Case: Seth Jamnadas Daga And Others Vs. Commissioner Of Income-Tax, South Bombay

Two of the appellants are 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. 11,902 loss.      1,265 loss.      Total loss Rs.13,167.      Income from the unregistered firm Rs. 26,110 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-sec. (5) of the S. 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. 12,905/- to the succeeding year under S. 24(2) 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.

Court's reasoning:
3. The order of the Tribunal involved, in addition to the point set out above, certain other questions, which were asked by the assesses to be referred to the High Court for decision under S. 66(1). 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 assessee 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 filed4. 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 firm5. Inasmuch as we substantially agree with the High 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 S. 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(2)(a), 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-sec. (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 16(1)(a), however, provided that in computing the total income of an assessee, any sum exempted under sub-sec. (2) of section 14 shall be included. The combined effect of those two sections was stated by the High Court to beIn our opinion, 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 that rate applicable to his income, taxable in the year of assessment. In our opinion, to read the provisions of Ss. 14(2) and 16(1)(a) in this extended manner would be to nullify in certain cases S. 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.