S CHICKOTAPPA Vs. INCOME TAX OFFICER CENTRAL CIRCLE I BANGALORE

JUDGEMENT

(1.) The common question of law raised in these writ petitions is 'whether an individual partner has the right to set off his share of the unregistered firm's loss against his share of income of registered firms of the same year under the same head'. It arises in this way. The petitioners in Writ Petition Nos. 3417 and 3419 of 1968 were partners in four firms during the accounting period relevant for the assessment year 1961-62. The petitioner in WP.No.3418 of 1968 was a partner during the said year in three firms. They were assessed by the assessment orders made on 27-2-62 on the basis of the returns furnished and also on the basis that the firms in which they were partners were all registered firms. At the time of the assessment of the petitioners in WP. Nos.3417 and 3419 of 1968, an application for registration of one of the firms in which the said petitioners were partners viz., Messrs Srinivasa Textiles was pending. Similarly, the application for registration of Messrs Lalitha Silk Throwing Factory in which the petitioner in WP. No.3418 of 1968 was a partner was also pending. The application for registration of the said firms, however, were ultimately rejected In the assessment orders passed on 27-2-1962, the assessee's share income of the firms was provisionally accepted subject to subsequent rectification Subsequently, the Income Tax Officer (Respondent) made separate orders on 13-8-1968 in the case of each of these petitioners under S.35 of the Indian Income Tax Act, 1922, hereinafter called the 'Act' under the said orders the share of loss of the petitioners in WP.Nos.3417 and 3419 of 1968 from Messrs. Srinivasa Textiles which was an unregistered firm was not set off against the share of profits from the regisered firms and they were assessed accordingly disregarding the share of loss of the unregistered firm. Similarly in the case of the petitioner in WP.No.3418 of 1968, his share of loss from the unregistered firm Messrs Lalitha Silk Throwing Factory was disregarded while computing his total income.

(2.) Aggrieved by the said orders the petitioners have preferred the above writ petitions. In the said writ petitions, the petitioners raised two grounds; firstly, that S.35(5) of the Act is not applicable to the case of the petitioners and secondly, that the share of loss from an unregistered firm must be set off against the share income from the registered firms for the purpose of arriving at the rate at which the total income of the assessee has to be assessed. When the matters came up for final hearing, the petitioners' learned Counsel abandoned the said grounds and sought leave to raise an altogether new ground. The leave sought for was granted and in the supplementary affidavits filed, the petitioners have urged the following one ground: that the respondent ought to have set off the share of loss from the unregistered firms against the share of profits from the registered firms and then arrived at the net taxable income under S.35(2) of the Act. In support of the said contention, Sri K. Srinivasan, learned Counsel for the petitioners, argued that sub-sec.(1) of S.24 of the Act provides for set off of losses under one head against profits under any other head of the same assessee in the same year, that the second proviso to the said sub-section provides for set off of share of loss of an unregistered firm and that the second proviso will operate in the same field in which S.24(1) operates. In other words, the second proviso to S.24(1) cannot be contrued as an independent provision and its operation must be limited to S.24(1). The learned Counsel argued that in the instant case, the share of loss of the petitioners from the unregistered firms and their share of profits from the registered firms arise under the same head, viz., business and as such S.24(1) does not apply and if S.24(1) does not apply, the second proviso to the said sub-section also does not apply. If Sec.24(1) does not apply the total income of the petitioners has to be computed under S.10 of the Act and for that purpose they are entitled to set off the loss from the unregistered firms against the profits from the registered firms.

(3.) In support of the contention, the learned Counsel relied on Commissioner of Income Tax v. Indo Mercantile Bank Ltd., 36 I.T.R.1 and Commissioner of Income Tax v. P.M.Muthuraman Chettiar, 42 ITR 710. In Indo Mercantile Bank(1) case, it was held that the territory of a proviso is to carve out an exception to the main enactment and exclude something which otherwise would have been within the section. It has to operate in the same field and if the language of the main enactment is clear it cannot be used for the purpose of interpreting the main enactment or to exclude by implication what the enactment clearly says unless the words of the proviso are such that that is its necessary effect In the said case, it was held that the assessee was entitled to set off the losses incurred in the State of Cochin against the profits made in the State of Travancore. In Muthuraman Chettiar's case(2), the assessee was a resident in India and carried on his business in India. He was also a partner of a firm carrying on business outside India. It was held that he was entitled to set off loss incurred by him as a partner of the foreign business against the profits and gains of the business carried on in India. The second proviso to S.24(l) was held not applicable to such a case. In our opinion, none of the cases are directly on the point and they do not deal with the question of setting off the share of loss of an unregistered firm against the share of profits of a registered firm. Until the amendment of the Act in 1939, a partner's share of the loss in the firm, whether registered or unregistered, could be set off against the profits and gains made by him in his individual business. After the amendment of the Act in 1939, the position of a partner in an unregistered firm stands on a different footing. The Supreme Court in Muthuraman Chettiar's case(2) has observed that the position of a partner in an unregistered firm may, stand on a different footing after the amendment. The total income of registered and unregistered firms is assessed or computed in the same way but thereafter there is a difference in the procedure for levying the tax. The tax is lex'ied on the unregistered firm directly as a distinct unit of assessment; in the case of registered firm, no tax is levied on the firm itself except income tax at specially low rates, but each partner's share of the firm's profits is included in his total income and taxed in his hands The procedure of assessing registered and unregistered firms is contained in the proviso to S.16(1)(b), the first proviso to S.23(5)(a), the second proviso to S.24(1) and clauses (c) and (d) of the proviso to S.24(2) which deal with the question of set off and carry forward of losses incurred by firms. Any loss incurred by an unregistered firm may be set off by the firm against its profits of the same year under the same head or any other head and further any unabsorbed loss may be carried forward by the firm and set off against its profits in a subsequent year in accordance with the provisions of S.24(2), If the contention of the learned Counsel for the petitioners is accepted, partners of unregistered firms stand to gain a double advantage. The firm itself is entitled to carry forward its loss and set off against its profits in a subsequent year in accordance with the provisions of S.24 (2). The partners of the unregistered firm at the same time will also be entitled to set off their share of loss against their own income of the same year under the same head notwithstanding the fact the unregistered firm is entitled to carry forward its loss and set off against its profits in the subsequent year. Such a position can never have been contemplated by the Legislature. Even the share of profits of a partner from an unregistered firm is not added to his share of income from registered firms or his own income of the same year for the purpose of computation of his total income under the Act. His share of profits of an unregistered firm is only taken into account for rate purposes. When the unregistered firm is assessed as an entity and its loss, if any, is carried forward and set off against its profits in a subsequent year in accordance with the provisions of S.24(2), the partner of an unregistered firm cannot claim that he is entitled to set off his share of the firm's loss against his own income or his share of profits of registered firms for the same year under the same head. We have not been shown any authority which directly supports the contention of the learned Counsel for the petitioner. It is not disputed that under the Income Tax Act, 1961 a partner is not entitled to claim set off of his share of loss of an unregistered firm against his individual Income under the same head. Vide S.77 of the 1961 Act. In our view, the law was the same even under the 1922 Act after the amendment of 1939. Therefore, the contention of the petitioner is untenable and has to be rejected. For the above reasons, these writ petitions fail and are dismissed. In the circumstances, no costs.