Commissioner of Income-Tax, U.P. versus J. P. Kanodia & Co.

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. ·

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B

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M.· V. Goswami, for the respondent.

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C.l.T. v. J, P. ltANODIA & CO. (Shah, J.1

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0

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The Judgment of the Court was delivered by

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Shah, J. Mis 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 th~ benefits of the partnership.

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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.

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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 business.

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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 manifestly without jurisdiction'', he quashed that part. of . the ·· order of the Income-tax Officer. The leamed Judge re.iected the 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 confim1ed in a special appeal by the Division Bench o( the High Court. This appeal is filed by the Commissioner with certificate granted by the High Court.

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(I) SS 1.T .R. SOI.

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[197Ij l S.C.R.

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SUPREME COURT REPORTS

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420

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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 :

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·· ( 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, - ·

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B·

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( i) the income-tax payable by the firm itself shall be determined :

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(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."

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.. ( 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."

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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 Income-tax Officer has granted registration of the firm, he cannot proceed to inquire . whether the share allocated to a partner is beneficially held by soll!e other person or entity. The Incometax 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 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.

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On the second contention not much .need be said. The Hi"h Court purported to follow the judgment in Jagannath Mahad;o

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C'.I.T. V. J. P. KAN(>DIA & CO. (Shah, J.)

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421

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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 Jagannath 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.

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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 Undivided Families to which they belonged is confirmed. There will be no order as to costs ..

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V.P.S.

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Appeal partly allowed.

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(I) SS l.T.R. SOI.

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(2) 71 1.T.R. 296 LI 2S"p.Cl/i0 ~ 13.

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

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

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