1969 PLP 827 (PTD)

Loss‑Set off‑Share of loss in unregistered firm‑Whether can be set of against partner's other income‑Indian Income tax Act, 1922, S. 24(1), proviso

2. The assessee sought to set off his share of the loss incurred by an unregistered firm, in which he was a partner, against his other income. The departmental authorities and the Tribunal negatived this claim relying upon the second proviso to section 24(2) of the Income‑tax Act, 1922. On a reference to the High Court; Held, (i) that, under the second proviso to section 24(1), the loss sustained by an unregistered partnership cannot be set off against the income of the partners of the unregistered partnership; and (ii) the claim of the assessee being to set off the loss of a partnership in which he was a partner in his assessment as an individual, the two capacities and status cannot be confused in this manner. Ganga Metal Refining Co. (P.) Ltd. v. Commissioner of Income‑tax (1968) 67 I T R 773 fol. Arunachalam Chettiar v. Commissioner of Income‑tax (1936) 4 I T R 173 (P C) ; Commissioner of Income‑tax v. Jadavji Narsidas & Co. (1963) 48 I T R (S C) 41 ; Commissioner of Income‑tax v. Jagannath Narsingdas (1965) 55 I T R 128 ; Commissioner of Income‑tax v. Jethalal Zaverchand (1966) 61 I T R 357 and Commissioner of Income‑tax v. P. M. Muthuraman Chettiar (1962) 44ITR710(SC) ref. D. K. De with P. Majumdar for the Assessee. B. L. Pal with D. Gupta for the Commissioner. JUDGMENT P. B. MUKHARJI, J.‑In this income‑tax reference the following question is for determination by this Court; "Whether, on the facts and in the circumstances of the case the assessee's claim to set off his share of the loss of Rs. 50, 587 from the unregistered firm separately assessed to tax was rightly disallowed in view of the second proviso to section 24(1) of the Indian Income‑tax Act, 1922?" The facts giving rise to the above question lie within a very small compass. The assessee is an individual. The assessment year is 1955‑

56. The relevant accounting year is the financial year 1954‑

55. During the relevant accounting year the assessee was a partner in an unregistered firm, Messrs S. B. Production, having one‑half share therein. The Income‑tax Officer had assessed this unregistered firm and computed its total loss at Rs. 1,01,

174. Thus, the assessee's share of loss comes to Rs. 50,

587. Apart from this partnership in this unregistered firm, this assessee had income from other sources like salary, house property and dividends. The total income from these other sources came to Rs. 34,

