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Civil Appeals Nos. 429 and 430 of 1960, decided on 16th January 1962.

Income‑tax Act (XI of 1922), Ss. 10 & 24 (1)‑Loss‑Set‑off- Loss in foreign partnership‑Whether can be set‑off against profits of Indian business‑Scope of Ss. 10 and 24.

Where an individual who is ordinarily resident in India and carries on business in India, is also a partner of a firm carrying on business outside India, he is entitled to set‑off the loss incurred by him as a partner of the foreign business, against the profits and gains of the business carried on in India. The second proviso to section 24 (1) of the Income‑tax Act, 1922 is not applicable to such a case.

Though the profits of each distinct business may have to be computed separately, the tax is chargeable under section 10; not on the separate income of every distinct business, but on the aggregate of the profits of all the businesses carried on by the assessee. Therefore, where the assessee carries on several businesses, he is entitled under section 10, and not under section 24 (1), to set‑off losses in one business against profits in another. If section 24 (1) has no application the second proviso thereto can also have no application. Further, the second proviso to section 24 (1) applies only where the assessee is an unregistered firm.

Rm. Ar. Ar. Rm. Arunachalam Chettiar v. Commissioner of Income‑tax (1936) 4 I T R 173 (P C) and Commissioner of Income-tax v. Indo‑Mercantile Bank Ltd. (1959) 36 I T R 1 (S C) applied.

Muthuraman Chettiar v. Commissioner of Income‑tax (1957) 31 I T R 61 affirmed.

K. N. Rajagopal Sastrf (D. Gupta with him) for Appellant.

S. Narayanaswamy and R. Gopalakrishnan for Respondents.

These two consolidated appeals raise a common question of law arid have been heard together. The Commissioner of Income‑tax, Madras, is the appellant in both the appeals. P. M. Muthuraman Chettiar, manager of a Hindu undivided family, is the respondent in Civil Appeal No. 429 of 1960 and S. Abdul Shakoor is the respondent in Civil Appeal No. 430 of 1960. We shall refer to the respondent in each of these two appeals as the assessee.

The short facts giving rise to the two appeals are these. The assessee in Civil Appeal No. 429 of 1960 is a Hindu undivided family consisting of a father and his minor son. The assessee carried on business as a money‑lender and a dealer in shares in what was then known as British India. The assessee was also a partner in three non‑resident firms carrying on business at Penang, Kuantan and Raub. By reason of the residence of the manager in the year of assessment which was 1946‑47, the assessee was treated as resident and ordinarily resident in the taxable territories. In the course of the assessment proceedings, the assessee claimed that it had incurred a loss of Rs. 23,672 in the three foreign businesses in which it was a partner, and it claimed a set‑off of this sum against its income from the money‑lending business within the taxable territories. The income‑tax authorities negatived the claim and this order was confirmed by the Appellate Assistant Commissioner and by the Tribunal. The reasoning on which the claim was disallowed by the Tribunal was this : the Tribunal said that when an assessee carried on more businesses than one and sustained loss in one of them, the same could be set‑off against the income from other business under section 10 of the Indian Income‑tax Act, 1922, but that principle was not applic able where the business carried on by the assessee was in partner ship with others. The Tribunal expressed the view that in such a case section 10 of the Indian Income‑tax Act would not apply and the right to set‑off would arise only under section 24 and as none of the subsections of that section were attracted to the case, the assessee was not entitled to the relief claimed.

In compliance with the requisition of the High Court of Madras under section 66 (2) of the Income‑tax Act, the Tribunal stated a case in respect of the following question of law which arose out of its orde;

"Whether the loss of Rs. 23,672 incurred by the assessee as a partner of the three firms outside India can be set‑off against the assessee's income from business in India having regard to the provisions of the Indian Income‑tax Act in this behalf "

This question was answered by the High Court in favour of the assessee.

