COMMISSIONER OJ!' INCOME-TAX, ANDHRA PRADESH, HYDERABAD versus A. DHARMA REDDY, MORTHAD

COMMISSIONER OJ!' INCOME-TAX, ANDHRA PRADESH, A

HYDERABAD • v. A. DHARMA REDDY, MORTHAD

February 19, 1969 (J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]

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Income-tax Act (11 of 1922). s. 24(2)(ii) as amended in 1955- Loss sustained by a partner in a dissolved firm, if can be set ofi against profit earned in anuther firm in the subsequent year.

The assessee carried on two businesses in Didi leaves as partner in two different firms. The first firm consisted of two partners, and the C second of four; both these firms were assessed to income tax separately and it was admitted that the two finns had nothing to do with each other. The first firm sustained losses and was dissolved. The assessee claimed that the losses sustained by him in the previous year (sustained in the first firm) should be carried forward and set off against his profit in the subsequent year (earned in the second firm) under s. 24 (2) (ii) of the Income-tax Ac~ !922 as the assessee carried on the business in Bidi leaves durin11 that year. The Income-tax Officer rejected the claim, and D his order was upheld by the Appellate Assistant Commissioner. But the Appellate Tribunal accepted the claim and the question was answered by the High Court in the assessee'a favour. The Revenue appealed to this Court and contended that for gettillll the benefit under s. 24(2)(ii) the same concern or partnership which carried on in the previous year would continue to function in the year of assessment.

HELD : The appeal must be dismissed. In order to &Ct the benefit of a. 24(2) (ii) of the Act especially after the amendment made by the Finance Act 1955 it was not necessary that 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 was significant and all that the assessee had to show was that the business in which Joss was originally sustained continued to be carried on by him in the assessment year.

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If the first partnership wa• dissolved it did not mean that his business i• Bidi leaves came to an end so long •• he continued to dp that business either individually or in partnership with -others. During the assessment year in question he was carryina on that business in partnership with three others. According to the provisions of s. 24(2) as they stood be fore the amendment made by the Finance Act of 1955 he continued to carry on the same business but for the purpose of the present case s. G 24(2) (ii) as it stood after the amendment was relevant and on the plain language Of the aforesaid provision the _business in which the loss was originally sustained was continued during the assessment year. The word "business" bas been defined in s. 2( 4) of the Act as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. These words are of wide import the underlying idea being of continuous exercise of an activity. In the pre- sent case, the 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 a,sseuec carried on the aame ryatematic or or1,.'l.niled coune of activity with a set purpose. [786 G--787 CJ

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C.I.T. v. DHARMA REDDY (Grover, J.)

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When the profits of a registered firm are ascertained, the as..,ssee for the purpose of paying tax is not the registered firm but each partner .of that firm. The Identity of the business for the purpose of s. 24(2) (u) does not change by reason of the change in persons who carry on that business since it continues to be carried on by the same individual. A set off for loss which had been carried forward from the earlier years under the provisions of s. 24 would only be available to the individual partner who had suffered the loss and not to the other partners of the firm or the firm. (787 FJ

Narain Swadeshi Weaving Mills v. Comn1issioner of Excess Profits Tax, (1954] 26 I.T.R. 765, 773, Dwarkadas Lee/adhar v. Commissioner of Jncome .. tax,' Kerala, 47 l.T.R. 619, S. Narain Singh v. Cpmmissioner of Income-tax, Delhi, 66 I.T.R. 341 and Sitaram Motirani JGin v. Commis sioner of Income-tax, 43 I.T.R. 405, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1057 of

1966.

Appeal from the judgment and order dated April 17, 1964 of the Andhra Pradesh High Court in Case Referred No. 48 of 1962.

S. Mitra, R. N. Sachthey and B. D. Sharma, for the appellant.

S. T. Desai and K. Jayaram, for the respondent.

The Judgment of the Court was delivered by

Grover, J. This is an appeal by certificate from a judgment of the High Court of Andhra Pradesh answering following question referred to it by the Tribunal. arising out of the assess ment of the assessee for the assessment year 1956-57 in the affir· mative and in his favour :

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"Whether the assessee is entitled under the provi sions of Section 24 ( 2) of the Act to set off his share of unabsorbed loss amounting to Rs. 24,532 from the dissolved firm to M/s. A. Dharma Reddy, Morthad the assessment year 1955-56 brought forward from against his other business income for the assessment year 1956-57."