066. After deducting the earned income relief allowable in his case, the assessee's total income was assessed at Rs. 31,

786. Now the assessee claimed to set off the loss in the unregistered firm amounting to Rs. 50,587 against his income from salary, property and other sources. The Income‑tax Officer refused this claim on the ground that the loss suffered in the unregistered firm could be set off only against the income, profits and gains of such firm under the second proviso of section 24(1) of the Income‑tax Act. 1n an appeal the Appellate Assistant Commissioner affirmed the order passed by the Income‑tax Officer. On second appeal, the Tribunal also confirmed the order of the Income‑tax Officer and held that the second proviso of section 24(I) was an exception to the general rule provided in section 24(1) for set off of losses under one head against income under any other head mentioned in section 6 of the Income‑tax Act. That in brief represents the relevant facts. Mr. De, who argued the case for the assessee with ability, relied on the short point of interpretation arising on the language of section 24 of the Income‑tax Act and particularly on the words where the assessee is an unregistered firm" appearing in the second proviso to section 24(1) of the Act. According to him, this was an assessment of an individual in his individual capacity and the assessee was not an unregistered firm. Therefore, the application of the second proviso of section 24(1) of the Act was entirely misconceived in the facts and circumstances of the case of his client. Proviso to a section in an Act or statute naturally must have to be read in the context of that particular section and not divorced from it. The second proviso of section 24(1) of the Act has necessarily to take colour and meaning from the main subject‑matter of section 24(1) of the Act. The opening words of section 24(l) of the Act use the expression "Where any assessee sustains a loss" of profits or gains in any year under any of the heads mentioned in section 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 the year. The words "any assessee" imply an assessee without any qualification and must, therefore, include an assessee within the definition of the Income‑tax Act. According to section 2(2) of the Income‑tax Act, an assessee means "a person by whom income‑tax or any other sum of money is payable under this Act, and includes every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the loss sustained by him or of he amount of refund due to him." It is the general rule of set off which has been given by these opening words of section 24(1). It gives "any assessee" a right to have the amount of loss set off on the terms and conditions stated there. "Any assessee", therefore, here does not mean only an assessee who is either an individual or a company or an association of persons or a Hindu undivided family or any partnership, registered or unregistered, or any other group of persons. It includes any assessee within the meaning of the Income‑tax Act. This is followed by the first proviso with which this reference is not concerned for the simple reason that that proviso deals only with loss sustained in "speculative transactions" which are in the nature of business and this reference is not concerned with such speculative transactions. The second proviso, which is material for our purpose, then follows with these relevant words; "Provided further that where the assessee is an unregistered firm which has .not been assessed under the provisions of clause (b) of subsection (5) of section 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 ; . . ." What thereafter follows relates to the registered firm with which again we are not concerned in this reference. The expression "where the assessee is an unregistered firm" in the second proviso of section 24 (1) of the Act means this that the general right of setting off loss under the opening words in the first paragraph of section 24(1) of the Act will not avail where the assessee is an unregistered firm. In other words, if the assessee is an unregistered firm the loss shall only be set off against the income of the unregistered firm, and not against the income of the partners of the unregistered firm. Mr. De made full use of the following observations of the Supreme Court in Commissioner of Income‑tax v. P. M. Muthuraman Chettiar ((1962) 44 I T R 710, 714 (S C)); "Moreover, the second proviso to section 24(1) applies only where the assessee is an unregistered firm." Muthuraman Chettiar's case, however, was not a case of unregistered firm at all. The assessees in that case were a Hindu undivided family and an individual. In fact, the Supreme Court in that case said at pages 713 and 714 of that report; "if as we hold that section 24(1) has no application to the facts of the present cases, the second proviso thereto can also have no application." Mr. De, however, is faced with an insuperable difficulty on the facts in the present case. In the present case, as a fact found is that this unregistered firm of Messrs S. B. Production had not only been assessed to tax, but its loss had been computed. Therefore, Mr. Pal for the Commissioner of Income‑tax has urged that, even technically speaking, the requirement of the expression, "where the assessee is an unregistered firm" is satisfied in this case. His argument proceeds to assert that the words in the second proviso of section 24(1) do not stop with the expression, "where the assessee is an unregistered firm", but go on to say, "which has not been assessed under the provisions of section 23(5;(b)". Therefore, under this proviso both the requirements must have to be satisfied. No doubt the assessee in the present proceedings is not the unregistered firm of Messrs S. B. Production but it has otherwise been assessed. If that be so, then such a loss cannot be set off having regard to the clear language used in the second proviso to section 24(1) of the Act. Therefore, the assessee can never really get any help from the argument which Mr. De advanced. Looking at the point from another angle, Mr. De's argument creates a situation that, if the assessee is not an unregistered firm in the sense in which he wanted this Court to interpret that language of the second proviso, then every partner of such unregistered firm will be in a position to nullify the whole object, purpose and effect of the second proviso, on the ground then that the assessee in the proceedings is a partner and not the unregistered firm itself. That interpretation which Mr. De for the assessee suggests would really lead to a repeal of the second proviso to section 24(1) of the Act, which was introduced by way of amendment. Thirdly, the set‑off, which the assessee in this case is claiming, is really in essence an attempt to set off between different capacities and different entities. The assessment in this case was the assessment of an individual. What the present claim to set off wants to do is to set off the loss of a partnership in which he was a partner. These two capacities and status cannot, in our view, be confused in this manner. This was a point which we have already decided in our judgment in the Income‑tax Reference No. 112 of 1962, Ganga Metal Refining Co. Pr. Ltd. v. Commissioner of Income‑tax ((1968) 67 I T R 771), on 5th August 1966. We follow our own decision on this point. It will not, therefore, be necessary to discuss the leading case of the Privy Council, Arunachalam Chettiar v. Commissioner of Income‑tax ((1936) 4 I T R 173 (P C)), dealing with the point as it stood before amend?ment and introduction of the second proviso, and which is also discussed in our other unreported judgment. Since our decision there has been a decision of the Gujarat High Court in Commissioner of Income tax v. Jethalal Zaverchand (1966) 61I T R 357) to which Mr. De made a reference. That case does not help him because that was a case where the partner of an unregistered firm was held to be entitled to adjust his share of loss sustained by the firm against the profits from his other business in computing his income under section 10 of the Act. The observations there to the effect that the second proviso to section 24(1) cannot be construed as an independent enactment, must be read subject to the provisions of the main section and that its conclusion that the right to set off loss under one head against the profits from? another head is in accord with the view that we have taken. (See the observations of Gujarat High Court in the report, specially at pages 365 and 370). Mr. Pal for the Commissioner of Income‑tax relied on the Bombay High Court decision in Commissioner of Income‑tax v. Jagannith Narsingdas ((1963) 48 I T R (S C) 41) and the Supreme Court decision in Commissioner of Income‑tax v. Jadavji Narsidas & Co. ((1965) 55 I T R 128), both of which have already been discussed in our previous unreported judgment Ganga Metal Refining Co. Pte. Ltd. v. Commissioner of Income‑tax mentioned above. For these reasons, we answer the question in the affirmative. There will be no order as to costs. LAIK, J.‑I agree. Question answered in the affirmative.