Appeal No 545 of 1961
Appeal from the judgment and order dated October 23 1958 of the Bombay High Court in Income tax Reference No 23 of 1958
K N Rajagopal Sastri and R N Sachthey for the appellant
Purushottam Trikamdas section N Andley Rameshwar Nath and P L Vohra for the respondent
611 1962
October 12
The following judgments were delivered
The judgment of Kapur and Hidayatullah jj was delivered by Hidayatullah J Sarkar J delivered a separate judgment
HIDAYATULLAH J This is an appeal by the Commissioner of Income tax Bombay against the judgment and order of the High Court of Bombay dated October 23 1958 by which the High Court answered two questions referred to it under section 66 2 of the Income tax Act in favour of the respondent jadavji Narsidas  Co The High Court certified this case as fit for appeal to the Supreme Court and hence this appeal
The facts are simple
The year of account is the section Y 2001 corresponding to October 10 1944 to November 4 1945 and the assessment year is 1946 47
The respondent is a firm consisting of four partners and was registered under section 26A of the Income tax Act for the relevant year
The assessee firm carries on business which is mainly speculation
In the year of account it claimed inter alia a loss of Rs 105641 which it was said arose in speculation in a venture of the assessee firm with one Damji Laxmidas
This venture was carried on in the name of Damji Laxmidas on behalf of an alleged firm in which Damji was said to have a share of 6 and the assessee firm the balance
A deed of partnership dated November 14 1944 was also produced before the Income tax Officer
The sum of Rs 105641 represented half the losses of the joint venture the other half being claimed by Damji in his own individual assess ment
The so called firm of Damji Laxmidas and the assessee firm was an unregistered one
The Income tax Officer
 Bombay disallowed these losses and added back this amount along with some others to convert a loss of Rs 55931 declared by the assessee firm into a profit of Rs 188575
This profit was carried by him in accordance with the share of the partners into their individual assessment
612 In the assessment of Damji it may be stated here the loss was not allowed on the ground that having arisen in an unregistered partnership it could only be considered in the assessment of the unregistered partnership
In rejecting the evidence of the loss of Rs 105641 in the assessment of the assessee firm the Income tax Officer gave three reasons i that the ankdas were in the name of Damji Laxmidas and not in the name of the unregistered firm or the assessee firm ii that the assessee firm claimed only 18 of the losses and riot 10 according to its share and iii that the assessee firm which was a well known firm doing extensive business was said surprisingly enough to have entered into a partnership wit an insignificant person like Damji Laxmidas to carry on this vast business
He held that the assessee firm had purchased these losses from Damji Laxmandas to be able to set them off against its profits to avoid tax
The Appellate Assistant Commissioner dismissed the appeal filed by the assessee firm and so also the Appellate Tribunal
The two members of the Appellate Tribunal gave different reasons
The judicial Member Mr A R Aggarwal observed So far as the last item No 3 is concerned we are not satisfied that really the loss of Rs 105641 was the loss of the assessee
It is admitted by the assessee that the ankdas are in the name of Damji Laxmidas
By no evi dence we are satisfied sic that really the assessee did business in the joint account
Consequently this claim of the assessee is disallowed
 The Accountant Member Mr P C Malhotra observed  I agree with my learned brother in the order which he has passed
I would however like to add a few words
It is not even the assessee s case that loss of Rs 105641 was suffered by it
613 According to the assessee it did some joint venture transactions with Damji Laxmidas
Damji Laxmidas came in appeal to the Tribunal in respect of his share of the loss
It was held that the loss arising to a person in a joint venture cannot be allowed in his personal assessment as the loss is suffered by an unregistered partnership
It can only be carried forward in the account of the unregistered firm
 The assessee firm applied to the Tribunal asking that a case be stated to the High Court but failed
The assessee firm then moved the High Court under section 66 2 of the Income tax Act and under the High Court s direction the Tribunal stated a case on the following questions 1 Whether there was any legal admissible evidence to justify the Tribunal s finding that the transaction in question was not the transaction of the assessee
2 If not whether the assessee can claim the set off of such loss although it is the loss of an unregistered partnership
 The first question arises out of the observations of the judicial Member and the second question from those of the Accountant Member
The High Court answered both the questions against the Department
It held that there was no legal admissible evidence to justify the finding that the transactions in question were not those of the assessee firm and further that the assessee firm could claim a set off in respect of the share of loss in the unregistered firm if the Income tax Authorities do not proceed to determine the losses of the unregistered firm and do not bring it to tax as permitted by section 235b
 On the first question the appellant argues that the High Court has decided the case as an Appeal 614 Court which it was not entitled to do
This is not a true representation of what the High Court did
