JUDGMENT
D.R. Dhanuka, J.
1. By this reference made under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question to this court for its opinion :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Circular No. 30 of 1941 is applicable in the case of the assessee when admittedly the provisions relating to option of assessing firm or the partner were not present in the Income-tax Act, 1961, as compared with the Indian Income-tax Act, 1922 ?”
2. The relevant assessment year is the assessment year 1975-76. The accounting period relevant to the previous year ended on March 31, 1975.
3. During the previous year one Mr. S. P. Seth used to carry on business as film distributor in the name of Messrs. S. P. Pictures. During the relevant years, the assessee used to carry on business as a film distributor in the name of “Sadhana Enterprises”.
4. Messrs. Navketan International Films Pvt. Ltd. was the producer of a film named “Ishk Ishk Ishk”. By an agreement dated July 3, 1974, Messrs. Navketan International Pvt. Ltd. appointed Messrs. S. P. Pictures as distributor of the said picture in the territories comprising the Bombay circuit as known in the film trade. By clause 5 of the said agreement, it was provided that the distribution period stipulated upon was a period of 11 years from the date of the first release of the said picture in any part of the said territory. The said Messrs. S. P. Pictures agreed to pay a sum of Rs. 16,51,000 to the producer as and by way of minimum guarantee as provided in clause 7 of the said agreement. On July 8, 1974, a written agreement was arrived at between Messrs. S. P. Pictures and Messrs. Sadhana Enterprises, a sole proprietary concern of the assessee, whereunder the parties to the agreement agreed to share profit or loss in respect of distributorship rights acquired under the agreement dated July 3, 1974, referred to hereinabove in the ratio of 40 per cent. for the assessee and 60 per cent. for Messrs. S. P. Pictures, i.e., Mr. S. P. Seth. By clause 10 of the said agreement, it was provided that the tenure of the agreement shall be for the period of and up to the expiry of the said agreement dated July 3, 1974, i.e., for a period of 11 years from the date of the first release of the said picture in the distribution territories, i.e., Bombay circuit or any part thereof.
5. In pursuance of the said agreement dated July 8, 1974, the assessee paid a sum of Rs. 3,00,000 to Messrs. S. P. Pictures. It appears from the facts set out in the statement of case that the said picture was a flop. By end of the financial year 1974-75, the total realisation from the sold picture is supposed to have been a little less than Rs. 3,00,000 whereas total expenses were nearly Rs. 14,00,000. It further appears from the narration of facts in the statement of case that the books of account maintained by S. P. Pictures did not strike either the profit or loss but merely carried forward the receipts and expenses and did not reflect the claim of the assessee under the said agreement dated July 8, 1974, to share profit or loss in respect of distribution of the said picture to the extent of 40 per cent. as claimed by the assessee.
6. It is the case of the assessee that during the previous year, the assessee suffered a loss of Rs. 4,43,940 in her capacity as a party to the transaction of joint venture dated July 8, 1974. The said agreement dated July 8, 1974, is construed by the authorities below as a transaction of “partnership”. The assessee filed her income-tax returns with the Income-tax Officer for the assessment year 1975-76. The assessee claimed to set off the said alleged loss pertaining to her share in the said partnership against her personal income. The Income-tax Officer rejected the claim of the assessee for adjustment or set off in respect of the said loss against her personal income, inter alia, on the ground that the said agreement dated July 8, 1974, was not a genuine agreement and the loss claimed to have been suffered by the assessee was not a genuine loss. The Income-tax Officer passed the necessary assessment order after obtaining directions from the Inspecting Assistant Commissioner in this behalf as contemplated under section 144B of the Income-tax Act, 1961. Being aggrieved by the said order, the assessee preferred an appeal before the Commissioner of income-tax (Appeals). The Commissioner of Income-tax reached the conclusion that the agreement dated July 8, 1974, was a genuine agreement. The Commissioner of Income-tax (Appeals) also reached the conclusion that the agreement dated July 8, 1974, was an agreement of partnership and the assessee was not entitled to claim set off or adjustment in respect of the loss alleged to have been suffered by the assessee against her personal income in view of the provision contained in section 77(2) of the Income-tax Act, 1961. During the course of the first appeal, the assessee relied on a circular being Circular No. 30 of 1941 issued by the Central Board of Direct Taxes and corrigendum thereto dated February 27, 1943, in support of her claim for set off or adjustment of the loss pertaining to the said unregistered firm against her personal income. The said circular reads as under :
“C. B. R. Circular No. 30 of 1941, C. No. 31(1) I. T./41 dated the 20th day of 1941.
