Todi Paharmal v. Commissioner of Income tax — 1985 DIGILAW 722 (RAJ)

Judgment 1. Theaforesaid two matters arise out of the order of the Income tax Appellate Tribunal, Jaipur Bench, dated September 30, 1975, passed on the application for making a reference to this Court for answering the questions of law submitted by the assessee arising out of the order of the Tribunal in I. T. A. No. 759 of 1972-73 in respect of the assessment year 1967-68. The assessee moved the Tribunal for making a reference on the following questions of law for the opinion of this Court: 1. Whether, on the facts and circumstances of the case and the material on record, the Tribunal was justified in refusing to allocate total accepted profits of Rs. 32,220 in cotton account No. II in the ratio of sales, i.e., 16,449 and Rs. 4,70,209, for both the periods relating to 1967-68 and 1968-69 assessments when there is practically no difference in average sale and purchase prices in both the periods. 2. Whether, on the facts and circumstances of the case and the material on record, the method of computation of profits done by the Tribunal in cotton account No. II is legally justified when another reasonable and scientific method of allocation of accepted profits in the ratio of sales was available. 3. Whether, on the facts and circumstances of the case, there is any legal material or evidence for the Tribunal to hold that 35% yield of cotton on 29355 mds of kapas, 63.5% of cotton seed and 1.5% of wastage in the first period up to April 17, 1967, in cotton account No. II is not inconsistent, unjustified and unreasonable in view of the fact that in the same account, the Tribunal has accepted yield of 34.2% of cotton on total purchases of 32392 mds. kapas inclusive of 29355 mds. of kapas, 63% cotton seed and 2.8% wastage as reasonable after holding that there is no reason to disturb the result shown in cotton account No. II as a whole. 4. Whether, on the facts and circumstances of the case and the material on record, the method of ascertaining the closing stock as on April 17, 1967, for 1967-68 and valuation adopted is legally correct. 5. 4. Whether, on the facts and circumstances of the case and the material on record, the method of ascertaining the closing stock as on April 17, 1967, for 1967-68 and valuation adopted is legally correct. 5. Whether, on the facts and circumstances of the case and the material on record, there is any basis and evidence for the finding that the trading result of 1968-69 will go to affect the trading result of 1967-68 in case profit of Rs. 32,220 in cotton account No. II is allocated in the ratio of sales. 6. Whether the finding of the Tribunal that the assessee earned notional profit of Rs. 1,01,485 in cotton account No. II in the accounting year relevant to the assessment year 1967-68 is not perverse and is not based on surmises, conjectures and imaginations. 7. Whether the Income tax Officer is correct, after having accepted diwali year in respect of cotton business for the assessment year 1968-69, not to have accepted diwali year for the same business for the assessment year 1967-68. 8. Whether, on the facts and circumstances of the case and the material on record, in the absence of any extension application, interest under Section 139 can be legally charged. 9. Whether disallowing of loss of Rs. 3,425 in joint venture account with Roop Lal Kanakmal in excess of total loss of Rs. 1,724 claimed by the assessee is not unjustified. 10. Whether annuity deposit should be deducted while calculating interest under Section 139 treating the assessee as unregistered firm.” 2. The Income tax Appellate Tribunal made a reference to this Court for its opinion on questions Nos. 8 and 9 which, according to the Tribunal, are questions of law, whereas the Tribunal declined to make a reference on questions Nos. 1 to 7 and No. 10. Question Nos. 1 to 6 in the opinion of the Tribunal are questions of fact and question No. 7 was purely academic in nature and as regards question No. 10, the Tribunal expressed that it does not arise out of the order of the Tribunal. Income tax Reference Number is 20 of 1976 and the Income tax Case Number is 189 of 1975 which is an application made by the assessee for directing the Tribunal to submit the statement of case and refer to this Court questions Nos. 1 to 7 and 10 for its opinion. 3. Income tax Reference Number is 20 of 1976 and the Income tax Case Number is 189 of 1975 which is an application made by the assessee for directing the Tribunal to submit the statement of case and refer to this Court questions Nos. 1 to 7 and 10 for its opinion. 3. We have heard Shri R. Mehta, learned Counsel for the assessee, and Mr. B.R. Arora, learned Counsel for the Revenue. 6.4. We may first of all take up for consideration I. T. Reference No. 20 of 1976. Question No. 8 mentioned above relates to charging of interest under Section 139 of the Income tax Act when extension application is not moved by the assessee for late filing of the return and whether interest can legally be charged under Section 139 in such a situation. This question was earlier answered by this Court in Daljeet Singh & Co. vs. Union of India decided by the Division Bench in D.B. Civil Writ No. 258 of 1971 decided on October 22, 1971. Thereafter, the very same question again came up for consideration before this Court. The question which was referred by the Tribunal to this Court was whether, on the facts and circumstances of the case, the Tribunal was justified in upholding the levy of interest under Section 139(1)(iii) of the Act. This question was answered by the Division Bench of this Court on March 29, 1984, in Roop Narain Contractor vs. Addl. CIT, [1985] 153 ITR 670. In that case, views of different High Courts were taken into consideration and it was opined that, in the facts and circumstances of the case, the Tribunal was justified in upholding the levy of interest under Section 139(1)(iii) of the Act. The Division Bench relied on the earlier Division Bench decision of this Court in Daljeet Singh’s case and further reliance was placed on a Full Bench decision of the Andhra Pradesh High Court in ITO vs. Secunderabad Tin Industries, [1978] 113 ITR 1. The Full Bench overruled its earlier decision given in Kiskan Lal Harichand ‘s case [1971] 82 ITR 660. Other decisions on which reliance was placed on behalf of the Revenue have also been taken note of which were decisions of the Orissa, Gauhati, Gujarat and Karnataka High Courts. The Full Bench overruled its earlier decision given in Kiskan Lal Harichand ‘s case [1971] 82 ITR 660. Other decisions on which reliance was placed on behalf of the Revenue have also been taken note of which were decisions of the Orissa, Gauhati, Gujarat and Karnataka High Courts. The decisions of the Delhi and Patna High Courts cited on behalf of the assessee were also taken note of Thus, so far as question No. 8 is concerned, our answer is in the affirmative in favour of the Revenue and against the assessee relying on the Division Bench decision of this Court as stated above. 