Commissioner of Income-tax Vs. M. Manickasundaram - Court Judgment

Abdul Hadi, J.

1. All these tax cases references under section 256 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), relate to the same assessee. Tax Cases Nos. 408 and 409 of 1982, both preferred by the Revenue and relating to the assessment year 1975-76, arise out of the same order of the Tribunal, which dismissed the Departmental appeal before it and allowed the cross-objection therein by the assessee. Tax Case No. 978 of 1986 is also by the Revenue against another order of the Tribunal in relation to the assessment year 1981-82. The sole question referred to this court in Tax Case No. 978 of 1986 is almost identical with the first of the two questions referred to this court in the other two tax cases, while the second of the said two questions therein is different.

2. The first question in Tax Cases Nos. 408 and 409 of 1982 is as follows :

'Whether, on the facts and in the circumstances of the case, and having regard to the provisions of rules 5 and 7 in Part IV of the First Schedule to the Finance Act, 1975, the Appellate Tribunal was right in holding that the assessee's share of loss from a firm, known as Shakthi Estates, should be taken into account and given set-off while computing the net agricultural income of the assessee for the assessment year 1975-76?'

3. The sole question in Tax Cases No. 978 of 1986 runs as follows :

'Whether, on the facts and in the circumstances of the case and having regard to rules 5 and 7 in Part IV of the First Schedule to the Finance Act, 1980, the assessee's share of loss from a firm should be taken into account and given set off while computing the net agricultural income of the assessee?'

(Though in the abovesaid question the term 'Finance Act, 1980' is referred to, to be precise it must be 'Finance (No. 2) Act, 1980'). Thus, of these two almost identical questions, the first refers to the relevant provisions in the Finance Act, 1975, and the second refers to the Finance (No. 2) Act, 1980. Since the relevant provisions, viz., rules 5 and 7 in Part IV of the First Schedule to the respective Finance Acts are the same, both the questions can be taken as the 'common question' involved in all these three tax cases, and even at the outset, we may state that the said common question revolves round the interpretation to be placed on the proviso to the abovesaid rule 7.

4. The second question referred to us in Tax Cases Nos. 408 and 409 of 1982 runs as follows :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that an appeal would lie before the Appellate Assistant Commissioner against the levy of interest under section 139(8) and section 215 of the Income-tax Act, 1961?'

5. We shall first deal with the abovesaid common question involved in all the tax cases. The assessee is an individual and a partner in the firm known as 'Shakthi Estates.' Right from the year 1973, agricultural income, though excluded from 'total income' assessable to tax under the Act, is taken into account for determining the rate of income-tax on the other non-agricultural income, which is taxable under the Act. This change in the law was introduced by the Finance Act, 1973, and thereafter continued, by the subsequent Finance Acts, including the above referred to Finance Act, 1975, and the Finance (No. 2) Act, 1980. The abovesaid assessee owned large agricultural lands and he derived agricultural income of Rs. 28,303 from the abovesaid lands during the previous year in relation to the abovesaid assessment year 1975-76 (that is, with reference to Tax Cases Nos. 408 and 409 of 1982). The abovesaid firm suffered loss in its agricultural operations. During the said previous year, the assessee claimed set-off of his share of loss from the said firm to the extent of Rs. 25,423 against his abovesaid agricultural income of Rs. 28,303. While taking into account his entire agricultural income, in assessing to tax his non-agricultural income chargeable to tax under the Act, for purposes of fixing the rate of tax. This set-off was allowed by the Tribunal on the basis of the interpretation the Tribunal placed on the abovesaid proviso to the abovesaid rule 7. Similarly, in relation to the assessment year 1981-82 in the case of Tax Cases No. 978 of 1986, the assessee claimed set off of his share of agricultural loss from the abovesaid firm to the extent of Rs. 1,23,528 against his own individual agricultural income of Rs. 23,060. This set off claimed has also been allowed likewise by the Tribunal in the other order of the Tribunal in relation to Tax Case No. 978 of 1986. Here also, the same interpretation of the abovesaid proviso to rule 7 has been adopted. So, the question to be decided by this court is, whether the abovesaid interpretation adopted by the Tribunal in the abovesaid two orders is correct.

6. In this connection, we may first set out the abovesaid rule 7 and rule 5, which are as follows :

'Rule 5. - Where the assessee is a partner of a registered firm or an unregistered firm assessed as a registered firm under clause (b) of section 183 of the Income-Tax Act, which in the previous year has any agricultural income, or is a partner of an unregistered firm which has not been assessed as a registered firm under clause (b) of the said section 183 and which in the previous year has either no income chargeable to tax under the Income-tax Act or has total income not exceeding the maximum amount not chargeable to tax in the case of an unregistered firm but has any agricultural income, then, the agricultural income or loss of the firm shall be computed in accordance with these rules and his share in the agricultural income or loss of the firm shall be computed in the manner laid down in sub-section (1), sub-section (2) and sub-section (3) of section 67 of the Income-tax Act and the share so computed shall be regarded as the agricultural income or loss of the assessee.'

'Rule 7. - Where the result of the computation for the previous year in respect of any source of agriculture income is a loss, such loss shall be set off against the income of the assessee, if any, for that previous year from any other source of agriculture income :

Provided that where the assessee is a partner of an unregistered firm which has not been assessed as a registered firm under clause (b) of section 183 of the Income-tax Act or is a member of an association of persons or body of individuals and the share of the assessee in the agricultural income of the firm, association or body, as the case may be, is a loss, such loss shall not be set off against any income of the assessee from any other source of agricultural income.'

