1961 (10) TMI 106 - HC - Income Tax

Set-off of Losses from Unregistered Partnerships under Indian Income Tax Act: Key Clarifications

The court affirmed that the assessee's share of losses from unregistered partnerships can be set off against their income from other sources. The judgment ... - Issues Involved:1. Whether the assessee's share of loss from an unregistered partnership can be set off against his income from other sources.2. The applicability of sections 16(1)(b), 23(5), and 24(1) of the Indian Income Tax Act in determining the set-off of losses from an unregistered partnership.Issue-wise Detailed Analysis:1. Whether the assessee's share of loss from an unregistered partnership can be set off against his income from other sources:The judgment addresses two referred cases under section 66(1) of the Indian Income Tax Act. In the first case (No. 7 of 1960), the assessee, a Hindu undivided family, claimed a set-off of Rs. 17,853 as a loss from a joint venture in Sailu, which was an unregistered partnership. The Income Tax Officer disallowed this loss, stating it was not proven. However, the Tribunal allowed the claim, stating that joint ventures in income tax cases need not be considered different firms. In the second case (No. 1 of 1960), the assessee claimed a set-off of Rs. 21,005 from a loss in the firm of Messrs. Vivekananda Textiles, which was not assessed or registered for the assessment year 1951-52. The Income Tax Officer and the Appellate Assistant Commissioner rejected this claim, but the Tribunal allowed it.The core question in both cases is whether the loss incurred in an unregistered partnership, which has not been assessed, can be set off against the income from other sources. The judgment clarifies that under the Income Tax Act, an assessee is assessable for business carried on by him and his share of profits or losses from a firm, whether registered or unregistered. The total income is computed after making deductions, allowances, or set-offs as provided under the Act. The relevant provisions are sections 16(1)(b), 23(5), and 24(1).2. The applicability of sections 16(1)(b), 23(5), and 24(1) of the Indian Income Tax Act in determining the set-off of losses from an unregistered partnership:Section 16(1)(b) states that a partner's share of profit or loss in a firm should be included in computing the total income of the assessee. Section 23(5) differentiates between registered and unregistered firms for tax purposes. Section 24(1) allows an assessee to set off losses from one source of income against profits from another source. The second proviso to section 24(1) specifies that losses from an unregistered firm not assessed under section 23(5)(b) can only be set off against the income of the firm and not against the income of the partners.The judgment emphasizes that there is no difference in the computation of taxable income between a registered and an unregistered firm. The income of a firm is computed as a unit, and the distinction arises only after the total income is computed. If the firm is unregistered, the tax is collected from the firm itself, whereas for a registered firm, the tax is collected from the partners individually. The judgment also highlights that an unregistered firm is assessed as a distinct entity, and the tax it pays is in discharge of its own liability.The judgment refers to the Supreme Court's decision in Seth Jamnadas Daga v. Commissioner of Income Tax, which held that a partner's share of profits in an unregistered firm should be included in his total income for determining the applicable tax rate. It also cites the Bombay High Court's decision in J.C. Thakkar v. Commissioner of Income Tax, which held that the profits of an unregistered firm should be included in the partner's total income even if the firm was not assessed to tax. The Bombay High Court's decision in Jadavji Narsidas and Co. v. Commissioner of Income Tax further supports the view that a partner can claim a set-off for his share of losses in an unregistered firm even if the firm has not been assessed.The judgment concludes that the Income Tax Officer cannot deprive the assessee of the advantage of claiming a set-off for losses in an unregistered firm by not assessing the firm. Therefore, the assessee's share of loss from an unregistered partnership can be set off against his income from other sources.Conclusion:The court answered the question in both references affirmatively, allowing the set-off of the assessee's share of losses from unregistered partnerships against their income from other sources. The references were ordered with costs in R.C. No. 1 of 1960.