Case: H.D.Devasia & Co., Kerala Vs. Commissioner Of Income Tax, Kerala

UNTWALIA J. 1. These six appeals have been heard together as a common question of law in relation to the assessment of the same assessee arises in them. Civil Appeals Nos. 2716-2718 of 1972 relate to the assessment years 1964-65, 1965-66 and 1966-67. The assessee-appellant is a registered firm carrying on business at several places in the State of Kerala. Apart from its regular trade in various commodities, the assessee was also carrying on a business in speculation. Apropos the speculation business of the assessee the ITO determined a loss of Rs. 40, 510, a loss of Rs. 598 and a profit of Rs. 1, 36, 264 for the assessment years 1964-65, 1965-66 and 1966-67, respectively In apportioning the assessees income amongst its partners under s. 67 of the I.T. Act, 1961, hereinafter referred to as " the Act ", he also apportioned the losses in speculation business in the two assessment years 1964-65 and 1965-66. The profit in speculation business as computed for the assessment year 1966-67 was also apportioned by the ITO amongst the partners. The assessee contended before the ITO that the losses in the speculation business could not be apportioned between the partners but should be carried forward and set off against the profit in the said business made in the assessment year 1966-67. The ITO rejected this contention. But the AAC in appeal, following the decision of this court in CIT v. Kantilal Nathuchand Sami [1967] 63 ITR 318 ; [1967] 1 SCR 813 , accepted the assessees stand. The department took the matter in second appeal before the Income-tax Appellate Tribunal. The Tribunal pointed out the distinction between the provisions of s. 24 of the Indian I.T. Act, 1922, under which the case of Kantilal Nathuchand Sami had been decided and those of ss. 73 and 75 of the 1961 Act. It, therefore, allowed the departments appeal. On being asked by the assessee to state a case and make a reference to the High Court, the Tribunal referred the following question of law for its opinion" Whether, on the facts and in the circumstances of the case and on a true interpretation of the various provisions of the Income-tax Act, 1961, the Tribunal was correct in holding that a registered firm was not entitled to have its losses in speculation business carried forward for set off against future profits in speculation business ? "2. The High Court of Kerala on a consideration of the relevant provisions of the Act contained in Chap. VI has answered the reference in favour of the revenue and against the assessee. The decision of the High Court is reported in M. O. Devassia & Co. v. CIT [1973] 90 ITR 525 (Ker) . Civil Appeals Nos. 2716 to 2718 of 1972 have been filed in this court by special leave. 3. Identical questions arose in respect of the assessment years 1967-68, 1968-69 and 1969-70. The High Court answered the references made in respect of those three years also against the assessee by its judgment and order dated the 24th May, 1977. Civil Appeals Nos. 365 to 367 of 1978 have been preferred from the said decision of the High Court 4. In the case of Kantilal Nathuchand [1967] 63 ITR 318 (SC), the question for consideration was whether on a true interpretation of the various provisions of the Indian I.T. Act, 1922, speculation losses of the assessee-firm for the assessment years 1958-59 and 1959-60 should be set off against its speculation profit in its assessment for the assessment year 1960-61. The provisions contained in s. 24(1) and the two provisos appended thereto were not very clear and some apparent conflict arose between the first and the second provisos. On a consideration of the same, this court held that speculation losses of a registered firm kept apart under the first proviso to s. 24(1) in computing its total income for one year could not be apportioned between the partners, and the registered firm could claim to carry forward such losses and have it set off against speculation profits of the firm of a later year in accordance with s. 24(2)But the provisions of law contained in Chap. VI of the Act have made a considerable departure from the corresponding provisions of the 1922 Act. In these cases, we are only concerned with the question of set off of speculation losses against the profits of any other speculation business. In this connection, it would suffice to read only the relevant provisions of ss. 73 and 75 as they stood at the relevant time. They are as follows :--" 73. Losses in speculation business.-- (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business (2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and-- (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assesssment year ; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on...... " " 75. Losses of registered firms.- (1) Where the assessee is a registered firm, any loss which cannot be set off against any other income 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 and carried forward for set off under sections 70, 71, 72, 73 and 74 (2) Nothing contained in sub-section (1) of section 72, sub-section (2) of section 73 or sub-section (1) of section 74 shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid sections. " 5. On reading the above provisions of s. 73, it is manifest that the assessees loss in speculation business cannot be set off except against profits and gains, if any, of another speculation business. For the purposes of set off it is permissible to carry forward the losses to the following assessment year or years subject to the limit of 8 years as provided in sub-s. (4) of 73. But it is to be noticed that the provision contained in sub-s. (2) is " subject to the other provisions of this Chapter ", which includes s. 75. In the latter section, it is clearly provided that where the assessee is a registered firm, for the purpose of set off and carry forward of the loss apportionment between the partners of the firm has got to be made and they alone are entitled to have the amount of the loss set off and carried forward for set off under s. 73. The matter is put beyond any pale of doubt and challenge in sub-s. (2) of s. 75 when it says that nothing contained in sub-s. (2) of s. 73 shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of s. 73(2). The Tribunal and the High Court, therefore, were right in holding that the ratio of the decision of this court in Kantilal Nathuchands case [1967] 63 ITR 318 (SC) cannot be applied in respect of the assessments made under the Act. Identical views have been expressed by the High Court of Gujarat in CIT v. Dhanji Shamji [1974] 97 ITR 173 and the High Court of Punjab and Haryana in Choudhary Cotton Ginning and Pressing Factory v. CIT [1977] 109 ITR 6. 6.

Decision reasoning: 0[ds]But the provisions of law contained in Chap. VI of the Act have made a considerable departure from the corresponding provisions of the 1922 Act. In these cases, we are only concerned with the question of set off of speculation losses against the profits of any other speculation businessOn reading the above provisions of s. 73, it is manifest that the assessees loss in speculation business cannot be set off except against profits and gains, if any, of another speculation business. For the purposes of set off it is permissible to carry forward the losses to the following assessment year or years subject to the limit of 8 years as provided in sub-s. (4) of 73. But it is to be noticed that the provision contained in sub-s. (2) is " subject to the other provisions of this Chapter ", which includes s. 75. In the latter section, it is clearly provided that where the assessee is a registered firm, for the purpose of set off and carry forward of the loss apportionment between the partners of the firm has got to be made and they alone are entitled to have the amount of the loss set off and carried forward for set off under s. 73. The matter is put beyond any pale of doubt and challenge in sub-s. (2) of s. 75 when it says that nothing contained in sub-s. (2) of s. 73 shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of s. 73(2). The Tribunal and the High Court, therefore, were right in holding that the ratio of the decision of this court in Kantilal Nathuchands case [1967] 63 ITR 318 (SC) cannot be applied in respect of the assessments made under the Act. Identical views have been expressed by the High Court of Gujarat in CIT v. Dhanji Shamji [1974] 97 ITR 173     and the High Court of Punjab and Haryana in Choudhary Cotton Ginning and Pressing Factory v. CIT [1977] 109 ITR 6.