Commissioner Of Income-Tax vs P.M. Muthuraman Chettiar And Anr.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 16 January, 1962

Coram: J.C. Shah, M. Hidayatullah, S.K. Das

In this case the Supreme Court considered two consolidated civil appeals that presented a common question of law and were therefore heard together. The appellant in both appeals was the Commissioner of Income‑Tax, Madras. The respondent in Civil Appeal No. 429 of 1960 was P. M. Muthuraman Chettiar, who acted as the manager of a Hindu undivided family, and the respondent in Civil Appeal No. 430 of 1960 was S. Abdul Shakoor. For the purpose of discussion each respondent will be referred to as the assessee.

The first appeal concerned a Hindu undivided family that comprised a father and his minor son. The family carried on two distinct businesses: one as a money‑lender and dealer in shares, which was conducted within the territory that was then called British India, and the other as a partner in three firms that were situated abroad, specifically at Penang, Kuantan and Raub. Because the manager of the family was resident in the year of assessment 1946‑47, the family was treated as resident and ordinarily resident in the taxable territories for that year. During the assessment proceedings the assessee claimed that the partnership interests in the three foreign firms had produced a loss amounting to Rs 23,672, and that this loss should be set off against the income earned from the money‑lending business in India. The income‑tax authorities rejected the claim, and that rejection was affirmed by the Appellate Assistant Commissioner and subsequently by the Tribunal. The Tribunal explained its disallowance on the ground that, although Section 10 of the Indian Income‑Tax Act, 1922 permits a loss from one business to be set off against income from another business carried on by the same assessee, the provision does not apply when the loss arises from a partnership with other persons. The Tribunal held that in such a situation the right of set‑off could arise only under Section 24, and because none of the subsections of Section 24 were attracted in the present facts, the assessee was not entitled to any relief.

Following a request from the High Court of Madras under Section 66(2) of the Income‑Tax Act, the Tribunal formulated a specific question of law that arose from its order: whether the loss of Rs 23,672 incurred by the assessee as a partner in the three foreign firms could be set off against the assessee’s income from business carried on in India, taking into account the provisions of the Indian Income‑Tax Act. The High Court answered this question in favour of the assessee. The second appeal, Civil Appeal No. 430 of 1960, involved an assessee who was resident and ordinarily resident in the taxable territories and who engaged in the manufacture and sale of “lungies” at Madras. In or about April 1946 the assessee entered into a partnership in Rangoon, Burma, together with two other persons; the assessee’s share in the partnership was nine‑sixteenths, and he was the capital partner while the other two were working partners responsible for managing the business. The Rangoon partnership incurred a loss, and because no formal accounts were maintained, a statement of affairs dated 31 December 1946 was prepared, showing a loss of Rs 43,969. The partnership was later dissolved, and a registered deed of dissolution was executed on 13 January 1947, under which the assessee agreed to bear the whole loss of Rs 43,969 as the

In the matter that was referred to the High Court under section 66(2) of the Indian Income‑tax Act, the Court was asked to determine whether the loss of Rs 23,672 that the assessee had incurred as a partner in three firms located outside India could be set off against the assessee’s income from a business carried on in India. The High Court examined that question and rendered a decision in favour of the assessee.

In the subsequent civil appeal numbered 430 of 1960, the assessee, who was both resident and ordinarily resident in the taxable territories, operated a manufacturing and retail enterprise that produced and sold “lungies” in Madras. Around April 1946, the assessee entered into a partnership in Rangoon, Burma, creating a business that was similar in nature to his Madras operation. The partnership comprised the assessee together with two other individuals, and the assessee’s entitlement to the partnership’s profits and losses was fixed at nine‑sixteenths of the total. The assessee acted as the capital‑contributing partner, while the other two partners functioned as working partners responsible for managing the Rangoon business. The Rangoon firm experienced a financial loss, and because no regular accounts were maintained, a statement of affairs was prepared as of 31 December 1946, which disclosed a loss amounting to Rs 43,969. The partnership was later dissolved, and a formal deed of dissolution dated 13 January 1947 recorded that the assessee would assume the entire loss of Rs 43,969 because the other partners were unable to meet their respective shares and also to take over the assets and liabilities of the Rangoon firm as of the stated date. In the books kept by the assessee at his Madras establishment for the financial year ending 31 March 1947, the sum of Rs 43,969 was transferred to the assessee’s capital account. When filing his return of total income for the assessment year 1947‑48, the assessee claimed that the loss incurred by the Rangoon partnership should be allowed as a set‑off against his assessable income. The income‑tax authorities rejected the claim, refusing to permit either a full or a partial set‑off of the Rs 43,969 loss. On appeal, the Tribunal held that the Rangoon partnership constituted a separate legal entity from the assessee and consequently ruled that the assessee was not entitled to set off the loss sustained by the partnership. The Tribunal dismissed the appeal. Thereafter, another reference was made to the High Court under section 66(2) of the Income‑tax Act, posing the legal question: “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 this question in favour of the assessee.

