COMMISSIONER OF INCOME-TAX VS KISHAN GOPAL SHITAL PARSHAD, 2000 PTD-PUNJAB-AND-HARYANA-HIGH-COURT-INDIA 2460 (1997)

Income-tax---

----Loss---Firm---Carry forward and set off of loss---Loss incurred when firm was unregistered---Subsequent registration of firm---Loss can be carried forward and set-off---Indian Income Tax Act, 1961, S.77.

If an unregistered firm becomes a registered firm in the subsequent years, the loss. incurred by the unregistered firm can be carried forward in the subsequent years in spite of the registration. One of the pre-requisites for doing this, is that the firm should be same. If there is a change in the constitution of the firm, then, different consequences may follow. The word "firm" used at the end of section 77(1) of the Income Tax Act, 1961, would include 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.

CIT (Addl.)v. B. S. Dall Mills (1981) 131 ITR 111 (Kar.) and CIT v. Sunil Theatre (1989) 177 ITR 558 (P&H) fol.

R. P. Sawhney, Senior Advocate and S. K. Sharma for the Commissioner.

Nemo for the Assessee.

JUDGMENT

ASHOK BHAN, J.---At the instance of the Revenue, the following two questions of law have been referred to this Court by the Income-tax Appellate Tribunal, Delhi Bench "B", New Delhi (hereinafter referred to as "the Tribunal"), for opinion:---

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Income-tax Officer to carry out the rectification under section 154?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee-firm was entitled to carry forward the loss of the unregistered firm to be set off against the income of the registered firm in year in which the firm earns income?"

The assessee, a firm, was assessed as an unregistered firm for the previous year relevant to the assessment year 1972-73. Assessment was framed on August 30, 1974, at a loss, which was computed and determined by the Income-tax Officer at Rs.79,100. For the previous year relevant to assessment year, 1973-74, the firm filed a return showing loss of Rs.48,155 and claimed registration under section 185 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The firm was granted registration and loss was determined at Rs.47,788.

After completion of the assessment, the assessee found that the loss of Rs.79,100 for the assessment year 1972-73 had not been carried forward by the Income-tax Officer to be set off in future years against the income of the firm. The assessee filed an application on August 12, 1977, under section 154 of the Act pointing out that under the provisions of section 77(1) of the Act the loss determined for the earlier year should have been 'carried forward by the Income-tax Officer and as the same had not been done there was a mistake apparent from record which required to be rectified.

The Income-tax Officer rejected the application filed by the assessee under section 154 of the Act on the ground that under section 77(1) of the Act, the loss of the unregistered firm could be carried forward and set off against the income of an unregistered firm. As the firm had been granted registration for the assessment year 1973-74, the loss of the unregistered firm could not be carried forward and set off against the income of the registered firm. The assessee filed an appeal against this order before the Appellate Assistant Commissioner who agreed with the view taken by the Income-tax Officer and dismissed the assessee's appeal.

Aggrieved against the order of the Appellate Assistant Commissioner, the assessee filed a second appeal before the Tribunal, which was accepted. It was held that the assessee-firm was entitled to carry forward the loss of the unregistered firm to be set off against the income of the registered firm in the year in which the firm earned income. A further direction was given by the Tribunal to the Income-tax Officer to carry out the rectification in terms of the order passed by the Tribunal.

Thereafter, on an application filed by the Revenue under section 256(1) of Act, two questions of law, reproduced in the earlier part of the judgment, have been referred to - this Court by the Tribunal for its opinion.

Question No.2 regarding entitlement to carry forward the loss of unregistered firm to be set off against income of the registered firm in the year in which it earned income, stands concluded by a Division Bench judgment of this Court in CIT v. Sunil Theatre (1989) 177 ITR 558, against the Department and in favour of the assessee. While answering a similar question, it was held (page 559):

"The decision in B. S. D all Mills' case (1981) 131 ITR 111 (Kar.) is on all fours in favour of assessee, and, therefore, question that arises is whether it lays down correct law. After considering the provisions of section 77(1) of the Act and other relevant provisions, we are of the opinion that the Karnataka High Court has come to the correct conclusion on the interpretation of section 77(I) of the Act, that if an unregistered firm becomes a registered firm in the subsequent years, the loss incurred by the unregistered firm can be carried forward in the subsequent years in spite of the registration. One of the prerequisites for doing this is that the firm should be same. If there is a change in the Constitution of the firm, then, different consequences may flow. Here, there is no change in the constitution of the firm, and, therefore, the word 'firm' used at the end of section 77(I) of the Act would include 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. Accordingly, we agree with the view taken by the Karnataka High Court and hold that carry forward was rightly allowed and? the referred question is decided in favour of the assessee, that is, in the affirmative, with no order as to costs."

In view of the aforesaid decision of this Court in Sunil Theatre's case (1989) 177 ITR 558, question No.2 is answered in the affirmative, i.e., against the Revenue and in favour of the assessee.

Question No. 1 to carry out rectification, to give effect to the order of the Tribunal, being consequential, is also answered in the affirmative, i.e., against the Revenue and in favour of the assessee.

M.B.A./4120/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.