Additional Commissioner of Income Tax vs Shri B.S. Dall Mills

M. Rama Jois, J.—The Appellate Tribunal, Hyderabad Bench, has referred the following two questions for the opinion of this Court u/s 256(1) of the income tax Act, 1961 (hereinafter referred to as "the Act"): 1. Whether the Appellate Tribunal in law was right in holding that the loss suffered by the assessee in assessment year 1966-67 when it was assessed as an unregistered firm should be carried forward and added into the loss incurred by the assessee-firm in 1967-68 in which year it was assessed as registered firm and that such resultant increased loss should be divided between the partners?

Whether on facts and circumstances of the case and in law, the Appellate Tribunal was right in directing that the loss incurred by the assessee in assessment year 1966-67 in which year it was assessed as an unregistered firm should be carried forward and set off against the profits of the assessee-firm in assessment year 1967-68 even though the assessee-firm had not made any profit in the assessment year 1967-68?

Briefly, the facts of the case as set out in the statement of case are as follows: The assessee-firm is engaged in the manufacture and sale of dals and the trade in pulses. During the assessment year 1966-67, the assessee-firm consisted of five partners. It was assessed as an unregistered firm. It had incurred a loss of Rs. 51,482. During the assessment year 1967-68 a change had occurred in the constitution of the firm. The assessee-firm consisted of only four partners. It was assessed as a registered firm. During this assessment year also the business of the assessee resulted in a loss of Rs. 7,200. Out of the loss of Rs. 51,482 incurred during the assessment year 1966-67, the proportionate loss of the continuing partners was worked out in terms of section 78 of the Act. It was Rs. 23,167. In the assessment order, the ITO did not make any mention about the carry forward of the loss of the assessment year 1966-67. In the appeal preferred before the AAC, the assessee contended that the loss of the firm of Rs. 23,167, during the assessment year 1966-67 when it was unregistered firm, should have been carried forward for the assessment year 1967-68 in terms of sub-section (1) of section 77 of the Act. This plea was rejected by the AAC. Aggrieved by the said order, the assessee preferred second appeal before the Tribunal. The Tribunal accepted the plea of the assessee and held that, under sub-section (1) of section 77, there could be no objection to the carry forward of the loss of the earlier year of the assessee-firm to the extent of the share of the continuing partners, to the assessment year 1967-68. Thereafter at the instance of the revenue, the two questions set out first have been referred for the opinion of this Court. 2. At the outset we must observe that the second question and the last part of the first question relating to apportionment of the loss between the partners do not arise out of the order of the Tribunal. There is no direction in the order of the Tribunal that the loss of the unregistered firm for the assessment year 1966-67 should also be apportioned between the partners. There was also no question of set off as the firm did not earn any profit for the assessment year 1967-68. Therefore, we confine ourselves only to the first question excluding its later part which relates to the apportionment among the partners.

Shri S.R. Rajashekhara Murthy, learned counsel for the revenue, contended that, under sub-section (1) of section 77, the loss incurred by an unregistered firm during an assessment year could be carried forward only if the status of the firm continues to be that of an unregistered firm during the subsequent assessment year or years, as the case might be. He submitted that the wording of the sub-section is clear and no exception could be taken to the said position and, therefore, the view taken to the contrary by the Tribunal is erroneous.

Sub-section (1) of section 77 reads as follows:

Where the assessee is an unregistered firm which has not been assessed as a registered firm under the provisions of clause (b) of section 183, any loss of the firm shall be set off or carried forward and set off only against the income of the firm.

The wording of above sub-section is clear and unambiguous. It provides that in cases where the assessee is an unregistered firm and which had not been assessed as a registered firm and u/s 183(6) of the Act, any loss which had been incurred by the firm shall be set off or carried forward and set off only against the income of the firm. Two conditions to permit carry forward and set off of loss which are implicit in section 77(1) are : (i) the loss of the firm must be during the period when it was assessed as an unregistered firm; and (ii) the benefit of set off of loss or carry forward and set off of loss is available only against the income of the firm.

The sub-section does not say that such set off or carry forward and set off of loss would be available if only or so long, the firm is assessed as an "unregistered firm". The benefit of set off of loss or carry forward and set off of loss incurred by a firm during the year when it was assessed as an unregistered firm, is permitted by the section even if it is assessed as a registered firm during subsequent years. In other words, the firm, which is entitled to the benefit is one and the same though its status may differ for purposes of assessment in view of the special provisions incorporated in the Act as applicable to a firm assessed as an unregistered firm or as a registered firm, as the case may be. Therefore, there is nothing in the wording of sub-section (1) of section 77 to warrant the construction suggested for the revenue to the effect that once a firm which had been assessed as an unregistered firm in a given year is assessed as a registered firm during any subsequent year, it loses the right to the carry forward of the loss, if any, incurred during the earlier year.

The Tribunal in coming to the conclusion that the assessee-firm which had been assessed as an unregistered firm during the assessment year 1966-67 and as a registered firm during the assessment year 1967-68 was entitled to the carry forward of the proportionate losses of the assessment years 1966-67 to 1967-68 had relied on the decision of the Kerala High Court in Excel Productions Vs. Commissioner of Income Tax, Kerala, The firm concerned in that case had been assessed as an unregistered firm in the earlier year and as a registered firm in the subsequent year. It had suffered loss in the earlier year, but had secured profits in the later year. The question for consideration was whether the loss of the previous year could be carried forward and set off against the income earned by the firm as a registered firm during the subsequent year. The Kerala High Court held that under subsection (2) of section 24 of the Indian income tax Act, 1922, such carry forward and set off of the loss of the firm during the period when it was unregistered against the profit of the firm in the subsequent year when it was assessed as a registered firm was permissible. The wording of sub-section (1) of section 77 being similar, the same interpretation, with which we respectfully agree, holds good to the said provision also. From the view that carry forward of loss incurred by a firm during the period when it was unregistered against the income earned by it after it got registered is permitted by section 77(1), it follows that carry forward has to be permitted whether the firm incurs loss or profit in the subsequent year, subject however to section 78(1) in the case of change in the constitution of the firm and subsection (3) of section 72 which prescribes that no carry forward shall be permitted beyond eight years. In the result, we hold that the view taken by the Tribunal is correct. For the reasons, our answer to the first question, as confined by us, in the affirmative.