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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY I VS Respondent: CHIMANLAL J. DALAL & Co.Honorable Justice TAMBEG. N. Joshi,S. P. Mehta and Y. P. Trivedi
1966 P T D 149
1966 P T D 149
[Bombay (India)]
Before Y. S. Tambe and Y. S. Desai, JJ
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY I
versus
CHIMANLAL J. DALAL & Co.
Income‑tax. Reference No. 15 of 1962, decided on 5th March 1965.
Loss‑Registered firm‑Loss in speculation‑Whether can be carried forward and set off against profits in speculation of later year‑Indian Income‑tax Act, 1922, Ss. 23 (5), (6) & 24 (1).
A registered firm is entitled to carry forward loss in specula tion suffered in an earlier year and set it off against profits from speculation of the subsequent year.
Commissioner of Income‑tax v. Kantilal Nathuchand (1964) 53 I T R 420, doubted but followed for the sake of uniformity among the High Courts in the matter of interpretation of the Income‑tax Act.
Keshavlal Premchand v. Commissioner of Income‑tax (1957) 31 I T R 7 and Maneklal Chunilal & Sons Ltd. v. Commissioner of Income‑tax (1953) 24 I T R 375 ref.
STATEMENT OF CASE
By this application the Commissioner of Income‑tax, Bombay City I, Bombay, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's order in I T A No. 6681 of 1960‑61. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Judicature at Bombay under section 66 (1) of the Indian Income tax Act, 1922.
2. The assessee is a registered firm carrying on business as share and stock broker, ready and forward. For the calendar year 1957, the previous year for the assessment year 1958‑59, there was a speculation loss, which was computed at Rs. 2,60,128. Acting under section 23 (6), the Income‑tax Officer apportioned this loss too among the various partners to be carried forward and set off in their respective future assessments against profit from speculation.
3. In the next calendar year 1958, the previous year for the assessment year 1959‑60 there was a speculation profit computed at Rs. 2,38,777. The assessee contended before the Income‑tax Officer that the aforesaid speculation loss .of 1958‑59 should be carried forward and set off against this profit of the year. The Income‑tax Officer rejected this contention and apportioned the profit under section 23 (6) in the same manner as he did for the earlier year.
4. The assessee thereupon appealed to the Appellate Assistant Commissioner repeating its contention. The arguments before him and his reasons for dismissal of the appeal are extracted below from his order:
"(3) It is the contention of the appellant that although the speculation loss of Rs. 2,60,128 for the assessment year 1958‑59 was allocated amongst the partners, this loss should have been carried forward and set off against the speculation profit of Rs. 2,38,777 earned by the firm for the assessment year 1959‑60. The arguments advanced by Shri S. P. Mehta, the appellant's Advocate, in support of this contention are on the following lines. The appellant is a registered firm whose income was assessed for the assessment year 1959‑60. The appellant should, therefore, be considered as an assessee within the meaning of section 2(2) of the Act. When a registered firm suffers a speculation loss, the speculation loss is disallowed for purposes of computing the total income as per the proviso to section 24 (1). However, when the registered firm earns a speculation profit and if the registered firm is also liable to be assessed as a separate entity, the speculation profit is also included in the total income for purposes of assessment of the registered firm. This position is anomalous and operates to the detriment of registered firms that are liable to be assessed. It was submitted that the proviso to section 24 (2) by which a registered firm is not entitled to carry forward and set off any loss which has been apportioned amongst the partners should be given a liberal interpretation in the case of registered firms which are liable to be assessed. This proviso was introduced at a time when registered firms were not assessed. Since registered firms with income exceeding Rs. 40,000 are now liable to be assessed, the benefit of carrying forward the loss of the earlier year which has been apportioned amongst the partners should not be denied to the registered firm.
