Partner's share of loss in an unregistered firm can be set off when the loss is established and no statutory bar applies.
A partnership arrangement and account material were treated as sufficient to support the assessee's position; the mere fact that speculative ankdas stood in one partner's name did not, by itself, disprove that the transactions were the assessee's, and the adverse finding was unsupported by legal evidence. On the tax issue, the Income-tax Act, 1922 was read to permit a partner's share of loss from an unregistered firm to enter computation of business income, and the firm's separate assessment was not a condition precedent where the loss was established and no statutory bar applied. The assessees' claimed set-off was therefore upheld.
Issues: (i) whether there was legal admissible evidence to sustain the finding that the impugned transactions were not the assessee's transactions; (ii) whether the assessee could claim set-off of its share of loss in an unregistered partnership firm though that firm had not been separately assessed.
Issue (i): whether there was legal admissible evidence to sustain the finding that the impugned transactions were not the assessee's transactions.
Analysis: The record showed a partnership arrangement and supporting account material. The only substantial basis relied upon to reject the claim was that the speculative ankdas stood in the name of one partner. That circumstance, on the facts, did not exclude the existence of the partnership or prove that the transactions were not carried on for the assessee. There was no evidence that the books of account were false or that the statement of the other partner was unreliable.
Conclusion: The finding was unsupported by legal evidence and could not stand, in favour of the assessee.
Issue (ii): whether the assessee could claim set-off of its share of loss in an unregistered partnership firm though that firm had not been separately assessed.
Analysis: The scheme of the Income-tax Act, 1922, permits a partner's share of profit or loss from a firm to enter the partner's total income computation. Section 23(5)(b) gives the Income-tax Officer an option in dealing with an unregistered firm, but there is no express provision making assessment of the firm a condition precedent to a partner's claim for set-off. Where the loss is in fact established, and the Department does not determine the firm's loss under the statutory machinery, the partner is not barred from claiming set-off against business profits.
Conclusion: The assessee was entitled to set off its share of the unregistered firm's loss against its business income, in favour of the assessee.
Final Conclusion: The reference was answered in favour of the assessee on both questions, and the disallowance of the claimed set-off could not be sustained.
Ratio Decidendi: A partner's share of loss in an unregistered firm is not barred from set-off against business income merely because the firm has not been separately assessed, provided the loss is established and no statutory prohibition applies.