Whenever the question propounded is whether there is any material on which a finding can be given the discussion savors of an appellate approach but it is not so
The High Court noticed that the Tribunal had picked up only one reason from the order of the Income tax Officer and held that the assessee firm had  purchased losses from Damji Laxmidas but said nothing about the other reasons which had influenced the Income tax Officer
The High Court however examined all the reasons given by the Income tax Officer and reached the conclusion that there was no evidence to justify the finding which had been given in the case
Before examining the evidence ourselves to see which conclusion is justified we wish to make a few general observations
In a reference under section 66 a finding given by the Tribunal is considered final and the High Court accepts it without examination of the material
The High Court does not hear an appeal but answers certain questions of law in the light of the facts proved
If a finding is final in this way one does expect that the reasons for reaching it will at least be stated with sufficient fullness to inform all concerned what they were
Even if the reasons given by an inferior Tribunal are not restated at least a general approval of them or such of them as are acceptable should appear
In the present case all that is stated is It is admitted by the assessee that the ankdas are in the name of Damji Laxmidas
By no evidence we are satisfied sic that really the assessee did business in the joint account
 This by itself is hardly a fair disposal of the question whether the assessee firm did business in a joint account with one Damji Laxmidas
The solitary ground for rejecting the claim is too indefinite to 615 warrant this conclusion
It is contended that we should take into account also the reasons given by the Income tax Officer which were before the Income tax Tribunal and which have also been mentioned in the statement of the case
The High Court did so and we allowed those reasons to be brought before us
We would however have preferred if the order of the Tribunal in the appeal filed by the assessee firm had even briefly expressed their approval of those reasons and not left them to be mentioned in the statement of the case
The question then is whether there was evidence to justify the Tribunal s finding that the transactions with Damji Laxmidas were not the transactions of the assessee firm
In such an inquiry the Court looks not to the sufficiency of the evidence but whether any evidence exists at all
Even if there be slight evidence which was believed by the Tribunal and on which the conclusion can be rested such question must be answered in the affirmative
But the finding must not proceed upon conjecture suspicion or surmise
If there is not a scintilla of evidence the finding cannot be sustained because the proved facts would not then support the inference
In this connection the Income tax Officer gave three reasons
The most important of which being the ankdas were in the name of Damji
According to the deed of partnership which has been produced in the case the four partners of the assessee firm and Damji had entered into a partner ship to do business together specifying the shares of the partners of the assessee firm which shares inter se are in the same proportion as their interest in the assessee firm
The new firm was not given a trade name
This is no doubt an unusual feature
But if no name was given then business could be carried can only in the name or names of one or more partners
That Damji s name was chosen and not any other does not lead to the inference that business was not done If Damji s 616 name was used then it is reasonably clear that the ankdas would be in his name and that is how the matter stood
The next reason is that the losses were claimed on the basis of half and half by the assessee firm and Damji in their respective assessments contrary to the proportion of 10 and 6 as in the deed
What ever may be said of the losses claimed by Damji which were in excess of the agreed share the same cannot be said of the assessee firm which is claiming a share of losses which is less than the a greed rate
But sometimes additional responsibility is shouldered by a partner because of some action taken by him not meeting with the approval of the others
Often enough the shares are readjusted by agreement
There may be many reasons why the loss claimed by the assessee firm was less than what it could have really claimed but this hardly leads to the inference that no business was done
This circumstance also does not lead to the inference which has been drawn from it
The third reason is that it is unlikely that the partners of a big firm like the assessee firm would enter into an agreement with a comparatively small  man for doing such vast business
It is pointed out that Damji had at no time paid Income tax in excess of Rs
1300
The accounts of the new partnership have been exhibited in the case
They show a long course of business
The total business done was to the tune of Rs 9 lacs odd
As speculative business is made up almost always of either loss or profit we should also look to the extent of the profits made and not merely the losses
In this case but for one or two transactions which miscarried Damji would have made a huge profit
It is possible that he was chosen as a partner In view of his acumen in these matters rather than his ability to finance the projects
This is not to say that buying of losses  is not common or that men of straw are not taken on as partners to give up 617 their losses to equalise profits elsewhere
