1962 (10) TMI 49 - SC - Income Tax

Supreme Court clarifies set-off rules for unregistered partnership losses

Commissioner of Income-tax Versus Jadavji Narsidas & Co.

The Supreme Court upheld the High Court's finding that there was no legal admissible evidence to support the conclusion that the transactions were not ... Whether there was any legal admissible evidence to justify that the transactions in question was not the transaction of the assessee? Whether the assessee firm can set off the loss Rs. 1,05,641 against its other profits from its other business? Held that:- Appeal allowed in part. High Court did not exceed its powers in examining the evidence in support of the inference of the Income-tax Officer that no business was done in company with Damji but the assessee firm took over some of his losses. The answer of the High Court to the first question is therefore upheld. High Court's answer to the second question is set aside. Issues Involved:1. Whether there was any legal admissible evidence to justify the Tribunal's finding that the transactions in question were not the transactions of the assessee.2. Whether the assessee can claim the set-off of the loss although it is the loss of an unregistered partnership.Issue-wise Detailed Analysis:1. Legal Admissible Evidence Justifying Tribunal's Finding:The High Court answered the first question against the department, stating that there was no legal admissible evidence to justify the finding that the transactions in question were not those of the assessee firm. The High Court examined all the reasons given by the Income-tax Officer and concluded that there was no evidence to justify the finding given in the case. The Tribunal's finding was primarily based on the fact that ankdas (accounts) were in the name of Damji Laxmidas, not the assessee firm, and that the assessee firm claimed only 8 annas of the losses instead of 10 annas as per its share. The High Court found these reasons insufficient to conclude that the assessee firm did not do business in a joint account with Damji Laxmidas.The Supreme Court upheld the High Court's decision, stating that the reasons given by the Income-tax Officer, individually or collectively, did not provide a foundation for the inference that the losses were purchased by the assessee firm from Damji. The Court emphasized that the finding must not proceed upon conjecture, suspicion, or surmise, and there must be some evidence to support the conclusion. The Court found that the High Court did not exceed its powers in examining the evidence and upheld the High Court's answer to the first question.2. Set-off of Loss of Unregistered Partnership:The High Court held that the assessee firm could claim a set-off in respect of the share of loss in the unregistered firm if the income-tax authorities do not proceed to determine the losses of the unregistered firm and do not bring it to tax as permitted by section 23(5)(b). However, the Supreme Court disagreed with this conclusion, stating that the High Court was in error.The Supreme Court clarified that the assessee firm, as a firm, could not enter into a partnership with Damji. Instead, the partnership was between Damji and the four partners of the assessee firm in their individual capacity. Consequently, there were two distinct partnerships: the registered assessee firm and the unregistered firm consisting of five partners. The Court explained that under section 24(1), the losses of the unregistered firm could only be set off against the income, profits, and gains of the unregistered firm, not those of the partners or the registered firm. Therefore, the loss of Rs. 1,05,641 could not be set off against the income of the assessee firm.The Supreme Court set aside the High Court's answer to the second question and answered it in the negative, stating that the provisions of section 24 did not permit the set-off of the unregistered firm's losses against the registered firm's income. The Court also noted that the question of whether the partners in their individual assessments could take advantage of section 16(i)(b) did not arise for consideration in this case.Separate Judgment Analysis:Sarkar J.:Justice Sarkar agreed with the majority on the second question but provided additional reasoning. He emphasized that a firm, as such, is not entitled to enter into a partnership with another firm or individuals, as held in Dulichand Laxminarayan v. Commissioner of Income-tax. Therefore, the respondent firm could not have entered into any partnership with Damji, and the first question did not arise.On the second question, Justice Sarkar stated that the respondent firm could not claim a set-off for the loss of an unregistered partnership as it did not exist in law. He explained that the sections of the Income-tax Act dealing with set-off did not justify a set-off in such circumstances. He concluded that the respondent firm, as a registered firm, could not claim a set-off for the loss of an unregistered partnership, and the appeal should be allowed with costs.Conclusion:The Supreme Court upheld the High Court's answer to the first question regarding the lack of legal admissible evidence but set aside the High Court's answer to the second question, concluding that the assessee firm could not claim a set-off for the loss of an unregistered partnership. The parties were directed to bear their own costs in the Supreme Court and the High Court. The appeal was allowed in part.