1968 PLP 179 (PTD)

Income‑tax Act (XI of 1922), Ss. 10, 12, 24(1)‑Loss in speculative transactions‑Whether can be set off against assessee's share of profits in speculative business carried on by firm in which assessee is partner‑Share income from partnership, whether business income or income from other sources. The assessee who incurs loss in a speculative business carried on by him individually is entitled to set it off against his share of the profits in a, speculative business carried on by a registered firm of which he is a partner. Where the profits of a registered firm are allocated to the various partners, the income received by each partner is income from business falling under section 10 of the Income tax Act and not "income from other sources" falling under section

12. Santikumar's case (1955) 27 I T R 69 followed. By these applications, which are consolidated for the sake of convenience, the assessees Ramanlal Prabhudas Shah and Manilal Lalji require the Appellate Tribunal to refer to the High Court some three questions of law which are said to arise out of the Tribunal's orders in I. T. A. No. 6358 and I. T. A. No. 6359 of 1953‑

54. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid orders we hereby draw up a statement of the case to which the parties agree and refer it to the High Court of Saurashtra under section 66(1) of the Indian Income‑tax Act.

2. The assessees, Ramanlal Prabhudas Shah and Manilal Lalji, hereinafter referred to as Ramanlal and Manilal respectively, are partners of a registered firm called Rajnikant & Co. at Veraval, their respective shares being as specified in the partnership deed. In S. Y. 2008 the firm made a total income of Rs. 81,889 out of which Rs. 37,253 was the profit made by it from speculative transactions' referred to in section 24 of the Indian Income‑tax Act. The assessee Ramanlal suffered a loss of Rs. 5,894 in his individual speculative transactions. Similarly the assessee Manilal suffered a loss of Rs. 6,128 in his individual speculative transactions.

3. For the assessment year 1953‑54, the year of account being S. Y. 2008, Ramanlal's assessment was made by the Income‑tax Officer as follows: Income from Part "B" States : 55% share of profit from commission business of the said firm Rs. 2,089 Add: 5 % share of profit from ready and forward business of the said firm Rs. 38,635 Interest received from the said firm in the name of assessee's wife Rs. 141 Rs. 40,865 Add :‑ Income from Part "A" State : Income from dividend Dividend income net Rs. 75 (not to be grossed) Rs. 75 Add : Income from dividend net Rs. 25 gross Rs. 31 Rs. 106 Rs. 40,971 It is not necessary to reproduce the figures of assessment of Manilal for the assessment year 1953‑

54. His assessment was also made on the same lines as the assessment of Ramanlal. The assessee Ramanlal claimed a loss of Rs. 5,894 to be set off against his share of profit from the firm Rajnikant & Co. The claim of the assessee Ramanlal was negatived by the Income‑tax Officer remarking as follows: "The assessee claims a loss of Rs. 5,894 which he has made in the forward business through the firm in which he is a partner. The second proviso of section 24(1) of the Income‑tax Act says, 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, if any, in any other business, consisting of speculative transactions.' In this case, the assessee's income is from the share of profits from the firm of Messrs Rajnikant & Co. in which he is a partner. It means that his share of profit from the said firm falls under the head `Profits and gains of business.' It is for the assessee to prove that the loss sustained in speculative transactions should be allowed to be set off against profits and gains in any other business consisting of speculative transactions. The assessee having failed to do so, his claim regarding the set‑off of his loss in speculative transactions, is not allowed."

4. A similar claim of the assessee Manilal was also negatived by the Income‑tax Officer. It is not necessary to reproduce what the Income‑tax Officer said in the case of Manilal.

5. Both the assessees then appealed to the Appellate Assistant Commissioner who was pleased to concede the claim of the assessees. A copy of the Appellate Assistant Com missioner's order in the case of the assessee Ramanlal is Annexure `A' and forms part of the case. The Department then appealed to the Appellate Tribunal. The appeals were allowed by the Tribunal. A copy of the Tribunal's order in the case of Manilal is Annexure `A' and forms part of the case.

6. The questions of law that, therefore, arise out of the facts stated above are: "(1) Whether the assessees' share of income from the registered firm Rajnikant & Co. falls to be computed under section 10 or section 12 of the Indian Income‑tax Act? (2) If the answer to question No. (1) above is that the income falls to be computed under section 10, are the assessees entitled to a deduction of their individual losses from speculative transactions from their share of profits from the firm Rajnikant & Co.? (3) Whether in any event the assessees are entitled to claim a deduction of their losses from their individual speculative transactions from their total income ?" The status of the assessee is that of an individual. He is a partner in the firm of Rajnikant & Co. at Veraval. His share income from the firm is Rs. 20,

077. The total income of the firm is Rs. 81,889 and it includes income from speculation business done by the firm, amounting to Rs. 37,

253. During the year of account the assessee himself has done some speculation business individually and suffered a loss of Rs. 6,

128. In the assessment year under reference he claimed that as the share income from the partnership includes share of speculation profits, the loss suffered by him individually should be deducted from the share income received from the firm. The Income‑tax Officer, however, has relied upon the second proviso to section 24(1) and disallowed the claim of the assessee.

