AI Structured Summary
Not yet generated for this judgment
Judgment
Diwan, C.J.—The question in each of these four references has been referred to this court at the instance of the revenue and the question is
similar in each case, namely :
Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to the set-off of speculation loss of Rs. 26,947
determined for the assessment year 1962-63, against speculation profit made in the year under reference ?
The year under reference is different in each of the four cases which are governed by the provisions of the Income Tax Act, 1961, and not by
the provisions of the Indian Income Tax Act, 1922. The assessment years are different in each case and the figure of carried forward loss is
different in each case but the question of law which has been referred is the same, namely, whether a registered firm an carry forward losses
incurred in speculation business and have them set off against profits made in a subsequent year, also from speculation business.
Each of the four assessees in these four references is a registered firm and we will refer to the facts in Income Tax Reference No. 5 of 1971
only by way of illustration. In this reference the assessee is a registered firm. It was also registered in the preceding years. Besides other business
activities, the assessee carried on speculation business. For the year 1962-63, it suffered a loss of Rs. 26,947 in speculation business. In
assessment year 1963-64, the firm made a profit of Rs. 93,598 in speculation and it incurred a loss of Rs. 34,275 in other business. The Income
Tax Officer determined the total income of the assessee for the assessment year 1963-64 at Rs. 59,323, that is, profit made in the year 1963-64,
from speculation less the loss incurred in that same year from his other business. The assessee contended before the Income Tax Officer that the
speculation loss for the contended before the Income Tax Officer that the speculation loss for the year 1962-63, namely, Rs. 26,947, should be
set off against the speculation profit for the year under reference. This plea was rejected by the Income Tax Officer who held that the speculation
profit had to be allocated as per the provisions of the Act amongst the partners. The assessee carried the matter in appeal to the Appellate
Assistant commissioner who dismissed the appeal and upheld the order of the Income Tax Appellate Tribunal and was carried in second appeal
before the Income Tax Appellate Tribunal and the Tribunal held that the provisions under the Income Tax Act, 1961, were analogous to the
provisions of the Indian Income Tax Act, 1922, so far as carry forward and set off of speculation losses were concerned and hence the ratio of the
decision of the Supreme Court in commissioner of Income Tax v. Kantilal Nathuchand Sami applied to this case. The Tribunal, therefore, held that
the speculation loss determined for the year 1962-63 was to be set off against the speculation profit in a subsequent year. The Tribunal, therefore,
allowed the appeal so far as this particular point was concerned. Thereafter, at the instance of the revenue the question we have set out hereinafter,
at the instance of the revenue the question we have set out hereinafter, at the instance of the revenue the question we have set out hereinabove has
been referred to us for our decision.
In order to appreciate the contention which arises in this case, it would be necessary to refer to some of the sections in the 1961 Act and
compare them with similar provisions of the 1922 Act. In the 1961 Act provisions regarding set off and carry forward and set off of losses are to
be found in sections 70 to 80 and u/s 70, an assessee can set off loss from one source against income from another source under the same head of
income. This provision applies to income from any source falling under any head of income other than ""Capital gains"" and if the computed income
shows a loss, the assessee shall be entitled to have the amount of such loss set off against the income under the same head. u/s 71 provision is
made for set off of loss from one head against income from another. Here also the benefit of such set off is available in case of income falling under
any head other than ""Capital gains"" and if in respect of any particular assessment year, the net result of the computation under any head of income
other than ""Capital gains"" is a loss and the assessee has no income under the head ""Capital gains"", he shall, subject to the provisions of Chapter VI,
be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. u/s 72,
provision in made for carry forward and set off of business losses. It is to be borne in mind that sections 70 and 71 apply only to set off of loss in
the same assessment year where as sections 72, 73 and 74 deal with losses in speculation business and losses under the head ""Capital gains"" and
