Commissioner Of Income-Tax, U.p v. J. P. Kanodia & Co

COMMISSIONER OF INCOME-TAX, U.P. J, P. KANODIA & CO; .April 28, 1970 [J. c. SHAH, K. s. HEODli AND A. N. GROVER, JJ.j lncomo-tax Act (11 of 1922), ss. 25(5) and 24--R•gfaten'<I /11·111--furtnus and minors entitled ro benefits of partnership--Respective >hares , In profits-Directions to be assessed as the lncom1 of thtir re.1p<'cliv• . jamJ/ies-Va/idity Loss in speculative transactions-Set off against orofits /rolil urlier bus/. ness acrivities--lf permissible. The respo,;dent is a roistered firm of two partners. Three minors were admitted to the benefits di the partnership. For the assessment year !957-58, the Income-tax Officer rejected the claim of the firm to set off under s. 24( I) 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 thenl should be O,ssessed 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 dedsion in Jagannath Mahadto Prasad v. Co'11missloner of Income-tax, 55 l.T.R. ·SOI held that· lhe 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: (I) Once the lncome~tax Officer grants registration of a firnl he cannot proceed to inquire whether 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 accord-·ancc with deed of partnership. Therefore, the order of the Income-tax Officer, in the present case, directing that the income of the putners and ·minors shaTI be assessed in the hands of their respective families was with-··<>ut jurisdiction,· [420 F-Hl (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-Bl 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, Solici«Jr-General, G. C. Sharma and B. D. Sharma, for the appellants. · M.· V. Goswami, for the respondent. The Judgment of the Court was delivered by Shah, J. Mis J .. P. Kanodia and Company is a firm regis-tered 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 th~ benefits of the partnership. Jn 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,~65/-. 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 cif the respective Hindu Undivided Families to which they belonged, the profits allocated to the partners and to the minors \••ere liable to be assessed in the hands of the respective Hindu Undivided Families io which they belonged. MARL AZIM, TAL TIT TATA |Ho Go RatfsaT TEs Arqat (The Commissioner of Income-tax, Uttar Pradesh J. P. Kanodia and Company) (28 aia, 1970) (Fate Ho Ho Mg, Ko To. ITF WIT Yo Tao Taz) gheqagewa-daa daz1922 (1922at11)—aret 10(1)—ag&aeaagreA atfe—arnaxF weaFarrerd & ard F AS AAT Bea was aT TL ORT 25(5)att24—zfnedigea GA—aitardhHF GUST KI SFRATT AIMNT WT aeH—Ay A GAR WITA-ATWAI— Ast Bat FB ag wad fe sa da st Fraley sasmaa Tera at wT F STH feat arert—aew farafiatitat & g| —gendf atounftertt ar tfnediea cd 21 weitere & ora Fdia wast BT BHATT aATAT TAT aT) aa afrard Fraterat 1957-58 & faa caearer feat wat age slat wedtatt at feat fizmeg arateataFR ae afar aed F geaagrd F zs arfa aaver 24(1) 3 seta qorer we fear ore six ae afafraifea frat fedfs unfardt sit aameat gre afwerr & wr Ha af Galt daeaqa-aqa ga fag afauaa gera, fred & geer a, at gst a aa-ogsit ft gafae gaat mafet are at aah satay gare at artwa ® fratfca fear arar arfer | argaage area at gfee wz attHAVE 226 ¥ ada fads F sea eararaa F aferd atx waaayHar (Vat) Bl VaR aA-aga Herat F aa aH wT A fraifer Heaare fae at aged Bt fear, att STATA HeIeT Tare ATA TAHT ATAaT, 55 Algo zlo ItoS01 % fafreaa ar aqHtT HW EU asafafraiferfear fe aet at afar frateo agF aa areaaTal & ae Aa fT ar aha Ay| atte ATTa: ATT BW ge, afafaatica—oea cararaa 4 fara fafasaa at aaaea fear atSA FAITH AAA ge Ma-HL AAI TATA TTFATA AeA Tare,71 ATgo Elo AIto 296 (UAo ato) F sae fear war at ate gafaufaatfeet ae areas & fearwarat & ge are & AF aed at arfaayaT AAU BWA BT THAI TAT aT| (Fee.7)| afe ara-ae afraret § feet qe ar cfsedtecn aH ary Haat feat gtat ag ae aia él we aHar fe gar aretare #Y arafeaae fredt sea eafea at war gre wraarse wa Ft arita @, wate sarwrttert weg oafeal ar vfafafaca wear S1 sa arfe fie ag artard% faye s agate arat ar oder st. sega aAe F gra-arafearet ar ag fate fart afasarfear & ar fe araterdtt ake aaaeatal ata saw aaa feg fava gera at oa H wa H faatfeafry qIvT1 (Fz 6)oe ;fafesz facia DS||Tet |[1969]71 BTR Fo AIXo 296 (UA Fo):Aa AAI, JAC Rat TAIT WATagiad wale_.