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Civil Appeals Nos. 33‑K of 1974 and 11‑K‑of 1985, decided on 31st March, 1986.

(On appeal from the judgment of the High Court, Sind and Baluchistan, at Karachi, in I. T. R. C. No. 19 of 1968).

‑‑ Ss. 24(1), 10 & 6‑Loss‑Set‑off‑Whether assessee can be allowed to set off his share of loss computed in unregistered firm as a partner as against his share of income from a registered firm under the head "business for same charge year".

The second proviso to section 24 of Income‑tax Act, 1922 is not a substantive provision but operates as a proviso to the main enacting provisions of section 24(1). Section 24(1) is attracted to the case of set off of loss under one head against the income of the assessee under another head under section 6. It is to this general rule that the second proviso provides an exception that in the case of an unregistered firm any loss of that firm under one head must be set off against its income profits and gains under another head and not against the income, profits and gains of any of its partners. But in the case of an individual assessee if a loss is incurred in respect of any source of income, it must he set‑‑off against profits from the same source before the income from that source can be arrived at. Such set‑off may more appropriately be called deduction'. It is allowed on ordinary commercial principles of computing profits. If after allowing the set‑off as stated, the net result is a loss that loss may be set‑off against profits from another source wader the same head, even apart from section 24(1). This is allowed because income under each head is computed by lumping the profits from various sources which fall under the same head. This is done by having recourse to section 10. Sec tion 4(1) will be attracted only when loss under one head of income is intended to be set‑off against profits under another head. Where the loss and profits involved in the set‑off were not under different heads but under the same head, namely, business, section 24(1) was not attracted. Second proviso the application of which went alongwith the enacting clause to which it was attached, was also not attracted in its application to such a case.

A set‑off under section 24(1) can only be claimed when the loss arises under one head and the profits against which it is sought to be set‑off arise under a different head, When the two arise under the same head the loss can be deducted but that is done under section 10 and not under sec tion 24(1) of the Income‑tax Act. The argument that the second proviso to section 24(1) is an independent provision, so that it will get attracted even if the income of the partner of an unregistered firm is being assessed under section 10 in respect of the same head, was repelled.

The second proviso to section 24(1) did not operate as an independent substantive provision. Second proviso only operated as a proviso to the main enacting provisions of section 24(1). The second proviso would be attracted only in cases where adjustment of loss from one head is sought as against profits from other heads of income.

Anglo‑French Textile Company Ltd. v. Commissioner of Income‑tax Madras (1953) 23 I T R 82 and Commissioner of Income‑tax v. Messrs Haji Ferozuddin P L D 1967 Kar. 812 ref.

Mrs. Rashida Patel, Advocate‑on‑Record for Appellant.

Iqbal Naeem Pasha, Advocate Supreme Court and Faizanul Haq, Advocate‑on‑Record for Respondents.

Date of hearing : 31st March, 1986.

These are two appeals arising out of judgments passed by the High Court on reference under section 66(1) of the Income‑tax Act, 1922. Civil Appeal No. 11‑K/1985, is a certificated appeal from the judgment of a Division Bench of the erstwhile High Court of West Pakistan, Karachi Bench, Karachi, dated 3rd March, 1967, whereas Civil Appeal No. 33‑K/1974 is by leave of this Court from the judgment of a Division Bench of the erstwhile High Court of Sind and Baluchistan, Karachi, dated 16th November, 1973. As the learned Judges in the last mentioned case relied on and followed the view taken by the learned Judges in the High Court fn Civil Appeal No. 11‑K/85, it will be sufficient, for the present purposes to state the facts of that case.

2. The statement of facts as reflected in the reference trade by the Income‑tax Appellate Tribunal, is as follows : Haji Ferozoddin, the respondent in this appeal whom we shall refer to as 'the asaessee' was a partner owning 1/2 share in a registered firm known is Messrs National Rubber Works, Sialkot. The assessee was also a partner in an unregistered firm working under the name and style, of Messrs Munawar & Co., Karachi. For the assessment year 1952‑53 the Income‑tax Officers assessed the income of the assessee from Messrs National Rubber Works, Sialkot. at Rs. 50,568 and disallowed the assessee to set‑off hive share of loss which was computed by the Income‑tax Officer, Karachi, at Rs. 60,812 from the unregistered firm. The assessee's appeal to the Appellate Assistant Commissioner proved infructuous, and as such he filed a further appeal before the Tribunal The learned Tribunal by order, dated 9th February, 1961, accepted the claim for adjustment and set‑off by the assessee and held that in the facts and circumstances of the case, the assessee was entitled to set‑off his loss from the unregistered firm against his income from the registered firm. It was in these circumstances that the Department moved for a reference to the High Court of the following question of law for its opinion :‑

"Whether in the facts and circumstances Of the instant case the Tribunal was right in allowing assessee to set‑off his share of loss computed in the unregistered firm at Rs. 60,812 as a partner in an unregistered firm as against his share of income from a registered firm under the head business for the same charge year "

3. The contention of the Department before the High Court was that under the second proviso to section 24(1) of the Income‑tax Act, 1922, the share of the loss suffered by the assessee in the business ref the unre gistered firm can be set‑off only against the income, profits and gains of the firth and not against the income profits and gains of any of its partners to his individual business. The main thrust of the argument advanced on behalf of the Department was that the second proviso to section 24(1) was an independent provision, so that it will operate even while computing the income of an assessee under section 10 of the Income‑tax Act.