In Civil Appeal No. 430 of 1960 the assessee, who was resident and ordinarily resident in the taxable territories, carried on a business in the manufacture and sale of "lungies" at Mardas. In or about April 1946, a similar business was started at Rangoon in Burma in which the assessee became a partner along with two other persons, the assessee's share being 9/16 only. The assessee was the capitalist partner, while the other two were working partners in‑charge of the management of the business. The Rangoon firm suffered a loss and as no accounts were said to have been maintained, a statement of affairs as on December 31, 1946, of the Rangoon firm was taken and this showed a loss of Rs. 43,969. The partnership was later dissolved and a registered deed of dissolution of the firm was executed on January 13, 1947, under which the assessee agreed to bear the whole loss of Rs. 43,969 as the other partners were unable to contribute their share of the loss and also to take over the assets and liabilities of the Rangoon firm as on December 31, 1946. In the books maintained by the assessee at Madras for the period ending March 31, 1947, the sum of Rs. 43,969 was adjusted to the capital account of the assessee and in the return of the total income filed for the assessment year 1947‑48, the assessee claimed that the loss of Rs. 43,969 from the Rangoon firm should be allowed as a set‑off. The Income‑tax authorities negatived the claim of the assessee to set‑off either wholly or partly the loss of Rs. 43,969. On appeal to the Tribunal it held that the Rangoon firm was a different entity from the assessee and therefore he was not entitled to any set‑off of the loss incurred by the Rangoon firm and dismissed the appeal. A case was then stated under section 66 (2) of the Income‑tax Act to the High Court on the following question of law, namely;

"Whether on the facts and circumstances of the case the share of the assessee's loss out of the sum of Rs. 43,969 cannot be set‑off against the profits of the assessee's business in arriving at the total assessable income "

The High Court answered the question in favour of the assessee.

The only point for decision in the two appeals is whether the High Court has correctly answered the two questions.

It appears that in the High Court the point urged on behalf of the present appellant was that there was no identity between the unit which derived the income and the units which sustained the loss and on this ground it was urged that there could be no set‑off under section 10 which permitted the loss incurred by the same unit being set‑off against the profit derived by it ; in other words, the argument was that under income‑tax law when an individual or the karta of a Hindu undivid ed family was a partner in a firm, the unit of assessment in regard to the firm's profits or gains was the firm itself which was an entity separate and distinct from the partners composing it, notwithstanding that for the purpose of computing the total income of an individual, his share of the profits from the firm has to be included in his total income. The High Court repelled this argument and, in our opinion, rightly repelled it in the circumstances of these two cases. A similar argument was con sidered and repelled by the Privy Council in Arunachalam Chettiar v. Commissioner of Income‑tax ((1936) 4 I T R 173). It was observed therein that whether a firm was registered or unregistered, a partner's share of the loss in the firm could be set‑off against the profits and gains made by him in his individual business. That principle applies in the present cases, even though after the amendment of the Income-tax Act in 1939, the position of a partner in an unregistered firm may stand on a different footing, a distinction which is not material for the present cases.

The learned Advocate for the appellant has not supported the case sought to be made out by the Revenue in the High Court. He has, however, relied on the second proviso to section 24 (1) of the Income‑tax Act. It seems clear to us that that proviso has no application to the facts of the cases under our consideration. In Commissioner of Income‑tax v. Indo‑Mercantile Bank Ltd. ((1959) 36 I T R 1), this Court pointed out that the object of section 24 (1) of the Indian Income‑tax Act was to allow the set‑off of loss of profits or gains under one head against income, profits or gains under any other head, and there was nothing in the section or in the first proviso thereto which would favour the disintegration of the head "business", it further pointed out that section 10 of the Indian Income‑tax Act did not distinguish between business in British India and business in an Indian State or so divide busi ness. The ratio of that decision must apply to the cases under our consideration and the assessees are entitled to set‑off losses which they had suffered in business outside the taxable territories against profits and gains made from business within the taxable territories. It is worthy of note that though the profits of each distinct busi ness may have to be computed separately, the tax is chargeable under section 10, not on the separate income of every distinct business, but on the aggregate of the profits of all the businesses carried on by the assessee. It follows from this that where the assessee carries on several businesses, he is entitled under section 10, and not under section 24 (1), to set‑off losses in one business against profits in another. If as we hold that section 24 (1) has no application to the facts of the present cases, the second proviso thereto can also have no application. Moreover, the second proviso to section 24 (1) applies only where the assessee is an unregistered firm. That is not the case here. The assesses before us are, in one case, a Hindu undivided family and, in the other, an individual. It is obvious, therefore, that the second proviso to section 24 (1) can have no application in these cases.

It is thus clear that the High Court correctly answered the two questions referred to it, and the appeals are really concluded by the ratio of the decision in Commissioner of Income‑tax v. Indo‑Mercantile Bank Ltd. The appeals are accordingly dismissed with costs ; one hearing fee.

Appeal dismissed.

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