The fact remains as pointed out by the High Court that losses can only be bought if they have been incurred and in the present case there is a long course of business which at certain stages was profitable though ultimately it showed a loss
it is impossible to say in this case that the assessee firm took over losses without actually having done business in company with Damji
There is no foundation whatever for the inference that the losses were purchased by the assessee firm from Damji whether we take the reasons given by the Income tax Officer individually or collectively
We are of the opinion that the High Court did not exceed its powers in examining the evidence in support of the inference of the Income tax Officer that no business was done in company with Damji but the assessee firm took over some of his losses
The answer of the High Court to the first question is therefore upheld
This brings us to the second question and it is whether the assessee firm can set off the loss of Rs 105641 against its other profits from its other business The High Court has held that it can do so
In our opinion and we say it with great respect the High Court was in error in reaching this conclusion
To begin with the assessee firm as a firm could not enter into a partnership with Damji
Damji could be admitted into the assessee firm or the members of the assessee firm could enter into a partnership with Damji in their individual capacity
The assessee firm however could not do so as a firm
This was held by this Court in Dulichand vs Commissioner of Income tax1
There was thus a partnership between Damji and the four members of the assessee firm acting for themselves and indeed the deed which has been produced in this case shows as much
In the affairs of the unregistered firm the assessee firm had no locus standi
There were thus two distinct 1 618 partnerships
One was the assessee firm which was registered COnsisting of four partners and the second was an unregistered firm consisting of five partners of whom the fifth was Damji
The provisions which bear upon the question are many and need not be set out at length
The gist of the relevant sections will be stated by us in this judgment
Under section 241 an assessee sustaining a loss of profits in any year under any of the heads mentioned in section 6 is entitled to have the amount of the loss set off against his income profits or gains under any other head in that year
From April 1 1953 loss sustained in speculative transactions can only be set off against profits arising in the same kind of business
In the present case both the profits of the assessee firm and the loss in the transactions with Damji arose out of speculation and no difficulty arises
By assessee in the section is meant the person by whom tax is paid and in every instance it is necessary to find out who that assessee is
In this case the assessee is a registered firm of four partners and these partners did business resulting in profits as members of the assessee firm and also as members of another unregistered firm which led to a loss
Now the assessment of firms is done differently accordingly as they are registered or unregistered
Section 23 5 states that when the assessee is a firm the total income of the firm must be assessed but if the firm is a registered firm the tax payable by the firm is not to be determined but the total income is to be carried to the assessment of the partners in accordance with their shares and the profits or losses as the case may be must be assessed as part of their other income
But when the assessee is an unregis tered firm the assessment is of the firm itself unless the Income tax Officer finds that by assessing the unregistered firm as a registered firm more tax is likely to result
The assessment otherwise is of the unregistered firm and not of the partners in their 619 private assessment
This is the gist of the rule contained in the fifth sub section of section 23
There are however other provisions which must also be noticed
The first provision to notice is section 16 1 b which says that when the assessee is a partner of a firm then whether the firm has made a profit or loss his share whether a net profit or a net loss is to be computed in the stated manner and if his share so computed is a loss such loss may be set off or carried forward and set off in accordance with the provisions of section 24
Section 24 then provides for the set off of the loss as well as the carrying forward of the loss
The second proviso deals with the question of set off in relation to both registered and unregistered firm
It says that when the assessee is an unregistered firm not assessed as a registered firm the loss can only be set off against the income
 profits and gains of the firm and not those of partners but if the assessee is a registered firm the loss which cannot be set off against the income profits and gains of the firm shall be apportioned among the partners and they alone shall be entitled to have the amount of loss set off under the section
Shortly stated the losses incurred by an unregistered firm can be set off only against its own profits while the net losses of a registered firm are apportioned among the shareholders and they alone are entitled to set them off
Then come the provisions with regard to the carrying forward of the losses under section 24 2
Here also there is a difference between registered and unregistered firms
The difference continues the distinction made by the proviso to sub section
1 which we have just noticed
Proviso c deals with a registered firm and partners in unregistered firms in the same manner as the proviso to sub section
1 above analysed