carry forward and set off of losses in any business other than speculation business and it provides that where for any assessment year, the net result
of the computation under the head ""Profit and gains of business or profession"" is a loss to the assessee, not being a loss sustained in a speculation
business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71,
so much of the loss as has not been set off or, where the assessee has income only under the head ""Capital gains"" or where he has no income
under any other head, the whole loss shall, subject to the other provisions of Chapter VI, be carried forward to the following assessment year, and
such carried forward loss can in the subsequent assessment year be set off against the profits and gains, if any, of any business or profession
carried on by him and assessable for that assessment year; provided that the business or profession for which the loss was originally computed
continued to be carried on by him in the previous year relevant for that assessment year. It is to be noticed that under sub-section (3) of section 72,
no loss other than the loss referred to in the proviso to sub-section (1) of section 72 shall be carried forward for more than eight assessment years
immediately succeeding the assessment year for which the loss was first computed. u/s 73 with which we are directly concerned in the present
case, under sub-section (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. Under sub-section (2) of section 73, 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 Chapter VI, be carried forward to the
following assessment year, and it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for
that assessment year; under sub-section (4) of section 73, no such loss can be carried forward for more that eight years immediately succeeding
the assessment year for which the loss was first computed. Similarly, u/s 74, where in respect of any assessment year, the net result of the
computation under the head ""Capital gains"" is a loss, such loss shall, subject to the other provisions of Chapter VI, be dealt with, as mentioned in
clauses (i) and (ii), and here also the loss under the head ""Capital gains"" can be carried forward and set off against the profit occurring under the
head ""Capital gains"" in a subsequent year. A distinction is made between ""profits from short-term capital assets"" and ""profits from capital assets
other than short-term capital assets"" and the carried forward loss has to be set off against the appropriate profits from short-term capital assets and
assets other than short-term capital assets and the carried forward loss from short-term capital assets can be carried forward for eight years and
from capital assets other than short-term capital assets can be carried forward for four assessment years. Then comes section 75 which is the most
material section for the purposes of this judgment and we will reproduce it in full :
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.
We are not concerned with the reference to section 74A which is at present in section 75(1) since that portion was inserted by the Finance Act
of 1972.
(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.
Since we are concerned in each of these four references with assessees which are registered firms, it is not necessary for us to refer to the
provisions of sections 76 and 77 which deal with losses of unregistered firms and how they are to be carried-forward and set-off. u/s 78 provision
is made regarding carrying forward and set off of losses in case of change in constitution of firm or on succession and it is provided that where a
change has occurred in the constitution of a firm, nothing in Chapter VI shall entitle the firm to have carried forward and set off so much of the loss
proportionate to the share of a retired or deceased partner computed in accordance with section 67 as exceeds his share of profits, if any, of the
previous year in the firm, or entitle any partner to the benefit of any portion of the said loss which is not apportionable to him u/s 67.
The scheme u/s 24 of the 1922 Act was slightly different. Section 24 (1) provides that where any assessee sustains a loss of profits or gains in
any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains
under any other head in that year. Section 71 of the 1961 Act corresponds to section 24 (1) of the 1922 Act. But the provisions of section 70 of
the 1961 Act were implicit in the provisions of the 1922 Act, though there is no exact corresponding section in the 1922 Act corresponding to
section 70 of the 1961 Act. Proviso 1 to section 24 (1) of the 1922 Act laid down :
Provided that in computing the profits and gains chargeable under the head ''Profits and gains of business, profession or vocation'', any loss
sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of
profits and gains, if any, in any other business consisting of speculative transactions.