|:(The Commissioner of Income-taxVs.Jagannath Mahadeo Prasad). att7||sere fear wat frie[1965]55 aTgo eho HIXo 501:|:ATFATA Alaa WM FATT WAST ATA(Jagannath Mahadeo PrasadVs. The—'Commissioner of Income-tax).:4 ait 7 fafas aatet afearitar : 1967 a fafa aia deat 193. 1964 a ao Uo dear 972 H garelate gee eaITaT arta 29 are, 1965 are facia att area H fees at Tg a aieiaat at ate & aaa ada eaed, afte aloTAT AIT sto Sto Tat serdtatote8aft uo ato alearitsararaa ar fro earatfaafa So ato ag F fear| raratfaata atg— HAG Fo To Hatfear wos Hrodt efosay grew Zaq daz, 1927a wate taectaa wa tssttadt afar adh ate adt gare ga otunter1 dla qaaea—aedle gary, arare sara ate UaeTare Bl APilard H Harel Bl SHele TaTAT Tar aT. 2. faratey ay1957-58 % faa we H frater at araarigal Farnt afoart + aa %, afare gee h aeqagre & sla aret sa arfml ST Het 22,234 waT sy Mt, TAT HWA F ary wT aedtare Hr fearate BH Al HTT 26,365 IE aahra st i TarHe afar at ag wset fe ate anitardt ate ga aageat are free ariterdt & oraal argrat saat Tat ar, afaaa at we gat avt-aqa fag afanataera st, frat a aaer a, gotarate gafaq wierd atemaaenl Ht adler 4 ara a sah aIa-aaA ferg afaaar Feral &qe &, fae J acer g, faater F abe g |a 3. ataae oferta. fea wee at age A GardetormiaaqFY gfe Btat eh| ga It Ga A Gas Vee MATT Heaaa afraia % Wee 226 F gels facta sige feat factaanda Hat eater at ag t—(i) fe oraz afeardt § ag fatawT Tye Hy fe artared alt waaeat ay ordfea ara at aayva fag afauaa geral at art F er A fraifer far ore faeq aaey g, WX (ii) fe get F Hreare H gs arf HY ara Heardart are ata & ae oraHt afafray a are 24 (1) & asta qaHt eat aTfet ar| 4, Alo HAA A TIA sale BY Ag AT AIT BW gU etaat faar tatfa ante & padiFX anierd ate waeaat ayatdfea vant % frater ar free wet aren are “eqsca: aferarfear The order passed by the Income-tax Officer was co11Jirmed in a qivision 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 Familie.!i 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 busi-ness. Manchanda, J., accepted the first contention, observing that th' order directing assessment of the shares allocated to the_ partners and the minors to the benefits of the partners "was mani-festly without jurisdiction'', he quashed that part. of . the ·· order of the Income-tax Officer. The leamed Judge re.iected the G second contention for in his view· the matter was covered by the judgment in Jagannath Mahadeo Prasad v. The Co111missio11er of Income-tax('). He accordingly held that the spec11liitivn losses were liable to be set off against the profits in other business in . the year of assessment. The order of Manchanda, J., was con-fim1ed in a special appeal by the Division Bench o( the High H Court. This appeal is filed by the Commissioner with certifi-cate granted by the High Court. (I) SS 1.T .R. SOI. 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 rnb-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. c including therein his share of its income, pro-fits 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 detennination 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 detennine 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 F Income-tax Officer has granted registration of the firm, he can-not proceed to inquire . whether the share allocated to a partner is beneficially held by soll!e 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 G cannot at that stage hold an inquiry whether the partners re-presented other persons. The order of the Income-tax Off.cer directing that the inc;oi;ne of the partners and the shares allocated to the minors admitted to the benefit of the partnership shall be asse,,sed in the hands. of the respective Hindu Undivided Families was plainly without jurisdiction. On the second contention not much .need be said. The Hi"h Court purported to follow the judgment in Jagannath Mahad;o & faat ar”, att saat araat afrard & maa Fs sa arr a afuesaaz feari fagrat eararettar & feet asita ay aedtare-azfear aaifsBAK AATZATT FI ATT F AMAA aga TaT TAT TAHT aTAaT’ Ffacia fear aT Bat aT| agqart Tela ag afafraifer feat fe wazat afaat faster ag & gra aware & ara F ae ase far aAara e1fate atte t sea grasa F que earadis F eato HAAAT% area at gfe at it1 agar A ag atte gee ara Fy sareAHL BEA HTS| 5. aaat afafaamast are 23 at stare (5) att (6) statfe @ faater ag F squat df ga sare F—| (5) gaadt sours & fret art % sta ge wt, aafaatfcdt arg wt at att Ga at ger ara aatfeafa srearer (1),eran (3) ar sqarer (4)% achat fratfea at ag at at—(i) faa we ara ata ara-stawaatfta feat«HITT,.