COMMISSIONER OF INCOME-TAX VS P. B. JAI SINGH, 2000 PTD-ANDHRA-PRADESH-HIGH-COURT-INDIA 3420 (1998)

Income-tax---

----Firm---Unregistered firm---Loss---Carry forward and set-off---Firm assessed as unregistered for assessment year 1973-74 but assessed as registered firm in subsequent years---Loss of unregistered firm can be carried forward and set-off against income of partner of registered firm---Indian Income Tax Act, 1961, Ss.72, 75 & 77(1).

The assessee was a partner of a firm, S, which was assessed at a loss as an unregistered firm for the assessment year 1973-74. For the assessment year 1974-75, the firm S was allowed registration. The assessee claimed that his share of loss from the unregistered firm in the year 1973-74 should be carried forward an set-off against his income from other sources in subsequent years. The Income-tax Officer held that the loss of the unregistered firm could be carried forward and set-off against the income of the partner of a registered firm. The Commissioner of Income-tax under section 263 of the Income Tax Act, 1961, revised the order of the Income-tax Officer and held that the benefit of set-off or carry forward of the unregistered firm's loss was available only against the income of that firm and there was a specific prohibition against the set off of such brought forward loss against the partner's own income from other sources. The Tribunal allowed' the appeal filed by the assessee and set aside the order of the Commissioner of Income-tax. On a reference:

Held, that in view of the specific language mentioned in section 77(1) read with section 75 of the Income Tax Act, 1961, the loss of an unregistered firm can be carried forward and set-off against the income of a partner of a registered firm subject to section 72 of the Act.

CIT (Addl.) v. B.S. Dail Mills (1981) 131 ITR 111 (Kar.); CIT v. Sunil Theatre (1989) 177 ITR 558 (P&H) and Excel Productions v. CIT (1967) 64 ITR 65 (Kar.) fol.

CIT v. Jadavji Narsidas & Co.(1963) 48 ITR (SC) 41; CIT v. Sadhana Nayar (1994) 210 ITR 648 (Bom.) and Todi Paharmal v. CIT (1987) 163 ITR 540 (Raj.) ref.

J.V. Prasad for the Commissioner.

K.V.S. Bhaskar Rao for the Assessee.

JUDGMENT

MS. S. V. MARUTHI, J.---The Tribunal referred the following two questions for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case and in view of the correct interpretation of section 77(2)(b), the share of the loss sustained by the unregistered firm in the assessment year 1973-74 (Sawan Films) can be carried forward and set-off from his income derived from other sources, for the assessment years 1975-76, 1976-77, 1977-78 and 1978-79?

(2) If so, whether the revisionary order of the learned Commissioner of Income-tax, AP-II, dated December 31, 1984, was correctly passed and whether the Tribunal's order can be sustained?"

The facts relevant for the purpose of disposing of this reference case are as follows:

The assessee was a partner of Sawan Films, which was an unregistered firm and had three partners. By the assessment order, dated February 10, 1983, the Income-tax Officer determined the loss sustained by the said unregistered firm at Rs.3,75,528, which he ordered to be carried forward to the assessment year 1974-75. Sawan Films was converted into a registered firm from the assessment year 1974-75 and it continued to be a registered firm in all the subsequent four assessment years. (In the present reference, we are concerned with the assessments for the assessment years 1974-75 to 1978-79). The assessee rectificatory petitions before the Income-tax Officer, when he was seized of the assessment proceedings for 1974-75. As a result of the rectification, the orders, dated October 24, 1983, came into existence. In those orders, the Income-tax Officer held that the amount of loss entitled to be carried forward for the subsequent years was only. Rs.2,02,872, inasmuch as one of the partners in the unregistered firm, namely, Smt. Kuljit Kaur, retired from the firm from the assessment year 1974-75 and hence her share of Rs.1,25,176 cannot be allowed to the registered firm. The Income-tax Officer further found that the assessee was having only 1/4th share in the registered firm and, therefore, the amount of loss, which can be allowed to be carried forward in his hands should be determined at Rs.50,718. In other words, the Income-tax Officer held that the loss of the firm can be carried forward and set-off against the income of the partners.

