Appeal No 516 of 1959
Appeal from the judgment and order dated September 3 1957 of the Bombay High Court in Income tax Reference No 49 of 1957
JM Thakar section N Andley J B Dadachanji Rameshwar Nath and P L Vohra for the appellants
A N Kripal and D Gupta for the respondent
December 12
The Judgment of the Court was delivered by HIDAYATULLAH J
The three appellants appeal against the judgment and order of the High Court of Bombay answering in the affirmative the following question Whether the share income of the assessees from the unregistered firm which is separately taxed namely Rs 26110 can be set off against their share loss from registered firms namely Rs 13167 The facts are as follows Two of the appellants are 176 brothers and the third appellant is the widow of a third brother who died during the pendency of the appeal after certificate had been granted by the High Court
The three brothers were partners in two registered firms and one other firm which was unregistered
The assessment years for the purposes of the appeal are 1948 49 and 1949 50
For the assessment year 1948 49 the income of the three brothers was the same and it was as follows From registered firms 
Rs 11902 loss 1265 loss Total loss Rs 13167 Income from the unregistered firm Rs 26110 profit Other income Rs 262 The income of the unregistered firm was taxed on the firm and not in the hands of the partners as was possible under the provisions of cl
b of sub section
5 of section 23
In assessing the amount of Rs 262 the Income tax Officer first determined the total income of each of the appellants by setting off their share of the profits of the unregistered firm against their share of the loss of the registered firms
The appellants contended that inasmuch as tax had already been assessed on the unregistered firm this could not be done and that as there was loss in the business of the registered firms no tax was demandable on Rs 262
They also contended that they were entitled to carry forward the loss amounting to Rs 12905 to the succeeding year under section 242 of the Income tax Act
These contentions were not accepted by the Income tax Officer to whose order it is not necessary to refer in detail
The assessment for the assessment year 1949 50 was also done on similar lines
The appeal to the Appellate Assistant Commissioner was unsuccessful and six appeals were taken to the Tribunal by the three appellants three for each assessment year
These appeals were disposed of by a common order
The Tribunal held relying upon the second proviso to section 241 that just as loss in an unregistered firm could not be set off against profits 177 from a registered firm under that proviso the profits in an unregistered firm could not be set off against the loss from a registered firm
It relied upon a decision of the Madras High Court in Commissioner of Income tax vs Ratanshi Bhavanji 1 which it purported to follow in preference to a decision of the Punjab High Court in Banka Mal Niranjandas vs Commissioner of Income tax 2
The same reasoning was applied to the assessment year 1949 50 and in the result all the six appeals were allowed
The order of the Tribunal involved in addition to the point set out above certain other questions which were asked by the assessees to be referred to the High Court for decision under section 661
The Commissioner also asked for a reference in respect of the decision substance whereof has been set out above
The Tribunal referred two questions at the instance of the assessees and one question which we have already quoted at the instance of the Commissioner
In the High Court the assessees abandoned the two questions and the High Court accordingly expressed its opinion in the judgment and order under appeal on the remaining question
The High Court differed from the decision of the Tribunal and held that the profit from the unregistered firm could be set off against the losses from the registered firms to find out the rate applicable to Rs 262 which was other income of the assessees
The High Court also held that the assessees could not carry forward the loss of the registered firms to the following year because such loss must be deemed to have been absorbed in the profits of the unregistered firm
It however certified the case as fit for appeal to this Court and the present appeal has been filed
In our opinion the High Court correctly answered the question referred to it but was in error in holding that the losses of the registered firms could not be carried forward because they must be deemed to have been absorbed in the profits of the unregistered firm
Inasmuch as we substantially agree with the High 1 2 23 178 Court on the first part of the case it is not necessary to examine closely or in detail the reasons on which the decision of the High Court proceeds
In our opinion the matter is simple and can be stated within a narrow compass
Under section 3 of the Income tax Act income tax is chargeable for an assessment year at rate or rates prescribed by an annual Act in respect of the total income of the previous year
Section 14 2a before its amendment in 1956 provided that the tax shall not be payable by an assessee if a partner of an unregistered firm in respect of any portion of his share in the profits and gains of the firm computed in the manner laid down in cl
b of sub section
1 of section 16 on which the tax had already been paid by the firm
The section thus gave immunity from tax to the share of the assessee as a partner in an unregistered firm in respect of the share of profits received by him from the unregistered firm and on which the unregistered firm had already been taxed
Section 161a however provided that in computing the total income of an assessee any sum exempted under sub section
2 of section 14 shall be included
The combined effect of those two sections was stated by the High Court to be that although the share of a partner in the profits of an unregistered firm is exempt from tax it is included in his total income for the purpose of rate only
 We agree that this is a correct analysis
