COMMISSIONER OF INCOME TAX Vs. JETHALAL ZAVERCHAND PATIALA

JUDGEMENT

(1.) 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 S. 10 of the IT Act, 1922. The question lies in a narrow compass and is primarily one of construction requiring examination of a few provisions of the Act. We shall presently refer to these provisions but before we do so, it would be convenient to briefly recapitulate the facts giving rise to the question as stated by the Tribunal in the statement of the case. The assessee is an individual who was at the material time a partner in two firms, namely, M/s Halar Salt and Chemical Works and M/s Subash Oil Traders and besides, he also carried on his own individual business. The firm of M/s Subash Oil Traders filed a return of its income for the asst. year 1957 58 on 2nd May, 1958, showing a loss of Rs. 38,835 but since the return was filed long after the expiration of the time prescribed for the filing of a return under S. 22 (2), the ITO 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 unassessed for the asst. yr. 1957 58. The assessee's share in the loss of the firm amounted to Rs. 12,448 and the assessee, therefore, in the course of his assessment for the asst. year 1957 58, the corresponding account year being Samvat year 2012, claimed to adjust such share of the loss against his profits from other businesses. This claim was rejected by the ITO and in appeal by the AAC, but the Tribunal on further appeal upheld the claim 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 s. 10. The Tribunal, in taking this view, followed the decision of the Bombay High Court in CIT vs. Jagannath Narsingdas (1965) 55 ITR 128 (Bom), which directly covered the point. The CIT thereupon applied for a reference and on the application the Tribunal drew up a statement of the case and referred the following question, namely : "Whether, on the facts and in the circumstances of the case, the assessee was entitled to set off loss of Rs. 12,448 being his share of loss of the firm of M/s Subash Oil Traders against profits of his other business ?" for the opinion of the Court. The determination of this question is directly covered by the decision of the Bombay High Court in Jagannath Narsingdas's case (supra) but that decision being a decision given subsequent to bifurcation is not 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 IT 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 no overriding reasons for taking a different view but the view taken by the Bombay High Court is, if we may respectfully say so, the only correct view which can be taken on this question of construction. Our reasons for saying so are as follows :

(2.) IN order to arrive at a proper determination of the question before us, it is necessary to refer to a few provisions of the Act and see what is the scheme of taxation embodied in the Act. "Total income" is defined in S. 2(15) to mean total amount of income, profits and gains referred to in S. 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 S. 3 on the total income of the previous year of an assessee and it, therefore, runs through almost every section of the Act. Sec. 4(1) defines the scope of the total income with reference to the factor of residence. Sec. 6 lays down the heads of income chargeable to income tax and for each head appropriate rules are provided in ss. 7 to 12 for computing the amount of income. The heads are six in number and amongst them is the head " Profits and gains of business, profession or vocation." Sec. 10 lays down the rules for computing the income of the assessee under the head "Profits and gains of business, profession or vocation." There is no specific provision in the section for adjustment of losses in one or more businesses against profits in other businesses where several businesses are carried on by an assessee. But it is now well settled by the decision of the High Court of Bombay in CIT vs. Muralidhar Mathurwalla Mahajan Association (1948) 16 ITR 146 (Bom), a view which has also received the approval of the Supreme Court in Anglo French Textile Co. Ltd. vs. CIT (1953) 23 ITR 82 (SC), that all businesses constitute one head under S. 10 and in order to determine what are the profits and gains of business under S. 10, an assessee is entitled to show all the profits and adjust against those profits, losses incurred by him under the same head. In other words, while profits or losses of each distinct business may be computed separately, the tax is chargeable under S. 10 not on the separate income of every distinct business but on the aggregate of the profits of all the businesses carried on by the assessee after adjusting the profits of one or more businesses against the losses, if any, in the other businesses [vide CIT vs. Muthuraman Chettiar (1962) 44 ITR 710 (SC)].

(3.) THE business carried on by the firm in which the assessee is a partner would, therefore, be business carried on by the assessee and the assessee's share in the profit or loss of the firm would represent his profits or gains of business carried on by him and would be liable to be taken into account in the computation of his income under S. 10. This reasoning would apply equally whether the firm be registered or unregistered and it must, therefore, follow that, even where the firm is unregistered, the assessee's share in the profit or loss of the firm is liable to be taken into account in computing his income under S. 10 and if such share is a loss, it must be adjusted against his profits from other businesses.