Section 73, sub-section (1) of the 1961 Act corresponds to the first proviso to section 24 (1) of the 1922 Act. The second proviso to sub-
section (1) of section 24 of the 1922 Act, in so far as it is relevant for our purposes, provided that where the assessee is a registered firm any loss
which cannot be set off against other income, profits and gains 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 under the section. Section 75, sub-section (1) of the 1961 Act, corresponds to this portion of the
second proviso to section 24 (1) of the 1922 Act. Section 24 (2) of the 1922 Act dealt with carrying forward and setting off of losses. Sub-
section (2) of section 24 of the 1922 Act provided that where any assessee sustains a loss of profits or gains in any year, being a previous year not
earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and
the loss cannot be 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 other
head of income, shall be carried forward to the following year and then provision is made for set off of carried forward losses in speculative
transactions and losses profits from any business, profession or vocation at the first instance and then to be carried forward. This provision of
section 24 (2) so far as the first clause is concerned corresponds to section 73 of the 1961 Act. Section 75, sub-section (2), corresponds to the
proviso to the clause (c) in section 24 (2) because that clause provided :
Provided that nothing herein contained shall entitle any assessee, being a registered firm, to have carried forward and set off any loss which has
been apportioned between the partners, under the proviso to sub-section (1)........
These then are the comparative provisions but one important thing to be noticed so far as the provisions of the 1922 Act were concerned is that
in the 1922 Act, there was no clear-cut ban that is to be found in section 75(2) of the 1961 Act. Section 75, sub-section (2), prevents an
assessee, which is a registered firm, from having its loss carried forward and set off so far as the loss is from profits and gains of business or
profession other than loss sustained in a speculation business is concerned [section 73, sub-section (1)], losses from speculation business [section
73, sub-section (2)] and losses under the head ""Capital gains"" [section 74, sub-section (1)]. None of these three kinds of losses which are referred
to in sections 72, 73 and 74 by virtue of the clear-cut provisions of sub-section (2) of section 75 when the assessee happens to be a registered
firm. The benefits of the carry forward and set off of the three kinds of losses under the relevant provisions of sections 72, 73 and 74 are available
to all assessees other than registered firms.
It is in the light of this comparison between the provisions of these two Acts and in the light of the departure made by the 1961 Act, from the
scheme of section 24 of 1922 Act that we will now consider the decision of the Supreme court in Commissioner of Income Tax v. Kantilal
Nathuchand Sami. That decision was given the light of the provisions of section 24 of the 1922 Act and the main question that we have to consider
is whether there is any difference between the scheme of section 24 of the 1922 Act and the provisions of the 1961 Act which would indicate that
the ratio of the decision in Commissioner of Income Tax v. Kantilal Nathuchand Sami would not apply to the scheme of the sections in the 1961
Act. We have already noted one material departure from the scheme of 1922 Act and that departure is set out in section 75, sub-section (2), of
the 1961 Act. The Supreme Court held that the expression ""any such loss"" in the first part and ""any loss"" in the second part of the second proviso
to section 24 (1) of the 1922 Act referred to the loss computed for the purpose of the main part of section 24 (1) taken together with the first
proviso thereto and did not comprise within their connotation the loss in speculative business which is not to be taken into account under the first
proviso. The Supreme Court held that speculation loss of a registered firm kept apart under the first proviso to section 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 loss and have it set
off against speculation profits of the firm of a later year in accordance with section 24 (2). We have already referred to the provisions of section 24
and we have pointed out that under the second proviso to section 24 (1), if the assessee was a registered firm, any loss which could not be set off
against other income, profits and gains of the firm were required to be apportioned between the partners of the firm and they alone were entitled to
have the amount of the loss set off u/s 24 (1). Under clause (c) of the proviso to section 24 (2), nothing contained in section 24 (2) was to entitle
any assessee, being a registered firm, to have carried forward and set-off any loss which has been apportioned between the partners, under the
proviso to sub-section (1)"". Therefore, if the loss from a speculation business was not to be apportioned between the partners, then it necessarily
followed that a registered firm was entitled to have carried forward and set-off losses from speculation business in one year against profits from
speculation business in any subsequent year. The connection between the apportionment between the partners and the inability of the registered
firm to carry forward any loss which had been apportioned amongst the partners, is not to be found in the scheme of section 75 of the 1961 Act.