Subject : Joint venture – Assessment of – It has been reported to the Board that the practice is not uniform in the matter of assessments of the profits arising from temporary partnerships of the nature of joint ventures. Legally such joint ventures, whether they are confined to a particular transaction or to a particular purpose, are recognised as partnerships under the Partnership Act. It is, therefore, open to the Income-tax Officer to assess the profits either in the hands of the firm as unregistered or of the partners whichever course is beneficial to the Revenue. As the former course causes hardships in certain cases, the Board directs that profits arising from purely temporary partnerships of short duration should, generally, be assessed in the hands of the respective partners. Where, however, the joint ventures are continuous and not of short duration, the partners may apply for registration of the partnership before it is dissolved. It is proposed to amend the rules relating to registration with a view to enabling the firm to apply for registration under section 26A before it is actually dissolved.
C. B. R. D. A. Dis. No. 29(11) l. T./42 dated the 27th day of February, 1943.
The concession of assessing the profits or allowing the losses arising out of a purely temporary joint venture in the assessment of its partners is intended to be applied to all cases of temporary joint ventures irrespective of whether or not the venture could have been registered under the amended Rules.”
7. The Commissioner of Income-tax (Appeals) allowed the appeal and held that the said circular was applicable to the case of the assessee and in view of the said circular the assessee was entitled to claim set off in respect of sum of Rs. 4,35,513 pertaining to her share of loss from the unregistered firm constituted under the agreement dated July 8, 1974, against her personal income. At no time Messrs. S. P. Pictures was assessed in respect of the business of the said joint venture constituted under the agreement dated July 8, 1974, construed as a partnership by the authorities below. At no time the accounts of the said partnership were finalised. In view thereof, the Commissioner of Income-tax (Appeals) directed that on S. P. Pictures subsequently finalising the accounts of the picture “Ishk Ishk Ishk”, the claim of Rs. 4,35,513, in respect whereof a set off was allowed as aforesaid, will have to be suitably amended. Being aggrieved by the said order, the Revenue preferred an appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal held that the agreement dated July 8, 1974, was a genuine agreement. The Tribunal further held that the agreement on its proper construction was an agreement of partnership. The Tribunal thereafter addressed itself to the question as to whether the loss arising from the said unregistered partnership firm could be allowed to be set off in the hands of the individual partners. The Tribunal relied on the abovereferred circular dated April 20, 1941, in support of its conclusion that the assessee was entitled to claim the set off in respect of her share of loss from the said unregistered firm against her personal income. The Tribunal held that the said circular was applicable to the case of the assessee. By the operative part of its order, the Tribunal held that the assessee will be entitled to set off her share of loss pertaining to the said unregistered firm against her personal income. The appeal filed by the Revenue was thus dismissed by the Tribunal.
8. At one stage, there was a controversy between the parties as to whether the abovereferred agreement dated July 8, 1974, was genuine or not. The Tribunal held that the said agreement was genuine. At one stage, there was also a controversy between the parties as to whether the document dated July 8, 1974, was a document of partnership or merely a joint venture not amounting to partnership. The Tribunal held that the agreement dated July 8, 1974, on its proper construction, constituted a partnership between the parties. These findings are accepted by the parties as binding on them and are not the subject-matter of this reference.
9. It is common ground that the said partnership constituted under the agreement dated July 8, 1974, was not registered as required under the Income-tax Act, 1961. The said partnership is thus liable to be considered as an unregistered firm. It emerges from the record that the said unregistered partnership was not assessed in respect of the alleged loss in question or otherwise. The question before the court is as to whether the assessee is entitled to set off her share of loss pertaining to the business of the abovereferred unregistered partnership against her personal income by relying on the said Circular No. 30 of 1941 in support of the said claim or otherwise. In other words, the court is required to decide as to whether the said Circular No. 30 of 1941 is applicable to the case of the assessee and whether the said circular entitles the assessee to make the abovereferred claim for set off. For the reasons indicated hereinafter, we are of the view that the said circular is not applicable to the case of the assessee and the assessee is not entitled to set off the abovereferred loss pertaining to the unregistered partnership constituted under the agreement dated July 8, 1974, on the basis of the said circular.