7.5. Sofar as question No. 9 is concerned, which is question No. 2 in the statement of the case and the reference made by the Tribunal, the assessee-firm has claimed a loss in joint venture of Rs. 3,425. This is the share of the loss in the joint venture which was made by the assessee in the partnership with M/s. Roop Lal Kanakmal. This question was decided by the Tribunal on the basis of the provision of Sub-section (2) of Section 77 of the Act and as it involved a question of law, reference has been made to this Court. 8.6. We have to look into the provisions of Section 77 of the Act. Section 77 deals with losses of unregistered firms or their partners which reads as under: “77. Losses of unregistered firms or their partners.-(1) Where the assessee is an unregistered firm which has not been assessed as a registered firm under the provisions of Clause (b) of Section 183, any loss of the firm shall be set off or carried forward and set off only against the income of the firm. .(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. .(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 73 ; or Sub-section (1) of Section 74 or Sub-section (3) of Section 74A; shall entitle the assessee to have such loss carried forward and set off against his own income.” 7. Aperusal of Sub-section (1) of Section 77 would reveal that where the assessee is an unregistered firm, then any loss of the said firm shall be set off or, carried forward and set off only against the income of the firm. This provision makes it clear that losses of an unregistered firm can be set off or carried forward and set off only against the income of the firm. An unregistered firm can carry forward its losses and can set off the same against its future income. 8. Clause (a) of Sub-section (2) of Section 77 provides that where the assessee is a partner of an unregistered firm and his share in the income of that firm is a loss, then, whether the firm has been already assessed or not, such a loss shall not be set off under the provisions of Sections 70 and 71. Further, Clause (b) of Sub-section (2) of Section 77 deals with the question whether such loss can be carried forward and set off by the assessee against his own income. It clearly provides that such losses cannot be carried forward and set off against his own income under Sections 72(1), 73(2), 74(1) and 74A(3). Clauses (a) and (b) of Sub-section (2) of Section 77 are clearly debarring provisions. An unregistered firm’s loss can be set off against its own income and partner’s share of loss in such firm cannot be set off or carried forward by him under the various provisions as contemplated under Sub-section (2) of Section 77. 9. Clauses (a) and (b) of Sub-section (2) of Section 77 are clearly debarring provisions. An unregistered firm’s loss can be set off against its own income and partner’s share of loss in such firm cannot be set off or carried forward by him under the various provisions as contemplated under Sub-section (2) of Section 77. 9. In The Law and Practice of Income Tax, seventh edition, by Kanga and Palkhivala, the learned commentators deal with the matter as under (at p. 634 of Vol. 1): “Likewise, if an individual is a partner in a registered firm and also in another unregistered firm, and the registered firm makes a loss and the unregistered firm makes a profit, the partner cannot be required to set off his share of the registered firm’s loss against his share of the unregistered firm’s profits on which the tax has already been paid by the firm ; but he is entitled to set off his share of the registered firm’s loss against his other taxable income or to carry forward the loss. Conversely, if the registered firm makes a profit and the unregistered firm makes a loss, the unregistered firm would be entitled to carry forward the loss and the common partner would be assessed on his share of the registered firm’s profits without taking into account his share of the unregistered firm’s loss.” 10. The claim of share of loss suffered in joint venture of Rs. 3,425 thus was rightly denied by the Tribunal in view of the provision of Sub-section (2) of Section 77. Our answer to this question as well, is against the assessee and in favour of the Revenue. 11. Coming to Income tax Application No. 189 of 1975 of the assessee to this Court for directing the Tribunal to submit the statement of the case for making a reference on the aforesaid remaining questions, it may be stated here that we are in agreement with the view taken by the Tribunal on questions Nos. 1 to 6 which are pure questions of fact and this Court cannot issue any direction to the Tribunal to make a reference on such questions of fact. These questions either relate to profit estimated or to rate of yield or percentage of gross profit which, in our opinion, are all questions of fact. 1 to 6 which are pure questions of fact and this Court cannot issue any direction to the Tribunal to make a reference on such questions of fact. These questions either relate to profit estimated or to rate of yield or percentage of gross profit which, in our opinion, are all questions of fact. Question No. 7 appears only to be academic and no such demand was made by the assessee. His own case for the assessment year 1967-68 is that the accounting year was up to Ramnavmi. It was only in the assessment year 1968-69 that the assessee showed his accounting year on diwali basis. Accounts were also maintained on that basis. There was no question of changing the accounting year for the assessment year 1967-68. 12. As regards question No. 10, it may be stated that it does not arise out of the order of the Tribunal dated May 30, 1974. It is only those questions of law which are required to be referred to this Court that arise out of the order of the Tribunal. Thus, we decline to direct the Tribunal to submit the statement of case for questions Nos. 1 to 7 and question No. 10. Application for Reference Case No, 189 of 1975, therefore, deserves to be rejected. 13. Accordingly, in Reference Case No. 20 of 1976 our answers to both the questions are in favour of the Revenue and against the assessee and I. T. Application Case No. 189 of 1975 is rejected. Parties are left to bear their own costs in both the matters.