Case: Commissioner Of Income-Tax, Andhra Pradesh,Hyderabad Vs. A. Dharma Reddy, Morthad

The assessee is an individual whose only sources of income were his shares in several partnership concerns. Apart from the firms which carried on other businesses there were two firms which carried on the business in Bidi leaves. The first was styled as M/s. A. Dharma Reddy, Morthad. The second firm was called A. Dharma Reddy and Co., Ditchpally. The first partnership was dissolved on March 31, 1955 but the second one continued during the assessment year 195657. During the assessment year 1955-56 the assessee sustained a loss of Rs. 30,255 in the first firm. As be was carrying on several other businesses after the necessary set off the total loss sustained by him for that year came to Rs. 24,532. During the assessment year 1956-57 the assessees profit in the second firm was estimated at Rs. 11,853 and his total taxable income was assessed at Rs. 28,758 for that assessment year. As the assessee carried on the business in Bidi leaves during that year he claimed that the loss sustained by him in the previous year viz,, assessment year 1955-56 should be carried forward and set off against his profit in the subsequent year 1956-57 under Sec. 24 (2) (ii) of the Income-tax Act 1922, hereinafter called the "Act".The Income-tax Officer rejected the claim. His view was that the set off could be allowed only if the business, profession or vocation in which loss was originally sustained continued to be carried on by the assessee during the relevant assessment year. According to him the business in which the loss of Rs. 30,255 had been incurred had ceased to exist because of the dissolution of that firm on March 31, 1955. The Appellate Assistant Commissioner in appeal considered the constitution of the two firms.The first consisted of two partners in which originally the loss had occurred and which had ceased to exist in the relevant assessment year. The second firm against whose income the loss was sought to be set off consisted of four partners. Both the firms had filed separate returns and were assessed separately for the assessment year 1955-56. The assessee had admitted in a letter dated September 16, 1960, that the two firms had nothing to do with each other and there was no material to show that the business of the dissolved firm was taken over by the other firm. The Appellate Assistant Commissioner, therefore, came to the conclusion that the business in which the loss was originally sustained could not be said to have continued during the assessment year 1956-57. The assessee took the matter to the Income-tax Appellate Tribunal which upheld the contention of the assessee that the same business of Bidi leaves continued during the assessment year. According to the Tribunal the assessee was carrying on two businesses in Bidi leaves as partner in two different firms. One of these firms was dissolved but he continued to carry on the same business in conjunction with his co-partners in the year under appeal. The High Court disposed of the matter in a fairly simple way. It wasa firm carries on business it is a business carried on by the partners of that firm and the individual partners of the firm are assessed to tax. When the profits of a registered firm are ascertained, the assessee, for the purpose of paying the tax, is not the registered firm, but each partner of the registered firm. In the present case, it was in the business in thebeedileaves that the assessee sustained a loss for the assessment year 1955-56. He carried on the same business in beedi leaves during the accounting year 1955-56 i. e., the assessment year 1956-57 though in partnership with others. Entering into partnership with another in one case and three others in the other case, was only the made of carrying business; but the business is the same business viz., trade it beedi leaves. Section 24 (2) (ii) does not require that the business should be continued to be carried on for the assessment year in question by the same concern or partnership or firm as in the previous year when the loss was originally sustained by the assessee. The only condition prescribed by that clause is that the same business must be continued to be carried on by "him" (the assessee)".

Court's reasoning:
For getting the benefit under that section it was essential that the business in which the loss was sustained should be continued to be carried on for the assessment year in question. This means that the same concern or partnership which carried on the business the previous year should continue to function in the year of assessment.4. There is no warrant for the proposition put forward on behalf of the appellant that in order to get the benefit of Section 24 (2) (ii)of the Act especially after the amendment made by the Finance Act 1955 the, assessee should carry on the same business in the year of assessment. The change in the Language of the provision substituted by the Amending Act is significant and all that the assessee has to show is that the business in which loss was originally sustained continued to be carried on by him in the assessment year. Now, in the present case, the assessee carried on the business in bidi leaves apart from other businesses. This business he was doing in partnership with another person. Nevertheless the business was of taking contracts in respect of or dealing in bidi leaves. This business he could do either individually or in partnership with some one else. If the first partnership was dissolved it did not mean that his business in bidi leaves came to an end so long as he continued to do that business either individually or in partnership with others. During the assessment year in question he was admittedly carrying on that business in partnership with three others. It could well be said that even according to the provisions of Section 24 (2) as they stood before the amendment made by the Finance of 1955 he continued to carry on the same business but for the purpose of the present case it is Section 24 (2) (ii) as it stood after the amendment which is relevant and we fail to see on the plain language of the aforesaid provision how it could be held that the business in which the loss was originally sustained was not continued during the assessment year 1956-57.The word "business" has been defined in Section 2 (4) of the Act as including any trade, commerce or manufacture or any advantage or concern in the nature of trade, commerce or manufacture. These words are of wide import the underlying idea being of continuos exercise of anpointed out by S. R. Das, J., (as he then was) in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, 26 ITR 765  , at p.773= (AIR 1955 SC 176   at p. 181) the word "business" connotes, some real substantial and systematic or organised course of activity or conduct with a set purpose. The systematic or organised course of activity of the assessee, in the present case, consisted of dealings or taking of contract in bidi leaves. That business did not depend on the constitution of a partnership firm through which it was carried on nor could it come to an end so long as the assessee carried on the same systematic or organised course of activity with a set purpose.5. The computation of a partners share in the firms profits is dealt with by Section 16 (1) (b). The proviso thereto lays down that if his share was computed as a loss such loss may be set off or carried forward and set off in accordance with the provision of Section 24. Under Section 23 (5) when the assessee is a registered firm and the total income of the firm has been assessed under subsection (1), (3) or (4) as the case may be, the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year shall be assessed and the sum payable by him on the basis of such assessment shall be determined. There is a proviso which says that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of Section 24.The High Court was right in saying that when the profits of a registered firm are ascertained the assessee for the purpose of paying the tax is not the registered firm but each partner of that firm.firm.7. In our judgment there could be no manner of doubt that the business in which the loss had been sustained by the assessee when he was a partner of the first firm which was dissolved on March 31, 1955, continued to be carried on by him in partnership with three other persons during the assessment year 1956-57, the business, as stated before, being of dealing in or entering into contracts in respect of bidi leaves. The mode in which he carried on the businees in bidi leaves was one of taking other persons as partners. He did not stop doing that business in the assessment year in question.