10. In the first instance, it is necessary to refer to the relevant provisions of the Income-tax Act, 1961. Section 77(2) of the Income-tax Act, 1961, reads as under :
“Section 77 :
(2) Where the assessee is a partner of an unregistered firm which has not been assessed as a registered firm under the provisions of clause (b) of section 183 and his share in the income of the firm is a loss, then, whether the firm has already been assessed or not –
(a) such loss shall not be set off under the provisions of section 70, section 71, sub-section (1) of section 73 or section 74A;
(b) nothing contained in sub-section (1) of section 72 or sub-section (2) of section 74 or sub-section (1) of section 4 or sub-section (3) of section 74A shall entitle the assessee to have such loss carried forward and set off against his own income.”
11. It is well-settled that any loss incurred by an unregistered firm may be set off by such firm against its income in the same year or may be carried forward if unabsorbed for being set off against the profits of such firm in subsequent year subject to the provisions of sections 70 to 74. It is equally well-settled that no individual partner has the right to set off his or her share of the firm’s loss against his or her personal income of the same year or carry forward such loss. Section 77 expressly enacts that in the case of an unregistered firm whether already assessed or not, no partner has the right to set off his share of the firm’s loss against his own income under any head or to carry forward such loss.
12. Learned counsel for the Revenue has invited the attention of the court to the judgment of the High Court of Rajasthan in the case of Todi Paharmal v. CIT [1987] 163 ITR 540. It was held by the court in this case that the loss suffered by an unregistered firm can be set off only against its own income and in no other manner. The words used in section 77(2) of the Act to the effect “whether the firm has already been assessed or not” are of considerable significance for resolving the controversy arising in this case. Thus section 7777(2) of the Act prohibits an individual partner of an unregistered firm to set off such loss against his or her personal income.
13. A similar question arose for the consideration of this court in the context of the provisions contained in 1922 Act. Learned counsel for the assessee has invited the attention of the court to several judgments on this aspect. In the case of Jadavji Narsidas and Co. v. CIT [1959] 36 ITR 266, this court considered the question as to whether a partner in an unregistered firm can claim to set off his share of losses of such firm against his other income from business when the unregistered firm has not been assessed. After construing the provisions contained in section 23(5) and the second proviso to section 24 of the Indian Income-tax Act, 1922, this court came to the conclusion that where the income-tax authorities did not proceed to determine the loss incurred by an unregistered firm, a partner of that firm was entitled to claim and set off his share of the loss incurred by the unregistered firm against the profit of his other business. This decision was rendered by the court on October 23, 1958, in the context of the provisions of the Indian Income-tax Act, 1922, as they then stood.
14. Learned counsel for the assessee has also invited the attention of the court to the judgment of the High Court of Andhra Pradesh in the case of CIT v. Vakati Sanjeeva Setty [1962] 46 ITR 755, whereby the High Court of Andhra Pradesh took a similar view following the abovereferred Bombay judgment in Jadavji Narsidas and Co. v. CIT [1959] 36 ITR 266.
15. Learned counsel for the assessee has fairly invited the attention of the court to the judgment of the Supreme Court in the case of CIT v. Jadavji Narsidas and Co. . The Revenue had filed an appeal against the decision of this court in the case of Jadavji Narsidas and Co. v. CIT [1959] 36 ITR 266. The Supreme Court reversed the Bombay view and held that under section 24(1), second proviso, losses of the unregistered firm could be set off against the income of the unregistered firm itself and not of its partners. It was observed in the judgment of Hidayatullah J. in this case at page 49 that the losses incurred by a unregistered firm could be set off only against its own profit. Having regard to this judgment of the Supreme Court, we have no hesitation in holding that even under the Indian Income-tax Act, 1922, the losses of the unregistered firm could be set off only against the income of the unregistered firm and not that of its partners.
16. Learned counsel for the assessee has submitted that section 77(2) of the Act is not applicable in a situation where an unregistered firm has not been assessed in respect of a loss suffered by it. It is not possible to accept this submission in view of the explicit language of section 77(2) of the Income-tax Act, 1961, and in view of the judgment of the Supreme Court in CIT v. Jadavji Narsidas and Co. . It is not possible to apply the ratio of the Bombay and Andhra judgments cited above in view of the Supreme Court judgment in CIT v. Jadavji Narsidas and Co. [1963] 48 ITR 41 having overruled the Bombay view. Learned counsel for the assessee has submitted that it could not have been the intention of the Legislature to deprive the partner of an unregistered firm of his right to set off the loss pertaining to an unregistered firm when an unregistered firm has not been assessed. The court is required to ascertain the intention of the Legislature from the language used in the relevant provisions and apply the existing provisions of the Act as they stood. We have, therefore, no hesitation in rejecting this submission of learned counsel for the assessee.
