PETITIONER: COMMISSIONER OF INCOME-TAX, U.P. Vs. RESPONDENT: J. P. KANODIA & CO. DATE OF JUDGMENT: 28/04/1970 BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N. CITATION: 1970 AIR 1588 1971 SCR (1) 418 1970 SCC (2) 7 ACT: Income-tax Act (11 of 1922), ss. 25(5) and 24-Registered firm--Partners and minors entitled to benefits of partnei- ship--Respective shares in profits--Directions to be assessed as the income of their respective families- validity. Loss in speculative transactions-Set off against profits from other business anctivities-if permissible. HEADNOTE: The respondent is a registered firm of two partners. Three minors were admitted to the benefits of the partnership. For the assessment year 1957-58, the Income-tax Officer rejected the claim of the firm to set off under s. 24(1) the loss from certain speculative transactions against profits from other business and held that since the capital contributed by the partners and minors was out of the capital of their respective Hindu undivided families to which they belonged, the profits allocate( to them should be assessed as the income of their respective families. The order was confirmed by the Commissioner. In a petition under Art. 226, the High Court set aside the direction to assess the shares of the partners and minors to their respective families, and, following the decision in Jagannath Mahadeo Prasad v. Commissioner of Income-tax, 55 I.T.R 501 held that the speculation losses were liable to be set off against the profits in other business in the year of assessment. in appeal to this Court, HELD: (1) Once the Income-tax Officer grants registration of a firm he cannot proceed to inquire whet-her the share allocated to a partner is beneficially held by some other person or entity that is, whether the partners represented other persons. He must allocate the profits in accordance with deed of partnership. Therefore, the order of the Income-tax Officer, in the present case, directing that the income of the partners and minors shall be assessed in the hands of their respective families was withOut jurisdiction. [420 F-H] (2) The decision relied upon by the High Court was reversed by this Court in Commissioner of Income-tax v. Jagannath Mahadeo Prasad, 71 I.T.R. 296 (S.C.), and therefore, the assessee was not entitled to set off speculation losses against profits from other business activities, [321 A-B] JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 193 of 1967.
Appeal from the judgment and order dated March 29, 1965 of
the Allahabad High Court in S.A. No. 972 of 1964.
jagadish Swarup, Solicitor-General, G. C. Sharma and B. D.
Sharma, for the appellants.
M. V. Goswami, for the respondent.
419
The Judgment of the Court was delivered by
Shah, J. M/s J. P. Kanodia and Company is a firm registered
under the Indian Income-tax Act, 1922. The partners of the
firm were Smt. Shanti Devi and Badri Prasad. Three minors-
Pradeep Kumar, Anand Prakash and Rajendra Prasad were
admitted to the benefits of the partnership.
In proceedings for assessment of tax for the assessment year
1957-58, the Income-tax Officer rejected the claim of the
firm to set off loss from certain speculative transactions
aggregating to, Rs. 22,234/- and computed the income of the
firm at Rs. 26,365/-. The Income-tax Officer was of the
opinion that since the capital contributed by the partners
and the minors who were admitted to the benefits of the
partnership was out of the capital of the respective Hindu
Undivided Families to which they belonged, the profits
allocated to the partners and to the minors were liable to
be assessed in the hands of the respective Hindu Undivided
Families to which they belonged.
The order passed by the Income-tax Officer was confirmed in
a revision application by the Commissioner. The firm then
moved a petition under Art. 226 of the Constitution before
the High Court of Allahabad. Two contentions were raised in
support of the petition : (i) that the Income-tax Officer
erred in directing that the profits allocated to the shares
of the partners and to the minors be assessed as the income
of the respective Hindu Undivided Families to which they
belonged; and (ii) that the loss in speculation business
should have been Set Off under S. 24(1) of the Income-tax
Act against profits from other business.
Manchanda, J., accepted the first contention, observing that
the order directing assessment of the shares allocated to
the partners and the minors to the benefits of the partners
“was manifestly without jurisdiction”, he quashed that part
of the order of the Income-tax Officer. The learned Judge
rejected the second contention for in his view the matter
was covered by the judgment in Jagannath Mahadeo Prasad v.
The Commissioner of Income-tax(1). He accordingly held that
the speculation losses were liable to be set off against the
profits in other business in the year of assessment. The
order of Manchanda, J., was confirmed in a special appeal by
the Division Bench of the High Court. This appeal is filed
by the Commissioner with certificate granted by the High
Court.
(1) 55 I.T.R. 501.
420
Sub-sections (5) and (6) of s. 23 of the Income-tax Act as
they were in force in the year of assessment read as follows
“(5) Notwithstanding anything contained in the
foregoing sub-sections, when the assessee is a
firm and the total income of the firm has been
assessed under sub-section (1), sub-section
(3) or sub-section (4) as the case may be,
(i) the income-tax payable by the firm
itself shall be determined :
(ii) the total income of each partner of the
firm, including therein his share of its
income, profits and gains of the previous
year, shall be assessed and the sums payable
by him on the basis of such assessment shall
be determined.”
. . . . . . .”
“(6) Whenever the Income-tax Officer makes a
determination in accordance with the
provisions of sub-section (5), he shall notify
to the firm by an order in writing the amount
of the total income on which the determination
has been based and the apportionment thereof
between the several partners.”
In the case of a registered firm the Income-tax Officer has
to determine the income-tax payable by the firm and also to
determine the total income of each partner of the firm and
the sum payable by him on the basis of such assessment. He
has then to certify the determination in accordance with
sub-s. (6) and the apportionment thereof among the partners.
Once the Income-tax Officer has granted registration of the
firm, be cannot proceed to inquire whether the share
allocated to a partner is beneficially held by some other
person or entity. The Income-tax Officer must allocate the
profits in accordance with the deed of partnership
registered by him and to the persons admitted to the
benefits thereof according to their respective shares. He
cannot at that stage hold an inquiry whether the partners
represented other persons. The order of the Income-tax
Officer directing that the income of the partners and the
shares allocated to the minors admitted to the benefit ‘of
the partnership shall be assessed in the hands of the
respective Hindu Undivided Families was plainly without
jurisdiction.
On tile second contention not much need be said. The High
Court purported to follow the judgment in Jagannath Mahadeo
4 2 1
Prasd’s case(1), but that judgment has been expressly
overruled by this Court in Commissioner of Income-tax, U.P.
v. Jagannath Mahadeo Prasad(-). This Court held disagreeing
with Jagannath Mahadeo Prasad’s case (2) that in the
computation of the income, profits and gains of the year of
assessment under s. 1O ( 1 ) of the Indian Income-tax Act,
the assessee is not entitled to set off speculative losses
against profits from other business activities of the same
year.
The appeal is partially allowed. The order of the High
Court setting aside the order of the Commissioner of Income-
tax refusing to allow the set off of speculation loss
against profits from ready business is set aside. The order
of the High Court vacating the direction to assess the
shares allocated to the partners and persons admitted to the
benefits of the partnership in the profits of the assessee
firm to the respective Hindu Undivided Families to which
they belonged is confirmed. There will be no order as to
costs.
V. P. S. Appeal partly allowed. (1) 55 I.T.R. 501. (2) 71 I.T.R. 296 LI 2Sup.CI/70 -13. 4 2 2