revenue, has submitted before us that the assessee's share of loss in an unregistered firm, which has not been assessed, cannot be set off against the assessee's individual profits, even though they may be under the head of "business", although of a different texture. He cited in support of his contention Commissioner of Income-tax, Nagpur vs. Hirani Construction Co (1 ). Commissioner of Income tax, Bihar and Orissa vs Gangadhar Nathmal (2), B. Chickotappa vs. Income tax Officer Central Circle II, Bangalore (3) and Raja Sugar Co. vs. Commissioner of Income-tax (4 ). His further submission was that all these authorities have their foundation in the Supreme Court authority in Commissioner of Income-tax, Bombay City II vs. Jadavji Narsidas & Co (5 ). In all fairness, he also cited before us the authorities which have taken the view contrary to one canvassed by him. namely, Commissioner of Income tax vs. P. M. Muthuraman Chettiar (6), Commissioner of Income tax, Mysore, Travancore-Cochin and Coorg vs. Indo Mercantile Bank Ltd. , (7), Commissioner of Income tax, Bombay South vs. Jagannath Narsingdas (8) Commissioner of Income-tax, Gujarat vs. Jethalal Zaverchand Patalia (9) and Commissioner of Income-tax, Delhi vs. Ramswarup Gupta (10 ). Mr. Lodha also submitted that the second proviso of sec. 24 (1) of the Act was in fact and substance an independent provision, although it is shaped as a proviso and if read in this light it supports his contention, namely, that the loss of an unregistered firm, which has not been assessed, cannot be taken credit of by an individual partner in his own assessment and in support of his contention, he cited Keshavlal Premchand vs. Commissioner of Income-tax Ahmedabad (11 ). Mr. J. K Singhi urged that the second proviso to sec. 24 (1) of the Act cannot, having regard to its language, be treated as a substantive provision and he placed reliance on Jamnadas Daga vs. Commissioner of Income-tax Madhya Pradesh & Bhopal Nagpur (12) and Mohanlal Hiralal vs. Commissioner of Income-tax C. P. and Berar, Nagpur (13 ). He further submitted that in Commissioner of Income-tax, Bombay south vs. Jagannath Narsingdas (8) the Bombay High Court has not treated it as a substantive provision and there must be strong reasons before the proviso can be treated as a substantive provision. Both the submissions made by the learned counsel for the Revenue rest upon the true interpretation of sec. 24 (1) of the Act, which reads as under: "24. Set off of loss in computing aggregate Income.- (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in sec. 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 ; Provided that in computing the profits and gains chargeable under the head 'profits and gains of business, profession or vocation' any loss sustained in speculative transactions 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, 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 cl. (b) of sub-sec. (5) of sec. 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 of any of the partners of the firm ; and where the assessee is a registered firm any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under the section. " It may be mentioned here that the second proviso to sec. 24 (1), as it stood at the relevant time, was introduced by sec. 27 of the Indian Income-tax (Amendment) Act, 1939 (Act No. 7 of 1939 ).
(3.) PRIOR to the introduction of the aforesaid proviso by the Amending Act of 1939, sec. 24 (1) of the Act was interpreted by their Lordships of the Privy Council in Arunachalam Chettiar vs. Commissioner of Income-tax, Madras (14 ). Their Lordships approved the decision of the Madras High Court in Commissioner of Income-tax Madras vs. Arunachalam Chettiar (15) wherein Schwabe, Chief Justice, 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 is his individual trade and otherwise. " Their Lordships of the Privy Council observed - "in their Lordships opinion whether a firm is registered or unregistered, partnership does not obstruct or defeat the right of a partner to an adjustment of 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 sec. 6 of the Act or under a different haed in which case only need recourse be had to sec. 24 (1 ). Thus, the Privy Council emphasised that the object of sec. 24 (1) was to allow a set off of profits against losses which arose under different heads of income and only in those cases sec. 24 (1) could be pressed into service. In a case where profits and losses arose under the same head, they had to be adjusted against each other for computing the income of the assessee. The question now is as to whether the principles laid down by the Privy Council in Arunachalam Chettiar's case (14) are still applicable to the case of a partner of an unregistered firm in the matter of set off his share of loss against the income, profits and gains of his individual business, even after the amendment of the Act in 1939? In Anglo-French Textile Company, Ltd. , vs. Commissioner of Income-tax, Madras (16) their Lordships of the Supreme Court followed the aforesaid decision of the Privy Council in Arunachalam Chettiar's case (14) and observed - "a set off under sec. 24 (1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arises under the same head, of course the loss can be deducted but that is done under sec. 10 and not under sec. 24 (1 ). " Their Lordships also held in that case that there was no provision in the Act which entitled the assessee to have a loss recorded or computed, unless something was to be done with the loss. Thus, under sec. 24 (1) a loss could be set off against an income, profit or gain and under sub-sec. (2) the balance of a loss could be carried forward to a following year on the conditions set out there. ;