(4) I am unable to accept the contentions of Shri S. P. Mehta. No doubt in the circumstances explained by him registered firms are at a disadvantage in not being allowed to carry forward the speculation loss of the earlier years which has been apportioned amongst the partners although the registered firm is liable to be assessed on the speculation profit earned in a subsequent year. The taxing statute has, however, to be construed strictly even though a strict interpretation may result in certain anomalies. Even after registered firms with income over Rs. 40,000 were made liable for assessment, clause (c) of the proviso to section 24(2) has not been amended so as to enable these registered firms to carry forward and set off the loss of the earlier year which has been apportioned amongst the partners. As the clause stands at present registered firms are not entitled to carry forward and set off any loss which has been already apportioned amongst the partners. If the contentions of Mr. S. P. Mehta were to be accepted, the position would be that the benefit of carrying forward the loss of the earlier year will be availed of both by the registered firm as well as by the partners. The speculation loss of Rs. 2,60,128 suffered by the firm for the assessment year 1958‑59 was allocated amongst the partners. As per clause (c) of section 24(2) it is, therefore, not open for the registered firm to claim that the speculation loss should be carried forward and set off against the speculation profit of Rs. 2,38,777 determined for the assessment year 1959‑60.
This contention of the appellant, therefore, fails."
5. An appeal to the Tribunal thereupon followed. The Tribunal accepted the. assessee's appeal in paragraphs 2, 3 and 4 of its order reproduced below:
"(2) The contention of the assessee appears to us to be well founded. In a plain reading of the proviso to section 24 (1) and the Explanation (l) thereto, speculation business requires to be deemed to be distinct and separate from any other business; the loss from such business in any year shall not be taken into account in the computation of 'Profits and gains of business, profession or vocation' for assessment under section 10; if there is, however, a profit from such speculation business, only then it shall be so included in such a computa tion; the divisible profits for purposes of section 23 (6) cannot include speculation loss as it cannot enter into the computation under section 10 and it commences to do so only after the loss is wiped out by future profits.
(3) A registered firm is an assessee under the definition in section 2 (2) as tax is payable by it, in certain circumstances no doubt, but clearly so when a tax is demanded from it. In this situation this registered firm, assessee, can demand under section 24 (2) (t) that the loss it had suffered in the assessment year 1958‑59 shall be carried forward in its own account and set off against future profits from the same business in speculative transactions as laid down therein. It is only after the set‑off, if in any year there is left any profit, that such profit becomes liable to get included in the computation under section 10 for that year. Till such a contingency occurs, the loss from such a business requires to be carried forward in its own assessment pending such set‑off and not liable to be apportioned under section 23 (6).
(4) The Appellate Assistant Commissioner, as one of his reasons for rejecting the assessee's claim, has stated that if it is conceded, the benefit of the carry forward will be availed of twice by the assessee‑firm as well as by each of the various partners. It is clearly not so. The loss in question is not capable of apportionment under section 23 (6) as it cannot enter into the computation of the divisible profits through section 10. Even it i.e. is divided, it cannot serve any useful purpose to the partner as cannot be set off under section 24 (1) in his own assessment in the normal manner; it will have to wait for a similar apportionment of speculation profit in a future year."
6. From out of the aforesaid facts, the question of law that arises is:
"Having regard to the latter part of the second proviso to section 24 (1) whether the speculation loss of Rs. 2,60,128 determined for the assessment year 1958‑59 which was apportioned among the partners of the firm under section 23 (6) can be set off against the speculation profit of the assessee‑firm for the assessment year 1959‑60?"
G. N. Joshi with IZ. J. Joshi for the Commissioner.
S. P. Mehta and Y. P. Trivedi for the Assessee.
JUDGMENT
TAMBE, J.‑This is a reference under subsection (1) of section 66 of the Income‑tax Act, 1922, at the instance of the Commissioner of Income‑tax. We are here concerned with the assessment year 1959‑60, the relevant accounting period being calendar year 1958. The assessee is a registered firm carrying on business as share and stock broker; ready and forward. In the earlier year, i. e., for the calendar year 1957, the assessment year being 1958‑59, the assessee‑firm suffered a speculation loss which was computed at Rs. 2,60,128, The Income‑tax Officer made an order under section 23 (6) apportioning this loss among the various partners to be carried forward and set‑off in their respective future assessments against their individual profits from speculation.