|(ii) AH geaH aaftard at ga ara fat gaatara, ary att ga ag % afeara afeafae g, fratfca fareTET MT CA frateor F gare Te saR are Har aifermagia BY are...”| *aasit 4 ae ga ware aC ‘‘(5) Notwithstandinganythingcontainedin theforegoing sub-sections, when the assessee isa firm and thetotal income ofthe firm has beenassessed under sub-section (1),sub-section(3) orsub-section(4) as thecase may be— (i) The income-tax payable by the firmitself shallbe determined; (ii) the total incomeof each partner of thefirm,including therein his share of its incomeprofits and gainsof the previous year, shall be assessed and the sums payablebyhimonthebasisofsuchassessmentshall bedetermined......”. 255 Algo cto AIXe SOL. [1975] 3 suo fro qo “(6) aa wat atrae aftard stare (5)* saatHATA MATT HTT ag Ga AY fafa ada srr sa gaara at uf faa ot aazaren arattea far qar @ ate fafaae F aa saat wast afsghaa Heat 1”| 6. waar afaarey at fat cfreciaa wa at car A GA sreGIT MAH ATTA HATSTAT SF AIT HA FH TAH antares al Hatmila ait ba fate & arare ge Taw ata aaa cfs Ht wt ATAHAT CATS1 SAH FATT FA STATA (6) F aAgale aay Ht ATward F sta sas TaTTT a saris arat ghar F1 afe araHzafar a feat ar ar tfrectator om art HAT HT fear el Tl ae aesSia vel Ht aH fH say aTATare HY arated war feel wea eafer ar Tarara Gaara STF arfeaSi aaa afsard Bl saH are esettaaafter & fare & agar ara ar ga eafeaal at at sah Grae Faffafaa g, sae wattage aa H aqart srdet Hear afer 1 agSa THT TTA ga Bl Ste sal He aaHat fe Ta rflare seq aafzaatat Sfafafaea wet F 1 arent afsard at ag area fad ag freerfear var at fa anita at ara att anierd & arae 4 atenfarwaren a ater wa ata-aga fag afauaa Herat F ora gat Feq Hf fastfea fear aren, cqsea: feat afsatfrar F ar 7. facta acter F aaa F ofan Het at mraernar at gt VFa,TATA aT PATI AMAT ARTA MATS ATA ATA!tore HT ATTHal UT fee xa eararaT a se fag at mART ATA, FAT WaTTATA ATTA ABA TAS’ ATA ATA F ease WI A sae fears ga “(6) WhenevertheIncome-taxOfficer makesadetermination inaccordancewiththe provisions ofsub-section (5), he shall notify to the firm by an order inwritingtheamountofthetotal incomeon which thedeterminationhasbeenbasedandthe apportionmentthereof between the several partners.’| 1 55 mIgo eto Mtoe SOL. 2 71 MTgo Fo HIXo 296 (UH Ato), sqarag X TATA Aga sere aX away A aga ga gl agafafaatfca frat fe aredta araaz afafray at are 10 at srarer (1)Sada feat ag at ara, are ate afsaral at daar wet Ffratfedt sat ad & wer area Fug gee at giftat Aa HA aTSHAT TeFL 8. ata ata: AAT HY ogy sl GPa eAATAT BT AZ AATfrase gil MART HAIT FI ag alae fas ATH AZ F PILAITHartt FF get ar ara at yee Hear ATT HVA| THIT BT fearmar ar aaied fear erat & 1 aTttaret ate sa safeaat Bt ay areitertt& gael & afenfaa fae ae &, aaa-waa fare afawaa gerat ®fratfedt wr % arat & & arafer aah ar frater Her are freer stMaa BTA AT Toa eararaT F seer al ghee at art Fi aa& ada F arg aida al. feat sat ot aia Wa: ATT HT TE b to/fHo Prasad's case('), 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 Jagan-nath Mahadeo Prmad's ca£.~(') that in the computation of the income, profits and gains of the year of assessment under s. 10( l) of the Indian Income-tax Act, the assessee is not entitled B to set off speculative Iosse> 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 Inconll>-tllX refusing to allow the set off of sp.eculation ioss 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 ihe resp.ective Hindu Un-divided Families to which they belonged is confirmed. There will be no order as to costs .. V.P.S. Appeal partly allowed.