Income-tax---

----Loss---Carry forward and set off ---Assessee, partner in three firms S, J and K---All firms carrying on same business of extraction of resin---Firm K also doing business of plying of trucks---Would not take away nature of primary business of extraction of resin---Firms S and J closed down---Loss incurred by assessee in firms S and J---Can be carried forward and set off against income of assessee as partner in firm K in next year---Indian Income Tax Act, 1961, S.72.

The petitioner was a partner in three firms S, J and K. All the three firms in which the petitioner was a partner carried on the business of exploitation of specified forests and extraction of resin.' However, the business of plying of trucks was also carried on by the third firm, K. The petitioner incurred a loss of Rs.4,680 in firm, S, in the assessment year 1976-77, a loss of Rs.45,113 in firm J, and a loss of Rs.12,600 in firm K. The first two firms, S and J, were closed down with effect from March 31, 1976, and were not in existence after the assessment year 1976-77. The petitioner claimed carry forward and set off of loss under section 72 of the Income Tax Act, 1961 in the two firms, S and J, which had closed down their business, against the income which the petitioner derived as a partner from the third firm K, on the ground that firm K continued the business of exploitation of forests taken on lease for extraction of resin. The Assessing Officer disallowed the claim of set off of the carried forward loss on the ground that after the firms, S and J, had closed down their businesses, there was no continuation of the business in the assessment year 1977-78 and whatever business was being done by firm K, was in respect of plying of trucks and that was the firm which remained in existence in the next year. On a writ petition challenging the order of the Assessing Officer:

Held, that since the petitioner was carrying on the business of exploitation of forests by tapping of resin in the three firms, discontinuance of business in the two firms S and J and continuation of the same in the third firm K, would entitle the assessee to claim set off of unabsorbed loss from the two firms S and J. The business in the third firm K, was not different in the next assessment year, though there was also an additional source of income through plying of trucks. The primary condition which required to be fulfilled stood fulfilled as the petitioner was carrying on the business of the same type through the third partnership firm K. If the third firm K, derived income from plying of trucks also, that would not take away the nature of the primary business. Therefore, the unabsorbed loss of Rs.49,793 in firms S and J, could be set off against the income of the petitioner as partner in firm K, in the next year.

B. R. Ltd. v. V. P. Gupta, CIT (1978) 113 ITR 647 (SC); CIT v. Ahmed Hussain (S.S.M.) (1987) 164 ITR 525 (Mad.); CIT v. Bharat Nidhi Ltd. (1966) 60 ITR 520 (Punj.); CIT v. Dharma Reddy (A.) (1969) 73 ITR 751 (SC); Joshi (M.R.) (HUF) v. CIT (1979) 118 ITR 11 (Bom.) and Standard Refinery and Distillery Ltd. v. CIT (1971) 79 ITR 9 (SC) ref.

Ramesh Kumar for Petitioner.

R. P. Sawhney, Senior Advocate and Mahavir Ahlawat for Respondents.

JUDGMENT

This is a petition under Article 226/227 of the Constitution, seeking setting aside of the order, dated March 15, 1980, passed by the Assessing Officer and the order January 19, 1982, passed by the Commissioner of Income-tax, under section 264 of the Income Tax Act, 1961, (for short "the Act").

The petitioner was an individual assessee under the Income-tax Act. He claimed carry forward of the loss under section 72 of the Act, in two firms, namely, Sham Lal Guran Diwaya & Co., Jammu, and Jagdish Ram Sud & Co., in which he was a partner. The petitioner was also a partner in a third partnership firm, Kishan Chand & Company. All the three firms in which the petitioner happened to be a partner carried on the business of the exploitation of specified forests and extraction of resin. However, the business of plying of trucks was also carried on in the third firm, Kishan Chand & Company. There were ten partners in the firm, Sham Lal Guran Diwaya & Company, under the partnership deed, dated May 6, 1974. There were eight partners in the second firm, Jagdish Ram & Co., under the partnership deed dated October 28, 1975. The petitioner incurred a loss of Rs.4,680 in the firm, Sham Lal Guran Diwaya & Co., Jammu, in the assessment year 1976-77, a loss of Rs.45,113 in Jagdish Ram Sud & Company and a loss of Rs.12,600 in Kishan Chand & Company. The first two firms, namely, Sham Lal Guran Diwaya & Co. and Jagdish Ram Sud & Company, were closed with effect from March 31, 1976, and were not in existence after the assessment year 1976-77, The petitioner claimed set off of the losses in the two firms, which had closed down their business against the income which the petitioner derived as a partner from the third firm, namely, Kishan Chand & Company, on the ground that the third firm contemned the business of the exploitation of forests taken on lease for extraction of resin. Since the business in all the three firms related. to the exploitation of forests and extraction of resin, the petitioner s plea was that the business was in fact continuing in the assessment year 1977-78 through the third firm, Kishan Chand & Company.

