Carry-forward of business loss after firm reconstitution excludes loss shares attributable to retired partners.

Where the constitution of a firm changes, carry-forward of business loss under Section 24(2) of the Indian Income-tax Act, 1922 is limited by the proviso. Clause (c) governs a partner's set-off of the firm's loss against personal income, while clause (e) separately applies to carry-forward and set-off by a firm after a change in constitution. The clauses operate independently, and Section 26(1) treats the firm as constituted at the time of assessment as the relevant unit, including unregistered firms. Accordingly, the loss carried forward belongs only to the firm as newly constituted and excludes the shares attributable to retired partners.

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Issues: Whether, on a change in the constitution of an unregistered firm, the firm could carry forward the whole of its business loss including the shares attributable to the retired partners.

Analysis: Section 24(2) of the Indian Income-tax Act, 1922 permits carry-forward of business loss, but the right is controlled by the proviso. Clause (c) of the proviso governs the position of a partner in an unregistered firm seeking to set off the firm's loss against his own income, whereas clause (e) specifically addresses the carry-forward and set-off of loss by a firm where there has been a change in constitution. The clauses operate in different fields and are independent. Section 26(1) supports the view that, after a change in constitution, assessment is made on the firm as constituted at the time of assessment, and for that purpose a change in constitution results in a new firm for assessment purposes. The expression "firm" in clause (e) includes both registered and unregistered firms.

Conclusion: The assessee, an unregistered firm, was not entitled to carry forward the whole of the loss including the shares of the two retired partners.

Final Conclusion: The statutory scheme allowed carry-forward only of the loss attributable to the continuing firm after the change in constitution, and not the portion referable to the retired partners.

Ratio Decidendi: Where the constitution of a firm changes, clause (e) of the proviso to Section 24(2) of the Indian Income-tax Act, 1922 limits carry-forward of loss to the firm as newly constituted and excludes the proportion of loss attributable to retired partners.

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