In the next calendar year 1958, i. e., the assessment year 1959‑60, the year with which we are here concerned, there was a speculation profit, which was computed at Rs. 2,38,777. The assessee contended before the Income‑tax Officer that the said speculation loss amounting to Rs. 2,60,128 suffered by it in the earlier year, i.e., in the assessment year 1958‑59, should be carried forward and set‑off against the said speculation profit of Rs. 2,38,777. The Income‑tax Officer rejected this contention and apportioned the profits amongst the partners under section 23 (6) in the same manner as he had apportioned the losses in the earlier assessment year 1958‑59. The assessee appealed to the Appellate Assistant Commissioner and reiterated its contentions. It was argued before the Appellate Assistant Commissioner that the assessee‑firm was entitled to carry forward the speculation loss of the earlier years under subsection (2) of section 24 of the Act. This contention was not accepted by the Appellate Assistant Commissioner. The assessee took a further appeal before the Tribunal, and the same contention was reiterated on behalf of the assessee before the Tribunal. The Tribunal accepted the contention raised on behalf of the assessee. The view taken by the Tribunal in its own words is:
"On a plain reading of the proviso to section 24 (1) and the Explanation (1) thereto, speculation business requires to be deemed to be distinct and separate from any other business; the loss from such business in any year shall not be taken into account in the computation of profits and gains of business, profession or vocation for assessment under section 10; if there is, however, a profit from such speculation business only then it shall be so included in such computation; the divisible profits for purposes of section 23 (6) cannot include speculation loss as it cannot enter. into the computation under section 10 and it commences to do so only after the loss is wiped out by future, profits.
A registered firm is an assessee under the definition in section 3 (2) as tax payable by it, in certain circumstances no doubt, but clearly so when a tax is demanded from it. In this situation this registered firm, assessee, can demand under section 24 (2) (i) that the loss it had suffered in the assessment year 1958‑59 shall be carried forward in its own account and set off against future profits from the business in speculation transactions as laid down therein. It is only after the set‑off, if in any year there is left any profit, that such profit becomes liable to get included in the computation under section 10 for that year. Till such a contingency occurs, the loss from such a business requires to be carried forward in its own assessment pending such set off and not liable to be apportioned under section 23 (6)."
In this view of, the matter, the Tribunal allowed the appeal. On an application on behalf of the Commissioner of Income‑tax, the Tribunal has stated the case referring to us the following question of law :
"Having regard to the latter part of the 2nd proviso to section 24 (1) whether the` speculation loss of Rs. 2,60,128 determined for the assessment year 1958‑59 which was apportioned among the partners of the firm under section 23 (6) can be set off against the speculation profit of the assessee‑firm for the assessment year 1959‑60 ?"
The question in short is, whether a registered firm is entitled to carry forward the speculative loss suffered by it in earlier year and set it off against speculative profits of the subsequent year ?
Mr. Joshi, learned counsel for the Revenue, contends that having regard to the relevant provisions of section 24, and on a true construction of the relevant provisions of subsections (5) and (6) of section 23 and section 24 of the Act, the registered firm .is not entitled to carry forward the speculation losses of the earlier years and have them set off against the speculation profits of the year of assessment. The speculation losses of the earlier years have to be apportioned to the respective shares of the partners in those very assessment years themselves.