The Tribunal relied upon the second proviso to section 241 which read as follows Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause b of sub section 5 of section 23  any such loss shall be set off only against the income profits and gains of the firm and not against the income profits and gains of any of the partners of the said firm and where the assessee is a registered firm any loss which cannot be set off against other income profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section
 179 The Tribunal came to the conclusion that  just as a partner in an unregistered firm which has suffered loss will not be allowed to set off his share loss in the unregistered firm against his income from any other source so it stands to reason that his loss from other sources cannot also be set off against his share income from an unregistered firm
 The decision of the Tribunal was not based upon any specific provision of the Income tax Act but upon a parity of reasoning by which a specific provision about loss was held to apply the other way round also
The High Court correctly pointed out that all that section 14 subs
2 did was to save the profits of an unregistered firm from liability to tax in the hands of the partners
It did not affect the computation of the total income to determine the rate applicable under section 3 in the light of section 161a
Indeed section 161a clearly provided that any sum exempt under section 142 was to be included in computing the total income of an assessee and in view of this specific provision the converse of the second proviso to section 241 which we have quoted above hardly applied
To this extent the order of the Tribunal was incorrect
The error was pointed out by the High Court and the question thus raised was properly decided
We see no reason to differ from the High Court on this part of the case
The question however arose before the High Court as to whether in view of this decision the assessees could carry forward loss from the registered firms in the subsequent year or years
The High Court came to the conclusion that they could not carry forward the loss
Indeed the Tribunal had earlier stated that if the profits from the unregistered firm were to be set off against the losses of the registered firms such losses would not be carried forward to the following year and that would be contrary to section 24
The High Court rejected this ground in dealing with the question as to the rate applicable to the other income and pointed out and in our view rightly that under sections 142 and 161a the profits and losses had to be set off against each other to find out the total income
180 The High Court however held that once losses were set off against profits they were to that extent absorbed and that there was nothing to carry forward
This conclusion does not follow
Section 24 provides for a different situation altogether it provides for the carrying forward of a loss in business to the subsequent year or years till the loss is absorbed in profits or till it cannot be carried forward any further
That has little to do with the manner in which the total income of an assessee has to be determined for the purpose of finding out the rate applicable to his income taxable in the year of assessment
To read the provisions of sections 142 and 161a in this extended manner would be to nullify in certain cases section 24 altogether
Neither is such an intention expressed nor can it be implied
In our opinion though the decision of the High Court on the main issue and on one aspect of the question posed for its opinion was correct it was in error in deciding that the losses of the registered firms could not be carried forward because they had been absorbed by the profits of the unregistered firm
To this extent the judgment and order of the High Court will stand modified
Subject to that modification the appeal will be dismissed
In the circumstances of the case there will be no order as to costs
Appeal dismissed with modification


Summary:
The appellants were partners of two registered firms and another firm which was unregistered
Their profit and loss for the assessment year 1948 49 were as follows From registered firms Rs 11902 loss 1265 loss total loss Rs 13167
Income from the unregistered firm Rs 26110 profit other income Rs 262
The income of the unregistered firm was taxed on the firm
In assessing the amount of Rs 262 the Income tax Officer first determined the total income of each of the appellants by setting off their share of the profits of the unregistered firm against their share of the loss of the registered firm
The appeal to the Appellate Assistant Commissioner being unsuccessful appeals 175 were taken to the Tribunal which relying on the decisions in Commissioner of Income tax vs Ratanshi Bhavanji 195222 ITR 82 held that just as loss in an unregistered firm could not be set off against profits from a registered firm the profits in an unregistered firm could not be set off against the loss from a registered firm
On a reference being made to it the High Court differed from the decision of the Tribunal and held that the profit from the unregistered firm could be set off against the loss from the registered firms to find out the rate applicable to Rs 262 which was other income of the assessees
The High Court further held that the assessees could not carry forward the loss of the registered firms to the following year because such loss must be deemed to have been absorbed in the profits of the unregistered firm
On appeal with a certificate of the High Court Held that the view of the High Court that under sections 142 and 161a the profit and loss had to be set off against each other to find out the total income and that although the share of a partner in the profits of an unregistered firm is exempt from tax it is included in his total income for the purpose of rate only was correct but the High Court erred in holding that the losses suffered by the registered firms could not be carried forward because they had been absorbed by the profits of the unregistered firm