The sole issue to be resolved in both appeals was whether the High Court had correctly answered the two legal questions that had been presented to it. It appears that, before the High Court, counsel for the present appellant argued that there was no identity between the entity that generated the income and the entity that incurred the loss. On that basis, the appellant contended that section 10 of the Income‑tax Act could not be invoked to allow a set‑off, because that provision permits a loss incurred by the same unit to be set off against the profit of that unit. In other words, the argument was that when an individual or the karta of a Hindu undivided family is a partner in a firm, the unit of assessment for the firm’s profits or gains is the firm itself, which is a distinct entity separate from the individual partners, even though the partner’s share of the firm’s profits must be included in his total income. The High Court rejected this line of reasoning and, in our view, correctly dismissed it in the circumstances of the two cases. The Court’s reasoning was consistent with earlier authority that had held that, irrespective of whether a firm is registered or unregistered, a partner’s share of loss in the firm may be set off against the partner’s own profits and gains from other sources.

In this matter the appellant contended that, according to income‑tax law, when an individual or the karta of a Hindu undivided family is a partner in a firm, the unit of assessment for the profits or gains of the firm is the firm itself, which is an entity separate and distinct from the partners who compose it. The argument further asserted that, although the partner must include his share of the firm’s profits in his personal total income, the loss incurred by the firm could not be set off against the partner’s other profits because the loss belonged to a different assessment unit. The High Court repelled this argument, and this Court agrees that the High Court was right to reject it on the facts of the two cases.

A similar submission was considered and rejected by the Privy Council in Arunachalam Chettiar v. Commissioner of Income‑tax, Madras. The Privy Council observed that, irrespective of whether a firm is registered or unregistered, a partner’s share of the loss of the firm may be set off against the profits and gains that the partner derives from his individual business. The same principle applies to the present cases, even though the amendment of the Income‑tax Act in 1939 introduced a different position for a partner in an unregistered firm; that distinction does not affect the outcome here.

The counsel for the appellant did not rely on the Revenue’s case as presented before the High Court but instead placed reliance on the second proviso to section 24(1) of the Income‑tax Act. This Court finds that the proviso is inapplicable to the facts before us. In Commissioner of Income‑tax v. Indo‑Mercantile Bank Ltd., this Court explained that the purpose of section 24(1) is to allow the set‑off of loss of profits or gains under one head against income, profits, or gains under any other head, and that neither the section nor its first proviso supports the fragmentation of the head “business.” The Court also observed that section 10 of the Income‑tax Act makes no distinction between business carried on in British India and business carried on in an Indian State, and therefore does not permit a division of the business for tax purposes. The ratio of that decision applies to the present matters, so the assessors are entitled to set off losses incurred in business outside the taxable territories against profits and gains earned from business within the taxable territories.

It is noteworthy that, although the profits of each distinct business may have to be computed separately, tax under section 10 is levied on the aggregate of the profits of all businesses carried on by the assessee, not on the separate income of each individual business. Consequently, where an assessee conducts several businesses, he is entitled, under section 24(1), to set off losses arising in one business against the profits of another business.

If the Court holds that section 24(1) of the Income‑Tax Act does not apply to the facts of the present matters, then the second proviso to that provision likewise cannot apply. The second proviso to section 24(1) is limited to situations involving an unregistered firm, and the present respondents are not such a firm. In the first appeal the respondent is a Hindu undivided family, and in the second appeal the respondent is an individual, neither of which falls within the category of an unregistered firm. Consequently, the Court finds that the second proviso to section 24(1) has no relevance to either of the present cases. The Court further observes that the High Court correctly answered the two questions that had been referred to it, and that the earlier decision in Commissioner of Income‑Tax v. Indo‑Mercantile Bank Ltd. provides the controlling ratio of decision, which governs the present appeals. Accordingly, the appeals are dismissed, the parties are ordered to bear costs, and a single hearing fee is awarded. In sum, the Court dismissed the appeals.