4. It would be appropriate at this stage to set out the provisions of section 24 of the Income‑tax Act, 1922, which reads as under :‑

"24(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned to section 6, he shall be entitled to have the amount of the loss of profits or gains under any other head in that year:

Provided that where an assessee is engaged in speculative transactions, which are in the business, such transactions shall, notwithstanding anything to the contrary contained in any law for the time being in force, be deemed to constitute a business distinct and separate from any other business carried on by the assessee, and any loss sustained by him in such business shall be set‑off only against the income, profits and gains of that business:

Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (5) of subsec tion (5) of section 23 in the manner applicable to a registered firm, any such loss shall be set‑off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm; and 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 apportion between the partners of the firm and they alone shall be entitled to have the amount of the loss set‑off under this section."

The learned Judges of the Division Bench referred to the dictum laid down by their Lordships of the Privy Council in Anglo French Textile Company Ltd. v. Commissioner of Income‑tax, Madras ((1953) 23 I T R 82), that a set‑off under section 24(1) can only be claimed when the loss arises under one bead and the profits against which it is sought 'to be set‑off arise under a different head, It was observed that when the two arise under the same B bead the loss can be deducted but that is done under section 10 and not under section 24(1) of the Income‑tax Act. The argument of the department that the second proviso to section 24(l) is an independent provision, so that it will get attracted even if the income of the partner of an unregistered firm is being assessed under section 10 in respect of the same head, was repelled. The learned Judges referred to the non obstante clause inserted in the first proviso, and held that the said proviso was, therefore, of an overriding nature and operates as substantive provision. But in regard to the second proviso to section 24(1), the learned Judges noting that the non‑obstante clause was not employed in its language, held that the second proviso did not operate as an independent substantive person. They came to the conclusion that the second proviso only operated as a proviso to the main enacting provisions of section 24(1). From this they concluded that the second proviso would be attracted only in cases where adjustment of loss from one bead is sought as against profit from other beads of income. Since in the facts of the case in hand the assessee was claiming set‑off in respect of loss from business allocated to him as the partner of the unregistered firm as against the profits which came in his share as a partner of the registered firm, the learned Judges were of the opinion that he was entitled to do so under section 10 and section 24(1) was not attracted to his case at all.

5. On this reasoning the learned Judges expressed the view that whether a firm is registered or unregistered partnership does not obstruct or defeat the right of the partner to an adjustment on account of his share of loss in the firm, when the set‑off be against other profits under the same head of income within the meaning of section 6 of the Income‑tax Act. Accordingly they answered the question referred to the Court in affirmative by the impugned judgment. In Civil Appeal No. 33‑Ki74, the assessee's income from his individual business was computed at Rs. 32,408. whereas there was a share of loss allocated to him as a partner in an unregistered firm to the tune of Rs. 8,530. The assessee claimed adjustment of the loss coming to his share from the business of the unregistered firm as against profits earned by him from his individual business. In this case also a reference was made on similar lines to the High Court which upheld the right of the assessee to set‑off. As already observed in reaching its conclusion the High Court relied on the case of the Commissioner of Income tax v. Messrs Haji Ferozuddin (PLD 1967 Kar. 812).

6. The only argument advanced in support of these appeals by the learned counsel for the Department was that on a plain reading of the first part of the second proviso to section 24(1) the assessees were not entitled to set‑off of loss coming to their shares as partners of unregister firms against their income in their individual business or for that matte against profits earned as partner of a registered firm. Emphasis was placed on the words in the second proviso, "any such loss shall be set‑off against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm." On a proper examination of the judgment in the case of Ferozuddin we are i agreement with the view expressed by the learned Judges that the second proviso is not a substantive provision but operates as a proviso to the mat enacting provisions of section 24(1). We further find no reason to disagree with the learned Judges that section 24(1) is attracted to the case of set‑o of loss under one head against the income of the assessee under another bead under section 6: It is to this general rule that the second proviso provides an exception that in the case of an unregistered firm any loss of that firm under one head must be set‑off against its income profits and gains under another head and not against the income, profits and gains of any of its partners. But in the case of an individual assessee if a loss is incurred in respect of any source of income, it must be set‑off against profits from the same source before the income from that source can be arrived at. Such set‑off may more appropriately be called "deduction". It is allowed on ordinary commercial principles of computing profits. If after allowing the set‑off as stated, the net result is a loss that loss ma be set‑off against profits from another source under the same head, even apart from section 24(1). This is allowed because income under ear head is computed by lumping the profits from various sources which fall under the same head. This is done by having recourse to section 10. Section 24(1) will be attracted only when loss under one head of income is intended to be set‑off against profits under another head. In the two cases before the loss and profits involved in the set‑off were not under different heads but under the same head, namely, business. Therefore, section 24(1) was rightly held not to have been attracted. The necessary result was that second proviso the application of which went alongwith the enacting clause to which it was attached, was also not attracted in its application to these cases. Learned counsel was unable to advance any contrary argument or point out any infirmity in the reasoning‑adopted by the learned Judges of the High Court in their construction placed upon the provisions of law discussed above.

7. In the result we find no force in these appeals and accordingly dismiss the same with no order as to costs.

M.B.A. Appeal dismissed.

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