The assessee is an individual whose only sources of income were his. shares !n sever~ partnership concerns. Apart from the firms which earned 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, Mortbad. The secqod firm was called A: Dharma Reddy & Co., Ditchpally. The first partnership wa> dissolved on March 31, 1955 bUt the second one continued during the assessment year 1956-57. During the assessment year 1955-56 the assessee sustained a loss of Rs. 30,255 in the first firm. As he was carrying on .several other businesses. after the that year necessary set off the total loss sustained by him for came to Rs. 24,532. During the assessment year 1956-57 the

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SUPREME COURT REPORTS

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assessee's 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 add set off agamst his prolit in the subsequent year 1956-57 under s. 24(2) (ii) of the income tax Act 1922,, here inafter called the "Act". 1'.he Income tax Officer rejected the claim. His view was that the set off could be allowed only if the business, profession or vocation ill which loss was originally sus tained continued to be carried on by the assesssee during the refo vant assessment year. According to him the business in which the loss of Rs. 30,255 had been incurred had ceased to exi>t because of the dissolution of that firm on March· 31, 1955. The Appellate Assistant Commissioner in appeal considered the cons titution of the two Jirms. The lirst consisted of two partners in which originally the loss had occurred and which had ceased to 'l'he second firm against exist in the relevant assessment year. whose income the loss was sought to be set off consisted oi four partners. Both the firms had tiled separate retur,ns and were assessed separately for the assessment year 1955-56. The assessee had admitted in a latter 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 . E loss was originally sustained could not be said to have continued during the assessment year 1956-57. The assessee the matter to the Income tax Appellate Tribunal which upheld the contention of the asscssee 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 uncl~r appeal. The High Court It was observed : disposed of the matter in a fairly simple way.

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"When a firm carries on business. it is a business carried on by the partners of that firm and the indivi- dual partners of that firm are assessed to tax. When the profits of a register¢ firm are ascertained, the asi;essee, 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 the beedi leaves that the assessee sustained a loss for the assess- ment 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 thou&h in partnership

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C.J.T. v. DHARMA RIDDY (Grovtr, l.)

785

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with others. Entering into partnership with another in one case and three others in the other case, was only the mode of carrying business; but the business is the same business viz., trade in 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 m the pre vious 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)".

In order to dispose of the contentions of the learned counsel for the Income tax Commissioner who is the appellant before us it is necessary to set out the relevant statutory provisions. Before the amendment made by the Finance Act of 1955 s. 24(2) was as follows : -

"(2) 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 in any busi ending on 31st day of March, 1940, ness, 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 set off against the profits and gains, if any, of the assessee from the same business, profession 6r vocation of that year ........ "

Sub-section (2) of s. 24 was substituted by s. 16 of the aforesaid Finance Act. The material portion was in the following terms:-

"{2) .Where any ass~ssee sust11;ins a loss of profits or gams m any year, bemg a prevmus year not earlier tha~ the previous year for the assessment for the year ending on the 3 lst day of March 1940 in airtv business profession or vocation. and the loss c~nnot be wholly set off under sub-s. (1), so much of the loss asc is not set off or the whole loss where the assessee had iOO other ~ead of income shall be carried forward to the follow mg year, and

(i) .........•....................

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SUPREME COURT REPORTS

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(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, oi any business, profession or vocation carried on by him ~n that year; provided that the busi ness, profession or vocation in which the Joss was originally sustained continued to be carried on by him in that year."

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The arguments of the learned counsel for the appellant are based mainly on the fact that the partners of the two firms were different although the assessee was a partner of both firms. It is contended that sjnce the first film was dissolved on March 31, 1955 it could not be said that the business in which the loss was sustained continued to be carried on by the assessee durin~ the assessment year 1956-57 within the meaning of s.24(2)(ii) of the Act. For getting the benefit under that section it was essential that the business in which the Joss was sustained should be continued to be carried on for the assessment vear ;n question. This means that the same concern or part~rshio which carried on the business in the previous vea" should continue to function in the year of assessment.