It says that a a registered firm is not entitled to carry forward and set off any loss apportioned between the partners and b partners in unregistered firms assessed as such are likewise not entitled to carry forward and set off against their own income losses sustained by the firm
An unregistered firm assessed as a registered firm comes under a above
What then is the position here  The unregistered firm has not been assessed
The assessee firm alone has been assessed and on its own assessment it has shown a profit
It seeks to set off against its profits a loss of Rs 105641 which it is said was incurred by it in partnership with Damji
We have shown above that there can be no partnership between the assessee firm and Damji
There was however a partnership between Damji and the four partners of the assessee firm in their individual capacity 
Now under section 24 1 2nd Proviso the losses of the unregis tered firm of Damji and these four partners can only be set off against the income profits and gains of the unregistered firm and not those of its partners
The loss of Rs 105641 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
The High Court was thus in error in holding that those losses could be set off against the income of the assessee firm
It makes no difference that the Department has not assessed the unregistered firm or taken action under section 23 5 b
What the High Court has ordered just cannot be done as it is against the provisions of section 24
Whether the partners in their individual assessments would be able to take advantage of section 16 1 b and the decision of the Privy Council in Arunachalam Chettiar vs Income tax Commissioner 1 a point almost conceded before us is not a matter on which we need pronounce our opinion
That question does not arise for our consideration
The answer of 1 1936 L R 63 I A 233
621 the High Court to the second question is set aside and the question is answered in the negative
In view of the equal success parties will bear their own costs here and in the High Court
SARKAR
 J The respondent a firm registered under the Income tax Act 1922 claimed in its assessment to that tax for the year 1946 47 a set off for a sum of Rs 105641 as its share of the loss of another partnership said to exist between it and one Damji Laxmidas and which for convenience I will call the bigger partnership
The Income tax Officer refused to allow the set off on the ground that the existence of the bigger partnership had not been established
The respondent firm s appeals first to the Appellate Commissioner and then to the Appellate Tribunal from the order of the Income tax Officer failed
Thereafter pursuant to an order obtained by the respondent firm from the High Court of Bombay two questions were referred by the Tribunal to that Court for decision
Both these questions were
answered by the High Court against the Department and the Commissioner of Income tax has thereupon filed the present appeal
The first of these questions is Whether there was any legal admissible evidence to justify the Tribunal s finding that the transaction in question was not the transaction of the assessee
Now it has been held by this Court in Dulichand Lakshminarayan vs The Commissioner of Income tax Nagpur 1 that eta firm as such is not entitled to enter into partnership with another firm or individuals
The respondent firm therefore as a firm could not in law have entered into any partnership with Damji
It would hence be to no purpose to enquire whether there was evidence to justify the finding that such a partnership existed or in other words to enquire whether the evidence showed that an agreement of partnership 11956 SCR 154163
622 which in law could not be made had in fact been made
That which the law does not recognise does not for a court of law exist
I think therefore that the first question does not really arise and no answer to it need be given
The second question which was referred to the High Court was If not whether the assessee can claim the set off of such loss although it is the loss of an unregistered partnership As framed this question is posed only if the first question is answered in the negative
As in my view the first question does not arise at all I will consider this question independently of the first
The High Court  s answer to this question was that the respondent firm can claim the set off and this answer was based on the assumption that a partnership between a firm and an individual is permissible an assumption which must be held to be unwarranted in view of the decision in Dulichand s case1 It must be held that no partnership in which the respondent firm as such is a partner exists
If the partnership does not exist the respondent firm cannot have suffered any loss as a partner in it and there is therefore no loss for which it can claim a set off
The sections of the Act dealing with set off would not justify a set off in such circumstances
Thus under section 10 an assessee is entitled to set off the loss incurred by him in one business against the profits made by him in another business  see Anglo French Textile Co Ltd vs Commissioner of Income tax 2
It is hardly necessary to point out that in the case of a single business its profits can only be ascertained after its losses have been taken into account
If this also is to be called a set off I suppose it may also be justified under section 10
It is clear that the set off contemplated by this section is of a loss suffered by the assessee himself
That is not the position in the present case
The assessee the respondent firm has no interest in the bigger partnership 1 1956 section C R 154 163
2 453 623 and therefore no concern with its losses
Sub section 1 of section 24 also provides for set off by an assessee of a loss suffered by him under one head of income against the profits earned by him under another head