The Assessing Officer disallowed the claim of set off of the carried forward loss on the ground that after the two firms had closed down their business, there was no continuation of business in the next assessment year 1977-78. Whatever business was being done in the third firm, Kishan Chand & Company that was also in respect of plying of trucks and that was the firm which remained to existence in the next year. Since no real business of the exploitation of forests was actually done, the Assessing Officer took the view that in the absence of continuation of business, the assessee was not entitled to claim set off of the losses of the two firms in terms of section 72 of the Act. Unabsorbed carried forward loss can be set off against the future profits of any business carried on by the assessee provided the business, in which the-loss was computed, continued to be carried on by the assessee in the next year. Merely because the petitioner was a common partner in the three firms, that will not make him entitled to claim set off of the unabsorbed ` losses of the other two firms which had discontinued the business.

There is no dispute about the fact that the petitioner happened to be a partner in the three firms during the assessment year 1976-77. He, however, continued to be a partner in the firm, Kishan Chand & Company, in the next assessment year and wanted set off of the unabsorbed losses of the other two firms against the profit derived by him as a partner from the third firm. The real test under section 72 of the Act was whether there was any interconnection, interlacing, interdependence in the business of the three firms and the profit must accrue to the assessee from the same business in the next year. All the three firms in which the petitioner was a partner carried on the same business, namely, exploitation of forests and extraction of resin. The third firm, Kishan Chand & Company, however, derived income from plying trucks also. But there is no denial of the petitioner's assertion that tapping of resin and exploitation of forests continued to be the business of the third firm in the next year besides the additional business of plying trucks. If the third firm derived income from plying of trucks also, that would not take away the nature of the primary business.

This High Court had an occasion to examine the question of set off of carried forward loss in CIT v. Bharat Nidhi Limited (1966) 60 ITR 520, That was a case where the assessee had dropped the business of banking but continued to carry on the business of money lending, financing and purchase and sale of securities. The assessee had claimed set off of the losses incurred in the earlier years m the banking business. It was held that, even after the banking business was terminated, the assessee had derived income from other sources in the subsequent period and, therefore, the assessee was entitled to claim set off of the losses. The balance sheet of the assessee showed that, even after the assessee had dropped its banking business, it maintained its capital with its assets, made realisations and discharged its liabilities, retained its staff and continued to incur legal expenses in connection with its business. It would be, thus, clear from the view taken in the aforesaid case that, if any part of the business is discontinued, the assessee, is entitled to claim set off of the unabsorbed losses of the earlier year incurred in the discontinued business against the profit earned from the remaining business.

In CIT, v. A. Dharma Reddy (1969) 73 ITR 751, the Supreme Court was considering a case where an assessee had sustained loss in a firm. He claimed set off of the loss against his share of income of another firm for the next assessment year. It wad held that, since the assessee carried on the business of bidi leaves apart from the other business in a partnership, he could claim set off because he was carrying on the business in bidi leaves in partnership with others. His business in bidi leaves would not come to an end so long as he continued to do that business either individually or in partnership with others. It was seen that the business of the assessee consisted of dealing or taking of contracts in bidi leaves and did not depend on the constitution of a partnership through which it was carried on, nor could it come to an end so long as the assessee carried on the same course of activity. The business in which the loss had been sustained had been dissolved as also the partnership firm, but the assessee continued to carry on the business in partnership with three others during the next assessment year. Since he did not stop doing that business, he was held to be entitled to set off his share of the unabsorbed loss brought forward from the earlier year. In the case in hand, the assessee undoubtedly was a partner in the three firms, two of which had closed down their business and the third firm continued with the business. All the three firms were doing the business of extraction of resin: Therefore, the plea of the assessee that the conditions of section 72 of the Act had been fulfilled by him, carries much force.