The Commissioner of Income-tax felt that the benefit of set-off or carry forward of the unregistered firm's loss is available only against the income of that firm and there is a specific prohibition against the set-off of such brought forward loss against the partner?s own income from other sources. Therefore, he revised the order of the Income-tax Officer under section 263 of the Income-tax Act.

Against the order of the Commissioner of Income-tax, the assessee filed an appeal before the Tribunal. The Tribunal allowed the appeal and set aside the revisionary orders of the Commissioner of Income-tax. At the instance of the Revenue, the Tribunal referred the two questions set out in the earlier paragraph.

The Tribunal held that the Income-tax Officer, while allowing the carry forward of losses and setting them off against the income of the assessee under other heads in the assessment year 1974-75, has not committed any error and the orders of the Income-tax Officer are not prejudicial to the Revenue and, therefore, the Commissioner of Income-tax has not correctly exercised the power under section 263 of the Income-tax. Act.

The main argument of learned counsel for the Revenue is that the firm was an unregistered firm; that section 77(2)(b) of the Income-tax Act prohibits carry forward of loss of an unregistered firm to be set off against the income of the individual partner and, therefore, the Tribunal committed an error in allowing the loss of the unregistered firm for the year 1973-74 to be carried forward and set off against the income, of the partner for the years 1974-75 to 1978-79. In support of his argument, he relied on the following judgments: CIT v. Jadavji Narsidas & Co. (1963) 48 ITR (SC) 41; Todi Paharmal v. CIT (1987) 163 ITR (Raj.) and CIT v. Sadhana Nayar (1994) 210 ITR 648 (Bom.).

On the other hand, learned counsel for the assessee contended that under section 77(1) of the Income-tax Act, the loss of an unregistered firm can be carried forward and set-off against the income of the firm. Section 77 does not say that it should be set-off against the income of the unregistered firm or registered firm. The expression used is only "a firm". "A firm" includes both registered and unregistered firm. Therefore, the loss of an unregistered firm can be carried forward and set-off against the income of a registered firm. Since under section 75 of the Income-tax Act, the loss of a registered firm can be carried forward and apportioned to a partner of the firm, the loss of the unregistered firm can be carried forward and set-off against the income of the partner of a registered firm. In support of his contention, he relied on the following decisions:

Excel Productions v. CIT (1967) 64 ITR 65 (Ker.); C IT (Add.) v. B.S. Dall Mills (1981) 131 ITR 11 (Kar.) and CIT v. Sunil Theatre (1989) 177 ITR 558 (P&H): -

The question, therefore, is whether the loss of an unregistered firm can be carried forward and set-off against the income of a partner of a registered firm.

The undisputed facts are that Sawan Films originally consisted of three partners. One of the partners retired. The partnership existed for 1973-74. For the year 1974-75, there was a change in the constitution of the firm, as one of the partners retired and two more partners were inducted. For the assessment year 1974-75, the firm was also registered.

There cannot be any dispute about the argument of learned counsel for the Revenue that in case of loss of an unregistered firm, the loss cannot be carried forward and set-off against the income of the partner of an unregistered firm, as there is a specific prohibition under section 77(2)(b) of. the Act. However, the question with which we are now concerned is whether the loss of an unregistered firm can be carried forward and set-off against the income of a partner of a registered firm. As pointed out by learned counsel for the assessee, section 77(1) does not specifically say whether the set-off can be against the income of the registered firm or unregistered firm. The expression used therein is "firm". Therefore, it includes both registered firm and unregistered firm. In other words, the loss of an unregistered firm can be carried forward and set-off against the income of the registered firm. If it can be set-off against the income of the registered firm, then section 75 comes into picture. According to section 75, the loss can be carried forward and set?off against the income of the partner of registered firm.

We are fortified in our view by the judgment of tie Kerala High Court in Excel Production's case (1967) 64 ITR 65, wherein it was held that the loss incurred by a firm in a previous year when the firm was an unregistered firm can be carried forward and set-off under section 24(2) against the profits of the firm in the following year, even though the firm was registered and is assessed as a registered firm in the following year.