This section would not assist the respondent firm or the same reason as in the case of 10 and also because it applies when two heads of income are being considered while in the present case we have only one head of income namely business
The second proviso to sub sec
1 of section 24 provides for certain rights of set off in the case of assessment of unregistered and registered firms
That part of this proviso which deals with an unregistered firm cannot obviously apply to the present case which is one of the assessment of registered firm
The other part of the proviso dealing with a registered firm would not assist the respondent firm either though it is a registered firm because the right of set off that it gives is only to the partners of a registered firm and not to the registered firm itself and in the present case we are not concerned with a claim of set off by any partners of the respondent firm
No other section of the Act dealing with set off has been brought to our notice
The second question should therefore be answered in the negative
Strickly speaking this question also does not arise
As the bigger partnership does not exist no question of its being registered or otherwise can arise
Learned counsel for the respondent firm however contended that the bigger partnership was really between Damji and the partners of the respondent firm
I will assume that to have been so
It may be that in such a case the individual partners of the respondent firm in their respective assessments may claim a set off of their shares of the loss of the bigger partnership but with such assessments of individual partners this case is not concerned
The question here is whether the respondent firm can claim a set 624 off in its own assessment
I venture to say that it does not follow that because the partners of the respondent firm may in their individual assessments be able to claim the set off the respondent firm itself can do so they are different assessees each with a separate and independent right of set off
One cannot claim a set off basing such claim on the other s right to it But it was said that in the present case the real assessees were the partners of the respondent
I am entirely unable to accept that contention
Section 235 of the Act contemplates a registered firm as an assessee though it did not have to pay any tax itself as the law stood prior to April 1 1956
The whole proceedings in the present case have been conducted on the basis that the respondent firm was the assessee
The questions raised in this case were framed on that basis and we are not called upon by them to say whether the partners of the respondent firm had any right of  set off
The assessees in the present case were not the partners of the respondent firm
If they were we would have found the respective incomes of the individual partners from other sources being considered but this was not what had happened
It seems to me to be impossible to contend in the present case that the assessees were the partners of the respondent firm
I would allow the appeal with costs here and below
By COURT  In view of the opinion of the majority the answer of the High Court to the first question is upheld and the answer to the second question is set aside
The parties will bear their own costs here and in the High Court


Summary:
The respondent a firm consisting of four partners was registered under the Indian Income tax Act 1922
For the assessment year 1946 47 it claimed to set off a sum of Rs 105641 as its share of the loss in respect of certain transactions said to have been carried on in the name of D by another partnership between it and D which was not registered
The income tax authorities rejected the claim and the Appellate Tribunal agreed with their decision on the grounds 1 that it being admitted that the ankdas were in the name of D there was no satisfactory evidence that the assessee did business in the joint account and 2 that in any case the assessee could not claim the set off as the loss was suffered by an unregistered firm
610 On a reference the High Court held 1 that there was no legal admissible evidence to justify the Tribunal s finding that the transactions in question were not those of the assessee and 2 that the assessee firm could claim a set off in respect of the share of loss in the unregistered firm if the income tax authorities did not proceed to determine the losses of the unregistered firm and did not bring it to tax as permitted by section 23 5 b
 Held that the High Court erred in its view that the asses see firm could claim a set off in respect of the loss incurred in the unregistered firm
Held further per Kapur and Hidayatullah
JJ  1 that if under section 66 of the Indian Income tax Act 1922 a finding given by the Appellate Tribunal is to be considered final it is necessary that the reasons for reaching it should be stated by the Tribunal with sufficient fullness to inform all concerned what they are
2 that there could not be a partnership between D and the registered firm
If there was a partnership it was between D and the four partners of the assessee firm in their individual capacity and under the provisions of section 24 of the Act the loss of Rs 105641 could not be set off against the profits of the registered firm
Per Sarkar J
In view of the decision in Dulichand Laksh minarayan vs The Commissioner of Income tax Nagpur 1956 section C R 154 that a firm as such is not entitled to enter into partnership with another firm or individuals the assessee firm could not in law enter into partnership with D and the questions answered by the High Court did not really arise in the present case