17. Circular No. 30 of 1941 does not entitle the assessee to claim set off in respect of loss pertaining to an unregistered firm. The subject-matter of “set off of loss pertaining to unregistered firm” is not at all dealt with by the said circular. By the said circular, the Board directed that in certain eventualities profit arising from purely temporary partnerships of a short duration should generally be assessed in the hands of the respective partners. The Indian Income-tax Act, 1922, as well as the Income-tax Act, 1961, make separate and distinct provisions in respect of set off of losses suffered by the unregistered partnership firm. The Tribunal erred in holding that the said circular was applicable to the case of the assessee and the assessee was entitled to set off her share of losses from the unregistered firm against her personal income on the footing that the said circular entitled the assessee to make the said claim. The said circular is not applicable to the case of the assessee. The said circular does not entitle the assessee to claim set off in respect of the said loss on the basis of the said circular or otherwise.
18. In this view of the matter, it is not necessary to discuss other authorities cited by learned counsel for the assessee at the Bar. We shall, however, make a very brief reference to the authorities indicated below.
19. Learned counsel for the assessee relied on the judgment of the Supreme Court in the case of CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95. In this case, the partners of the unregistered firm were assessed in respect of their respective shares in the profit of the joint venture. It was held by the apex court that subsequent assessment in the status of an unregistered firm was, therefore, not permissible. In this case, the apex court held that the Income-tax Officer could not seek to assess one income twice-once in the hands of the partners and again in the hands of the unregistered firm. This judgment, with respect, is not at all relevant for our purpose as the court is concerned in this case with a claim for set off and this case does not involve the consideration of double assessment at all. No one has taxed the same income twice in this case.
20. Learned counsel for the assessee also invited the attention of the court to the judgment of the High Court of Gujarat in the case of Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 and the Circular issued by the Central Board of Direct Taxes on August 24, 1966, referred to therein explaining the impact of the judgment of the Supreme Court in CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95. By the said circular dated August 24, 1966, the Central Board had invited the attention to the decision of the Supreme Court in Murlidhar Jhawar’s case [1966] 60 ITR 95 and observed that once the Income-tax Officer assessed directly the assessee’s share of income from a firm, it was not open to him to assess the same income again in the hands of the firm. In its judgment, the High Court of Gujarat held that in view of the principle against double taxation in the hands of the same person and in the absence of any special provision enabling double taxation of income, once in the hands of the unregistered firm and again in the hands of its partners, the assessee could not be taxed as an unregistered firm if the same income was already assessed in the hands of a partner. We are of the view that neither the circular dated August 24, 1966, nor the abovereferred judgment of the High Court of Gujarat is relevant for the purpose of determining the controversy arising in this case.
21. Learned counsel for the assessee also invited the attention of the court to the judgment of this court in the case of CIT v. V. H. Sheth [1984] 148 ITR 169. In this case, this court held that the Income-tax Officer was not entitled to tax the assessee as an association of persons once the income was already assessed in the hands of the members of such association. We are of the opinion that this judgment also is not relevant for our purpose.
22. Learned counsel for the Revenue submitted in the alternative that, in any event, Circular dated April 20, 1941, was not applicable to the case of the assessee as the partnership constituted under the agreement dated July 8, 1974, was not a partnership of a short duration. Learned counsel for the Revenue submitted that the duration of the unregistered partnership in this case was 11 years. It is not necessary to examine this controversy in view of our conclusion on the principal contentions urged at the Bar as discussed above. In view of the above discussion, we answer the question referred to us as under :
“The Circular No. 30 of 1941 is not applicable to the claim of the assessee for set off pertaining to adjustment of her share of loss from the unregistered partnership constituted under the agreement dated July 8, 1974, against her personal income and the assessee is thus not entitled to set off the said loss against her personal income. The Tribunal was in error in holding that the said circular was applicable to the assessee and the assessee was entitled to set off the abovereferred loss on the basis thereof. We accordingly answer the question in the negative and in favour of the Revenue.”
23. Having regard to the facts and circumstances of the case, there shall be no order as to costs.