Similar is the view expressed by the Karanataka High Court in B.S. Dall Mills case (1981) 131 ITR 111. It was a case where one of the partners of an unregistered firm retired and, thereafter, the firm was registered. The Karnataka High Court also agreed with the judgment of the Kerala High Court- in Excel Productions' case (1967) 64 ITR 65. In that case, the observations of the Karanataka High Court are as follows (page 115):

"The Kerala High Court held that under subsection (2) of section 24 of the Indian Income-tax Act, 1922, such carry forward and set-off of the loss of the firm during the period when it was unregistered against the profits of the firm in the subsequent year when it was assessed as a registered firm was permissible. The wording of subsection.(1) of section 77 of the Act being similar, the same interpretation, with which we respectfully agree, holds good to the said provision also. From the view that carry forward of loss incurred by a firm during the period when it was unregistered against the income earned by it after ingot registered is permitted by section 77(1) of the Act, it follows that a carry forward has to be permitted whether the firm incurs loss or profit in the subsequent year, subject, however, to section 78(1) in the case of change in the constitution of the firm and subsection (3) of section 72 of the Act which prescribes that no carry forward shall be permitted beyond eight years."

The Punjab and Haryana High Court also expressed a similar view in Sunil Theatre's case (1989) 177 ITR 558. In that case, it was held as follows (headnote):

"On an interpretation of section 77(1) of the Income Tax Act, 1961,. if an unregistered firm becomes a registered firm in the subsequent year, the loss incurred by the unregistered firm can be carried forward in the subsequent year in spite of the registration. One of the prerequisites for going this is that the firm should be the same. If there is a change in the constitution of the firm then, different consequences may follow. Where there is no change in the constitution of the firm, the word 'firm' used at the end of section 77(1) of the Act includes both -a registered as well as an unregistered firm. The registration of the firm does not take away the benefit which would have accrued to it under section 77(1) of the Act if it had remained unregistered. "

Therefore, it follows from the above, that in view of the specific language mentioned under section 77(1) read with section 75 of the Income Tax Act, 1961, the loss of an unregistered firm can be carried forward and set-off against the income of the partner of a registered firm subject to section 72 of the Income-tax Act.

The judgment of the Rajasthan High Court in Todi Paharmal's case (1987) 163 ITR 540 relied upon by learned counsel for the Revenue deals with the cases of carry forward of losses of an unregistered firm and set-off against the income of the partner of the unregistered firm. In view of the specific prohibition under section 77(1)(b) of the Act, the losses cannot be carried forward and set-off against the income of the partner. The judgment' is not relevant to the facts of the present case. Another judgment of the Bombay High Court in Sadhana Nayar's case (1994) 210 ITR 648 relied upon by learned counsel for the Revenue is a similar case and has no relevance to the facts of the present case.

The judgment in Jadavji Narsidas & Co.'s case (1963) 48 ITR (SC) 41 also is not relevant to the facts of the present case. On the facts of that case, it was held (page 49):

"Now under section. 24(1), second proviso, the losses of the unregistered firm of Damji and these four partners can only be set?off against the income, profits and gains of the unregistered firm and riot those of its partners. The loss of Rs.1,05,641 could be set off against the income, profits and gains (if any) of the unregistered firm of five persons and not of the partners. In the same manner .the loss, if not absorbed, could be carried forward to be set-off against further income, profits and gains of the same unregistered firm of five persons ...."

At this stage, it is necessary to refer briefly to the facts of that case: The respondent is a firm registered under the Income-tax Act. It consists of four partners. It carries on business in speculation. It has entered into partnership with an individual for the same business, which is an unregistered partnership. The said partnership sustained loss. It claimed that the said loss should be set-off against the profits earned by it as a firm. Under those circumstances, the Supreme Court made the observations referred to above. The facts of that case are different from the facts on hand. Hence the principle laid down in that case is not applicable to the present case.

In view of the above, we answer the first question in the affirmative and against the Revenue. Further, we answer the second question in the negative and in favour of the assessee. The- reference is answered accordingly.

M.B.A./37/FC? ????????????????????????????????????????????????????????????????????????????????? ?Reference answered.