Mr. Mehta, on the other hand, contends that a registered firm is entitled to carry forward speculative losses of earlier years and set it off against the speculative profits earned in the year of assessment under subsection (2) of section 24 of the Act. According to Mr. Mehta, the speculative losses do not get apportioned amongst the partners of a registered firm. They remain out of the apportionment and are available to a registered firm. for being set off against speculative profits of the following year. Mr. Mehta stated before us that he adopts the decision of the Gujarat High Court in Commissioner of Income‑tax v. Kantilal Nathuchand (1964,53 I T R 420) as his argument in support of the contention.
It is indeed true that the decision of the Gujarat High Court fully supports the contentions raised by Mr. Mehta. Facts in that case were: The assessee was a registered firm. It suffered losses in speculation business in the assessment years 1958‑59 and 1959‑60, amounting to Rs. 6,26,606 and Rs. 5,416 respectively. In the assessment year 1960‑61, it earned a profit in speculation business amounting to Rs. 6,19,784. The said loss in the years 1958‑59 and 1959‑60 had been apportioned as amongst the partners in the assessments of those respective years. The assessee claimed that the losses in the speculation business suffered by it in the assessment years 1958r59 and 1959‑60 should be set off against the profits of the speculation business earned in the assessment year 1960‑61. The Tribunal had upheld the contention raised on behalf of the assessee. At the instance of the Commissioner of Income‑tax, a reference was made by the Tribunal to the High Court. The High Court decided the reference against the Revenue, holding that : "Section 24 (I) does not apply to loss incurred in speculative business and so the loss sustained by a registered firm in speculative business cannot be apportioned amongst its partners under the second proviso to section 24 (1). The registered firm is entitled under section 24 (2) to have such a loss carried forward and set off against profits earned by it in speculative business in a subsequent year." Facts in the case decided by the Gujarat High Court and those of the case before us are very similar. Barring some exceptions, it has been the general policy laid down by this Court in income‑tax matters that whatever our own view may be, we should follow the view taken by another High Court _ on the interpretation of a section. Chagla, C. J., though he disagreed with the view taken by the Madras High Court, followed that view in Maneklal Chunilal & Sons Ltd. v. Commissioner of Income‑tax ((1953) 24 I T R 375). At page 385 of the report, Chagla, C. J. observed:
"A Special Bench of the Madras High Court has taken the view favourable to the Commissioner and contrary to the view suggested by Mr. Palkhivala and in conformity with the uniform policy‑ which we have laid down in income‑tax matters, whatever our own view may be, we must accept the view taken by another High Court on the interpretation of the section of a statute which is an all India statute."
This is the practice of, this Court, and, as we have already stated, it has been generally followed by this court, barring certain exceptions like where inadvertently the decision was not brought to its notice or where in the decision of the other courts some relevant provisions of law had been omitted to be considered. The decision of the Gujarat High Court is a very elaborate one, considering all the relevant provisions of law. This is, therefore, not a case in which we should depart from the aforesaid policy of this court. The answer, therefore, will have to be against the Revenue.