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the pcesent case.

the amendment made by

There is no warrant for the proposition put forward on behal.f of the appellant that in order to get the benefit of s. 24(2) (ii) of . the Act especially after the Finance Act 1955 the assessee should carry on the same business partnership in the year of assessment. The change in the lan l(Uage of the provision substituted by the Amending Act is signi ficant and all that the assessee has to show is that the business in which Joss was originally sustained continued to be carried on by him in the assessment year. Now, the assessee carried on the business in bidi leaves apart from other businesses. This business he was doing in partnership with a,nother person. Nevertheless the business was of takin~ con tracts 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 busi ness in bidi leaves came to an end so knl! "'' he continued to do that business either individually or in partnership with others. During the assessment year in question he was admittedly carry in!! on that business in partner5hip with th•ee others. It could well be said that even according to the provisions of s. 24(2) as they stood before the amendment made bv the Finance Act of 1955 he continued to carrv on the same business but for the pur the pose of the present case it is s. 24(2)(ii) as it stood after amendment which is releva1nt and we foil to sre on the plain language of the aforesaid provision how it could be held that the ]'msine;s in which the loss· was originally sustained was not ·con-

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C.l.T. v. DHARMA REDDY (Grover, 1.)

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tinued during the assessment year 1956-57. The word "business" trade, has been defined in s. 2 ( 4) of the Act as including any commerce or manufacture or any adventure or concern the nature of trade, commerce or manufacture. These words are ot wide import the underlying idea being of continuous exercise of an activity. As pointed out by S. R. Das, J. (as he then was) in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits the word '".business" connotes, some real substantial Tax(''), 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 taldng of contract in bidi leaves. That business· did not depend on the constitution of a part,nership firm through which it was carried on nor could k come to ·an end so long as the assessee carried on the · sa.'Tie systematic or organised course of activity with a set purpose.

The computation o,f a partner's share in the firm's profits js de~lt with by s . .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 provisi0t11 of s. 24. Under s. 23 (5) when the assessee is a registered firm and the total income of the firm has been assessed under sub-ss. ( 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 shal! 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 forviard and set off in accordance with the. provisions of s. 24. The High Coun 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. In a number of decided cases it has been held that the identity of the business for the purpose of s. 24(2)(ii) does not change by reason of the change in persons who carry on that ~>usiness since it continues to be carried on by the same individual. The Kerala Hi~h Coun ii!l Dwarkadar Leeladhar v. Commissioner of Income tax. Kera/a('), held that where a registered firm which was work ing at a loss was dissolved and one of the partners continued the same business as a sole proprietor he was entitled to set off his ·share cf the loss incurred by the firm against the profits accruine;· tfJ him from the busines• as a sole proprietor. The Delhi High Court in S. Narain Sinf!h v. Commis,ioner of Income tax. Delhi(') had to deal with a case where an assessee had taken certain liquor contract• and carried on the business of sale of liquor in his' individual name and sustained losses. Subsequently

Ill f1954) 26 LT.R. 765 •. 773.

0) 47 l.T.R. 619,

()) 66 l.T.R. 341,

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he. carried on the same business with 10 other persons and sought to set off the previous losses against the profits made the accounting year. Referring to the meaning the construction of the words "same business" as they stood in s. 24(2) before the amendment made by the Finance Act of 1955, it was held that the assessee was entitled to carry forward the loss~ for the pre vious year and have them set off against the share of his income of the registered firm during the assessment year became the busi ness in which the loss was sustained was the same business.

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In both the above cases reference was made to the decision of the Gujarat High Court in Sitaram Motiram Jain v. Commissioner of Income-tax('). In that case an assessee had incurred losses in a business carried on, by him as the sole proprietor and a register ed firm of which he was a partner took over that business as a run11-ing. concern. . The question was whether he could have the losses incurred by him in the business which he carried on as the sole proprietor carried forward and ·set off against his share of the profits of the registered firm. After referring to s. 24(2) (ii) and s. 23 ( 5) it was observed. what has to be <letermined in the case of a registered firm is the total income of each partner in tlie firm as the individual partners are assessed to tax and i!IOt the firm as such. A set off for loss which· had been carried forward from the earlier years under the provisions of s. 24 would only be available to the individual partner who had suffered the loss and not to the other partners of the firm or the firm.

In our judgment there could be no manner of doubt that the business in which the Joss had been sustained by the assessee when he was a partner of $e 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 busi ness, as stated before. being of dealing in or entering into con tracts in respect of bidi leaves. The mode in which he carried on the business in bidi leaves was one of taking other persons as partners. He did not stop doi~g that business in the assessment year in question.

The view taken by the High Court. in the nresent case, is un· is

exceptionable and must be upheld. The appeal fails and dismissed with costs.

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Appeal dismissed.

-m·43 l,T,)l. 405,