2. Section 24(1) is designed to set off loss in one head against another head. Business profits or losses from various businesses have to be considered under the head "Business." The second proviso restricts the computation of business profits if the profits include any speculation transactions. Loss in speculation transactions can only be taken into account if there are speculation profits and to the extent of such profits.

3. The Income‑tax Officer rejected the claim of the assessee. He writes: "It is for the assessed to prove that the loss sustained in speculative transactions should be allowed to be set off against profits and gains in any other business consisting of speculative transactions. The assessee having failed to do so, his claim regarding the set‑off of his loss in speculative transactions is not allowed." The Income‑tax Officer says in his order that the share Income from Rajnikant & Co. falls under the head "profits and gains of business." The Appellate Assistant Commissioner has found by making a reference to the assessment of the firm that the income of the firm includes speculation profits. If the share income from a firm does not fall under the head "profits and gains of business", but "income of other sources", the proviso would have no application and the claim of the assessee has to be rejected. The Appellate Assistant Commis sioner allowed the assessee's contention as in his opinion the share income from a registered firm was to be treated on the same footing as individual business income.

4. From the orders of the Income‑tax Officer and the Appellate Assistant Commissioner it would be clear that both of them have treated the share income from the firm as the business income falling under the same head. We do not think that is the correct approach. Share income from a firm may in clude income under various heads. Second proviso to section 24(1) will have to be applied while making assessment on the firm. If there are speculation losses of the firm, such losses could not be taken into account in computing the profits of the firm. Such losses have to be carried forward in the account of the firm and could not be apportioned between the various partners of the firm even if it was a registered firm. A firm in our opinion is under the Income tax Act a separate entity by itself. Speculative loss or profit made by the firm is not speculation profit or loss made by a partner. It 'is incorrect for the Appellate Assistant Com missioner to say that if the firm had suffered speculation losses, the share of loss could be taken advantage of by the assessed in his individual assessment under the proviso to section 16 (1) (b), Speculation losses of the firm would either be carried forward or set off against the speculation profits of the firm. In ascertaining the assessee's liability to tax under section 23(5) (a), speculation losses of the firm exceeding speculation profits of the firm will rot be taken into account. It appears to us that the Appellate Assistant Commissioner has fallen into an error when he imagines that speculation losses made by the firm could be taken advantage of by the assessed in his individual assessment under section 16(1) (b).

5. We think that the share income from a firm is "income from other sources" and not income under the head "business." Under the second proviso to section 24(1) the assessee is not entitled to claim speculation losses against income under other heads of income.

6. The appeal is allowed. S. P. Mehta with Hemendra Shah for the assessee. G. N. Joshi for the Commissioner. CHAGLA, C. J.‑Ramanlal Shah and Manilal Lalji carried on business in the assessment year 1953‑54 in the name Rajnikant & Co. The firm made profits of Rs. 37,253 in speculative business. The firm is a registered firm and under the partnership agreement. each partner was entitled to 8 annas share in those speculative profits, with the result that a sum of Rs. 18,000 of the speculative profits was allocated to the share of Ramanlal Shah, one of the partners. Now, Ramanlal Shah carried on speculative business on his own and in that business he suffered loss to the extent of Rs. 5,

894. He sought to set off this loss against his share of speculative profits in the sum of Rs. 18,

000. The Income‑tax Officer rejected the claim, the Appellate Assistant Commissioner admitted it, and the Tribunal has taken the same view as the Income‑tax Officer. Now, the view taken by the Tribunal is that the income from speculative profits which came to the share of Ramanlal was income which fell under section 12 of the Indian Income tax Act. That view is directly contrary to the view expressed by us in Shantikumar's case. ((955) 27 I T R 69) In that case we have considered the scheme of the Act and after careful consideration of all that was urged by counsel before us we held that when in the case of a registered firm the profits of the firm are allocated to the various partners, that income of the partner is income from business and falls under section 10 and not under section

12. If that be the true position, then it is clear that Ramanlal would be entitled to set off the loss of Rs. 5,894 against the profit of Rs. 18,000 because under the first proviso to section 24(1) it is stated: "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, if any, in any other business consisting of speculative transactions." Therefore, Ramanlal had suffered loss in speculative transactions and he is seeking to set it off against profits and gains which have been earned in another business consisting of speculative transactions. We will therefore answer the first question : "under section 10" ; the second question in the affirmative ; the third question does not arise. The Commissioner to pay the costs. Questions answered accordingly.