However, it should not be understood that, in our opinion; the contentions raised on behalf of the Revenue are without merit. Had the matter to be decided for the first time we might have agreed with the construction canvassed for on behalf of the Revenue, inasmuch as in our opinion, it is in harmony with the general intention of the Legislature expressed in the Act in respect of the assessment of a registered, firm. The relevant provisions in an enactment have to be construed as a whole. We may briefly state our reason
Section 3, which is a charging section, charges to tax the total income earned by an assessee in a year of assessment. A registered firm is one of the units, of assessment, and in that sense, an assessee. Total income has been defined in section 2 (15) as " `total income' means total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act". Section 4 provides that subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived. Six heads of income chargeable to income‑tax are enumerated in section 6. One of them is: "Profits and gains of business, profession and vocation". Sections 7, 8, 9, 10 and 12 (2) (b) provide the mode of computation of income under different heads.. Section 10 relates to the computation of income under the head: "Profits and gains of business, profession and vocation". Section 13 relates to the method of accounting adopted by an assessee, and its relative evidentiary value in assessment. Section 14 relates to exemptions of a general nature. Sections 15, 15A, 15B and 16 relate to exemptions of a special nature like the exemption in respect of premia on life insurance policies paid, earned income, donations and charities, etc. Section 16 partly deals with certain exemptions as well as making additions to the income of the assessee in certain cases. Section 17 relates to determination of tax payable. in certain special cases like person not resident in taxable territories, etc. These are the material provisions relating to the computation of income under various heads. A situation may arise and often arises when an assessee has more than one source or heads of income. In computation of income from these different sources, the result may in case of income from one source be profit and in the other a loss. In what manner these situations have to be dealt with in computation of the total income is provided in section 24, and the section provides in what manner the loss under one head should be set off' against profits under another head in computation of the aggregate income. It is on the computation of this aggregate income that ultimately an assessment is made under section 23. In brief, thus, income‑tax is charged on an assessee in respect of the total income derived by him from the various heads of his income chargeable to tax and computed in the manner provided in the Act. All the provisions of the Income‑tax Act ultimately are directed towards the ascertainment of the total income, bring ing it to tax, and the recovery of tax from persons liable to pay the tax. The proceedings ultimately culminate in an assessment under section 23 of the Act, under which the amount of total income is computed and the amount of tax payable by an assessee is quantified. The first stage, therefore, is determination of the income, either profit or loss, under the various heads. The second stage is adjustments and the results obtained under the different heads for determination of the aggregate amount of total income, and the last stage is determination of the amount of total income and quantification of the tax on the amount of total income so determined. Section 24 which relates to set‑off of loss under one head against profits of another head for purposes of determination of total income thus comes into play after determination of the income under different heads, and the levy of tax under section 23 would be the final stage after the determination of the total income. The provisions of sections 24 and 23 are thus closely interconnected. It would be at this stage convenient to refer to the relevant provisions of sections 23 and 24. Subsections (5) and (6) of section 23 provide the special mode of assessment of a registered firm. The material part runs
"23. (5) Notwithstanding anything contained in the foregoing subsections, when the assessee is a firm and the total income of the firm has been assessed under subsection (1), subsection (3) or subsection (4), as the case may be,‑
(a) in the case of a registered firm,
(i) the income‑tax payable by the firm itself shall be determined ; and
(ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the. basis of such assessment shall be determined
Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24: . . . .
(6) Whenever the Income‑tax Officer makes a determination in accordance with the provisions of subsection (5), lie shall notify to the firm by an order in writing the amount of the total, income on which the determination has been based and the apportionment thereof between the several partners."
It would be seen that the assessment of the registered firm is a composite assessment both of the registered firm as well as its partners. Whether the firm is registered or not, the first stage is common, namely, determination of the total income of the firm. The difference starts from this stage. In the case of an unregistered firm, tax is levied on the unregistered firm itself and recovered from it. The partners are not charged to tax in respect of their partnership income. There is, however, a difference in the case of a registered firm. After computation of the total income of a registered firm, tax payable by the firm itself is determined and levied. The tax imposed on a registered firm since 1956 is however at a very low rate. The Income‑tax Officer is also required to determine the total income of each partner of a registered firm including therein his share of its income, profits and gains of the previous year. In other words, the Income‑tax Officer has to determine the total income of an individual partner of a registered firm after taking into account his share of income in the profits and gains in the business of a registered partnership.. After the said amount of total income is determined, the Income tax Officer has to determine the tax payable by an individual partner on the basis of his total income inclusive of his share of profits in the partnership business. Proviso to subsection (5) (a) makes it clear that loss suffered by an individual partner in the business of the partnership enters his personal assessment, and he has a right to set off that loss against his income from other sources as well as to carry it forward and set off the unabsorbed loss against income of subsequent year in accordance with the provisions of section 24. The scheme of section 23 (5) thus is that except a nominal tax levied on the registered firm in respect of its…
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