Crown Hotel, New Delhi vs The Commissioner of Income Tax, Delhi

H.R. Khanna, J.

(1) The following question has been referred to this Court u/s 66(2) of the Indian Income Tax Act 1922 (hereinafter referred to as the Act) in pursuance of an order made by the Court on 16th March, 1965:

"WHETHER on the facts and in the circumstances of the case the loss of Rs. 6,889.00 suffered by the assessed in the assessment year 1955-56 could be carried forward and/or set off against his income of Rs. 17,045.00 determined for the "assessment year 1956-57" ?

(2) The assessed in this case derives income from various sources including hotel as well as race-course betting. During the assessment year 1955-56 he made profit in the hotel business but suffered loss in the business of race-course betting done by him at Delhi in his individual capacity. The assessed was also .a partner in race-course betting business at Bombay and Poona. After setting off the loss in individual race-course betting business at Delhi against the profits earned in other businesses, a net loss of Rs. 6,889.00 was carried forward to the assessment year 1956-57 which is the year under reference. During the assessment year 1956-57, the assessed made a profit of Rs. 22,477.00 in the hotel business. As against that he set off his share of loss amounting to Rs. 5,432.00 suffered by him in the race-course betting business at Bombay and Poona done under the name and style of M/s. Sharif and Manohar. The total income was thus determined to be Rs. 17,045.00. The assessed claimed that the loss of Rs. 6,889.00 brought forward from the earlier year 1955-56 and sustained by him in the race-course betting business done at Delhi in his individual capacity should be set off against the income determined for the previous year. The assessed''s claim in this respect was rejected by the Income Tax Officer. He observed that the brought forward loss from race-course betting business could not be set off against that year''s income as there was no income from this source. The matter then came up in appeal before the Appellate Assistant Commissioner. The Assistant Commissioner held that the race-course betting business was continued during the previous year in partnership with another. The Appellate Assistant Commissioner accordingly came to the conclusion that the assessed was entitled to the set off of the brought forward loss of Rs. 6,889.00 in accordance with the provisions of section 24(2) of the Act. An appeal was filed against the order of the Appellate Assistant Commissioner to the Income Tax Appellate Tribunal. The Tribunal noted that the loss was suffered by the assessed in the race-course betting business at Delhi during the assessment year 1955-56. It was, however, the common case of the parties that no race-course betting business was done by the assessed at Delhi during the year under reference. The only race-course betting business done by the assessed during the year was at Poona and Bombay in partnership under the name and style of Sharif and Manohar. The Tribunal observed that no material had been put forward by the assessed to show that the business done in partnership at Bombay and Poona was continuation of the business done by the assessed in the preceding year in his individual capacity at Delhi ; it being the common ground that the business done at Delhi was not done during the previous year. The tribunal held that since the assessed had not established that the business at Delhi in race-course betting in which the loss had been suffered in 1955- 56 assessment was continued in the previous year, he could not claim the set off thereof under the provisions of section 24(2). On the above facts the question referred to above has been referred to this Court.

(3) We have heard Mr. Bawa on behalf of the assessed and Mr. Kirpal on behalf of the Department and find that the answer to the question referred depends upon the provisions of subsection (2) of section 24 of the Act which reads as under :

"24. Set off of loss in computing aggregate income. (2) Where any assessed 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 assessed had no other head of income shall be carried forward to the following year, and * * * * * (ii) where the loss was sustained by him in any other business, profession or vocation it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year : provided that the business profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; and (iii) if the loss in either case cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on. . . . "

(4) A perusal of the above provision makes it clear that the loss suffered by an assessed in a previous year can be carried forward to the following year if the other conditions mentioned are fulfilled provided that the business profession or vocation in which the loss was originally sustained continued to be carried on by him in that year. It is not disputed that the other conditions in the present case had been fulfilled and the controversy between the parties is whether the business of race-course betting carried on by the assessed in partnership at Bombay and Poona during the assessment year 1956-57 was a continuation of such business done by the assessed in the preceding year at Delhi in his individual capacity. The contention advanced on behalf of the Department is that as the business of race-course betting was carried on in the year in question in partnership with another and the business of race-course betting was carried on in the earlier year by the assessed in his individual capacity, the business of race-course betting in partnership cannot be held to be a continuation of the business of race-course betting in the individual capacity. In our opinion, this contention is not well-founded. The question as to whether a business is continued depends upon the nature and identity of the business and not upon the fact whether the business is carried on in one year in individual capacity and in the other year in partnership with others. If the business is the same, e.g., of race-course betting as in the present case, it would make no difference that the business in the earlier year is carried on by the assessed in his individual capacity and in the following year in partnership with others. Partnership only relates to the mode of business, it does not effect or alter the nature of the business. The emphasis in the section is on the sameness and identity of the business and not on the mode of carrying it on. Likewise it would make no material difference if the business in the earlier year is carried on in one town and in the following year in another town, provided the nature of the business remains the same.

(5) A contention similar to the one now raised on behalf of the Department, was advanced in the case of Narain Singh v. Commissioner of Income Tax and my learned brother sitting with Andley, J., repelled it. In that case the assessed took certain liquor contracts and carried on the business of sale in his individual name in the assessment years 1949-50 and 1950-51 and sustained losses of Rs. 48,619.00 and Rs. 4,892.00 respectively. In the assessment year 1951-52 the assessed with ten other persons took another liquor contract and carried on the business of sale of liquor in partnership. The assessed''s share of profits of the firm came to Rs. 20,414.00. Question arose whether the assessed was entitled to carry forward and set off the losses for the assessment years 1949-50 and 1950-51 against his share of the profits from the registered firm for the assessment year 1951-52. It was held that as the business in all the three years was the sale of liquor, it was the same business within the meaning of section 24(2) of the Act. It was further held that the assessed was entitled to carry forward the losses for the assessment years 1949-50 and 1950-51 and have them set off against his share of the income of the registered firm during the assessment year 1951-52. A similar view was taken by the Andhra Pradesh High Court in the case of Commissioner of Income Tax v. Dharma Reddy Merthad. It was held that section 24(2) of the Act does not require that the business should be continued to be carried on for the assessment year in question by the same concern or firm as in the previous year when the loss was originally sustained by the assessed. The only condition prescribed is that the same business must be continued to be carried on by him during the subsequent year. In that case the assessed was a partner in two firms both of which carried on business in beedi leaves. He incurred a loss in one of the firms which was dissolved in the assessment year 1955-56.

(6) For the assessment year 1956-57 he sought to set off the loss carried forward from the dissolved firm against his share of profits from the other firm. It was held that entering into partnerships was the assessed''s mode of carrying on business but the business was the same, viz., trade in beedi leaves. The business in which loss was sustained was, Therefore, continued and the loss carried forward could be set off.

(7) An appeal was taken to the Supreme Court against the judgment of Andhra Pradesh High Court in Dharma Reddy''s case and the short notes of current cases in Vol.71 of Part 21 of Income Tax Reports indicate that the judgment of the Andhra Pradesh High Court was upheld and the appeal of the Commissioner of Income Tax was dismissed.

S.K. Kapur, J.

(8) I agree. As a result of the above, we decide the question referred to this Court in the affirmative. In the circumstances of the case, we make no order as to costs.