Under the 1922 Act, there was a clear link between the apportionment of the losses amongst partners and the disability or disqualification of a
registered firm to carry forward losses which had been apportioned amongst the partners. In the 1961 Act this link or connection between the two
is not to be found. On the other hand a clear ban is placed by sub-section (2) of section 75 on carrying forward and set off of losses under the
three distinct heads of income from profits other than speculation business (section 72) or losses in speculation business (section 73) and losses
under the head ""Capital gains"" (section 74) when the assessee is a registered firm. It was because of this clear connection between the
apportionment of losses amongst the partners under the second proviso to section 24 (1) of the 1922 Act and the inability or disqualification of a
registered firm to have carried forward and set off losses which had thus been apportioned that the decision of the supreme Court in Commissioner
of Income Tax v. Kantilal Nathuchand Sami was based. That link or connection is no longer to be found and, hence, on this point a new departure
has been made by the 1961 Act from the provisions of section 24 of the 1922 Act. It is because of this departure that we will have to consider the
effect of section 75(2) apart from the decision or without relying upon the decision of commissioner of Income Tax v. Kantilal Nathuchand Sami.
It is true, that Mr. Patel for the assessee, in each of these cases, pointed out to the commentaries on the Income Tax Act. He referred to the
comments that there is very little difference between the provisions of the 1922 Act and the 1961 Act regarding carrying forward and set off of
losses carried forward from previous years. In V. S. Sundaram''s Law of Income Tax in India, tenth edition, volume I, u/s 75, the commentary runs
:
This reproduces in an amplified form, but without any change of substance, part of proviso in old section 24 (2). A registered firm will set off its
own current profits against its current losses and apportion the net loss or gain as the case may be to its partners and then drop out of the picture.
Thereafter, only the partners will be in the picture. They can set off their share of net income or net loss in the firm against their other loss or
income, subject of course to the other provisions in this Chapter and similarly carry forward the unadjusted losses to be set off against other
income in later years.
Sub-section (2) merely expands the significance of the word ''alone'' in sub-section (1). Having apportioned the losses, the firm cannot carry
forward the loss itself. Apportionment under sub-section (1) is obligatory. The firm has no choice.
This sub-section nullified certain rulings which, however, were reversed or disapproved later.
Similarly the commentary on Income Tax Law by Chaturvedi and Pithisaria, 1971 edition, volume I, mentions u/s 75 of the 1961 Act :
Section 75 of the 1961 Act embodies the provisions of the second proviso, latter half, of section 24 (1) and earlier part of proviso (c) to section
24 (2) of the 1922 Act. The changes made are merely of a drafting nature.
In the instant case the Appellate Tribunal in its decision has also proceeded on the footing that there was no departure from the scheme of
sections u/s 24 of the 1922 Act, when the legislature enacted sections 70 to 75 of the 1961 Act. We have already pointed out that there is a vital
difference and, in view of that difference, the decision in Commissioner of Income Tax v. Kantilal Nathuchand Sami cannot be relied upon for the
purpose of interpreting the provisions of section 75.
It is true, as Mr. Patel for each of the assessees in these four references pointed out, a greater burden is likely to be placed on a registered firm
as compared to an unregistered firm when it comes to carrying forward and setting off of losses from previous years. u/s 75(1) each of the losses
under the three distinct heads has to be apportioned amongst the partners as a result of computation of the income of the registered firm for any
particular assessment year and thereafter the partners can carry forward the apportioned loss under the respective heads in accordance with the
provisions of sections 70 to 74 and not the partnership firm. The result would be, as Mr. Patel rightly pointed out, that if in any particular year a
registered firm makes a profit from speculation business, then the assessment in that particular assessment year will be at a higher figure so far as
the firm is concerned because it will not have the benefit of setting off its losses from speculation business from previous years. u/s 75(2) the benefit
of having the loss carried forward and set off against the profits of subsequent years under the provisions of sections 72, 73 and 74, as the case
might be, is not available to a registered firm. Hence, necessarily it will have to pay a higher tax in the particular year in which a registered firm
makes a profit under any of these three heads than the tax that it would have paid if the benefit of having the losses under three distinct heads
carried forward and set off, had been made available to the registered firm. But that is a matter of legislative policy with which we have nothing to
do. We are merely interpreting the sections as they stand and in view of the scheme of sections which we have set out, the only conclusion is that
the provisions of section 75(2) must be applied in the case of all registered firms and the benefit of having the losses carried forward and set off
under the provisions of sections 71, 72 and 73 is not available to a registered firm.