In Standard Refinery and Distillery Ltd. v. Cit, (1971) 79 ITR 9 (SC), it has been held by the Supreme Court that, for allowing set off of the carried forward losses, it must be seen whether two lines of business constitute the "same business" within the meaning of section 24(2) of the Indian Income-tax Act, 1922. It was held that the income-tax authorities must consider the interconnection, interlacing, interdependence and- unity furnished by the existence of common management, common business organisation, common administration, common fund anal a common place of business.

The question of set off of the unabsorbed loss again came to be examined by the Supreme Court in B. R. Ltd. v. V: P. Gupta, CIT (1978) 113 ITR 647. That was a case where the appellant-company had incurred a loss in the business of import and sale of fabrics in the assessment year 1953-54. It closed the business towards the end of the year and had started the business of exporting cotton textiles from the commencement of the next year which earned profits in the business in that year and subsequent years. The company's claim to set off the carried forward loss under section 24(2) of the Indian Income-tax Act, 1922, was allowed on the ground that, in view of the common management and common control 6f the business, the appellant was entitled to carry forward the loss in the import business and set it off against the profits of the export business of the subsequent years.

It would, thus, be clear from the principles laid down by the Supreme Court that the set off is allowed if the assessee carries on the same business in future. In the case in hand, the assessee is undisputedly carrying on the business through another firm and, therefore, for all intents and purposes, the assessee is continuing his business in extraction of resin and exploitation of forests.

The Bombay High Court in M. R. Joshi (HUF) v. CIT (1979) 118 ITR 11, had also an occasion to examine a case where the assessee was a partner in two firms and both the firms were carrying on film exhibition business. One firm was dissolved due to losses. There was a common manager and co-ordination in management between the two firms, since the same business was in existence, the share of loss in the dissolved firm was allowed to be carried forward and set off against the share of profits in the other firm for the subsequent year.

In CIT v. S. S. M. Ahmed Hussain (1987) 164 ITR 525, the Madras High Court has also examined the case of an assessee regarding carrying forward and set off of loss in the light of the principles laid down by the Supreme Court. The test of interconnection, interlacing or interdependence and unity was examined and it was held that loss in one line of business could be set off against the profits earned in the business carried on in a future year. It was noticed that there was a composite business of the assessee and merely because he had ceased to carry on the activity of purchase and sale of National Defence Remittance Scheme Certificates, it could not be held that he had ceased to carry on the business which he was originally carrying on in the earlier assessment year.

Since the petitioner was carrying on the business of exploitation of forests by tapping of resin in the three firms discontinuance of business in the two firms and continuation of the same in the third firm would entitle the assessee to claim set off of unabsorbed loss from the two firms. The business in the third firm was not different in the next assessment year, though there was also an additional source of income through plying of trucks. The primary condition, required to be fulfilled, stood fulfilled as the petitioner was carrying on the business of the same type through the third partnership firm.

It has also been argued by learned counsel for the assessee that, in the case of Jagdish Ram Sud as an assessee, losses incurred in the two firms were allowed to be set off against the profits from the third firm on the ground that Jagdish Ram Sud continued to be a partner in Kishan Chand & Company in the next year. This fact has not been controverted by the respondent except that an incorrect set off allowed to a partner could not be treated to be a legally allowable claim in the case of the present petitioner. The petitioner's plea, thus, finds force that the Assessing Officer has allowed set of the unabsorbed loss in the case of one partner, namely, Jagdish Ram Sud, but he disallowed the claim of set off in the case of the petitioner, Kishan Chand.

In the result, the writ petition succeeds and the unabsorbed loss of Rs.49,793 incurred in the two firms is held to be allowable by way of set off against the income of the petitioner in the next year. No Costs.

M.B.A./4040/FCPetition accepted.