We may point out that u/s 182 which deals with assessment of registered firms, provision is made for assessment of the total income of the
firm. Under sub-section (1), in the case of a registered firm, after assessing the total income of the firm, the Income Tax payable by the firm itself
shall be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.
Under sub-section (2) of section 182, if such share of any partner is a loss it shall be set off against his other income or losses carried forward and
set off in accordance with the provisions of sections 70 to 75. Thus the scheme of sections 70 to 75 is reflected in the assessment of registered
firms by clear provisions of section 182, sub-section (2).
Mr. Patel relied upon the provisions of section 78 and pointed out that carrying forward and setting off of losses in case of change in
constitution of firm or on succession indicates that a registered firm can have its losses carried forward and set off in subsequent years. He relied
upon the following words of section 78(1) in support of his contention :
Where a change has occurred in the constitution of a firm, nothing in this Chapter shall entitle the firm to have carried forward and set off so much
of the loss proportionate to the share of a retired or deceased partner, etc.
He contended that the words ""nothing in this Chapter shall entitle the firm to have carried forward and set off"" indicate that in some cases a firm
which will include a registered firm can have its losses carried forward and set off in subsequent years. In our opinion this contention cannot be
accepted because we have first to read the provisions of Chapter VI to find out which type of firm can have its losses carried forward and set off
and under what circumstances and then we have to examine the non-obstante clause in section 78, namely, ""nothing in this Chapter shall entitle the
firm to have carried-forward and set-off"". It is obvious that it is only an unregistered firm which can have its losses carried forward under certain
circumstances but not a registered firm and the clear ban u/s 75(2) cannot be negatived by implication by the language of section 78(1).
It was also contended by Mr. Patel that under the scheme of section 182, whenever there is a registered firm, there are two distinct assessees,
namely, the registered firm itself and the partners of the registered firm and he contended that sub-section (1) of section 75 deals with one of the
two sets of assessees, namely, the partners, whereas sub-section (2) deals with the other assessee, namely, the registered firm. He contended that
sub-sections (1) and (2) of section 75 are two sides of the same coin, namely, section 75(1) which deals with apportionment of losses amongst the
partners of a registered firm whereas sub-section (2) deals with the registered firm not being able to carry forward losses which have been actually
apportioned between the partners. This argument of Mr. Patel would have been tenable if the 1961 Act had adopted the scheme of the 1922 Act
so far as carrying forward and setting off of losses was concerned. But, since there is a clear departure from the scheme of the 1922 Act in the
provisions of section 75(2), this argument of Mr. Patel cannot be accepted and is, therefore, rejected.
Under these circumstances, in our opinion, the only conclusion which we have reached is that the decision of the Supreme Court in
commissioner of Income Tax v. Kantilal Nathuchand Sami, which interpreted the scheme of section 24 is not applicable to the scheme of sections
70 to 75 and particularly to the provisions of section 75(2). It is, therefore, obvious that a registered firm cannot have its losses from speculation
business in one year carried forward and set off from speculation profits in another year in view of the clear-cut provisions of section 75(2).
We may mention that the Kerala High Court in M. O. Devassia & Co. v. Commissioner of Income Tax also reached the same conclusion as
we have done and it has held that the decision of the Supreme Court in Commissioner of Income Tax v. Kantilal Nathuchand Sami has no
application to an assessment under the provisions of the new Act.
Under these circumstances we answer the question referred to us in each of these four references in the negative and against the assessee. The
assessees in each of these four references will pay the costs of the reference to the Commissioner.