7. Based on the abovesaid proviso to rule 7, learned counsel for the Revenue contends that the abovesaid firm, in which the assessee is a partner is 'an unregistered firm, which has not been assessed as a registered firm under clause (b) of section 183 of the Income-tax Act' and that, therefore, in each of the abovesaid assessment years the abovesaid assessee's share of loss cannot be set off against the assessee's abovesaid individual agricultural income.

But, the contention of learned counsel for the assessee is that the abovesaid firm is not one such unregistered firm spoken to in the said proviso and that hence the said proviso is not applicable. In other words, according to him, though the abovesaid firm is an unregistered firm under the Partnership Act, it cannot be treated as 'unregistered firm' as defined under section 2(48) of the Act since in the relevant assessment years in question, the said firm was having only agricultural income which was not liable to tax under the Act and thus the said firm was completely outside the purview of the Act. (Here, it must also be stated that as per another provision in the relevant Finance Acts, the terms 'unregistered firm' and 'registered firm' have the same meaning as defined under the Act).

8. We have considered the rival submissions. But, we are unable to accept the contention of learned counsel for the assessee and the reasoning and conclusion reached by the Tribunal. The term 'registered firm' is defined under section 2(39) of the Act, as follows :

'registered firm' means a firm registered under the provisions of clause (a) of sub-section (1) of section 185 or under that provision read with sub-section (7) of section 184.'

9. In other words, if a firm under the Partnership Act gets registered under section 185(1)(a) or under the said provision read with section 184(7), then only, it is a 'registered firm'. But, if it is so registered, it is only an unregistered firm as defined under section 2(48) since the latter provision says 'unregistered firm, means a firm which is not a registered firm.' Simply because such an unregistered firm, in relation to a particular assessment year, is not having any income at all chargeable to tax under the Act, it would not cease to be an unregistered firm as per section 2(48). There is no warrant for such an interpretation of section 2(48). In the present case, the above said firm 'Shakthi Estates' may have only agricultural income in the relevant assessment years in question, which is not chargeable to tax under the Act and, yet, so long as it remains a 'firm' under section 2(23) of the Act (which only says that the said term 'firm' has the meaning assigned to it in the Indian Partnership Act, 1932) and so long as it is not a 'registered firm' under section 2(39) of the Act, it should necessarily come within the definition of the term 'unregistered firm' under section 2(48) of the Act. There is no dispute that in the present case, the abovesaid Shakthi Estates is a firm under the Partnership act and that it is not a registered firm under section 2(39) of the Act. It is also not in dispute that the abovesaid Shakthi Estates 'has not been assessed as a registered firm under clause (b) of section 183 of the Act', as mentioned in the abovesaid proviso to rule 7. Then, automatically the said proviso to rule 7 is attracted. It is true that the assessment under section 183(B) of the Act would arise only if the firm in question has income chargeable to tax under the Act and not when it is not having such income at all, it having only agricultural income. But, even so, the said firm cannot be said to fall outside the category of 'an unregistered firm which has not been assessed as a registered firm under clause (b) of section 183 of the Income-tax Act' spoken to in the abovesaid proviso. In other words, even then, it would fall under the abovesaid category. No doubt, learned counsel for the assessee also contends that in the present case, there may not be necessity for getting the said firm registered under the Act by making the application under section 184, because the said firm has only agricultural income during the previous year in question, which is totally exempt from the tax under the Act and that hence the said firm is not going to get the normal benefit, by applying and getting itself registered as a 'registered firm'. But, in our view, this factor may not have relevance in interpreting the expression 'unregistered firm, which has not been assessed as a registered firm under clause (b) of section 183 of the Income-tax Act.' All that has to be seen is whether the firm in question is an 'unregistered firm' under section 2(48) of the Act and whether it was not assessed as a registered firm under clause (b) of section 183 of the Income-tax Act. Further, it does not also appear that an application for registration of a firm cannot at all be made under section 184, if the firm has only agricultural income during the previous year in question. In fact, in an application for such registration, all that is to be decided is, whether there is or there was during the previous year in existence a genuine firm with the constitution as specified in the instrument of partnership (vide section 185).

10. Further, if the interpretation sought to be made by learned counsel for the assessee on the abovesaid expression used in the abovesaid proviso, is to be adopted, then, in that case, rule 5 itself will become inapplicable to the assessee since in rule 5 also, the same expression 'an unregistered firm, which has not been assessed as a registered firm under clause (b) of section 183 of the Income-tax Act' is used (no doubt, with a rider 'and which... agricultural income') and the whole scheme of the relevant Finance Act in this regard may become unworkable. Therefore, such an interpretation cannot be the correct interpretation. Further, while rule 5 says about what constitutes the relevant share of agricultural income or loss of the assessee from the firm in question, rule 7 in the main part says that in the case of the assessee's loss from any source of agricultural income it shall be set off against the income of the assessee from any other source and the proviso to rule 7 says that if the abovesaid loss is the assessee's share in the agricultural income of an unregistered firm spoken to in the said proviso, it cannot be set off against the income from any other source of agricultural income. So, reading rule 5 and rule 7 together, the interpretation, which is sought to be made by the assessee and accepted by the Tribunal, cannot be accepted by us. Only the interpretation urged by the Revenue could be accepted by us as correct.

11. Learned counsel for the assessee submits that the abovesaid expression used in the proviso would apply only to an unregistered firm, having both agricultural income and non-agricultural income, chargeable to tax under the Act. In our opinion, there is no warrant for such a restrictive interpretation in the light of what we have stated above. Further, he also places reliance on CIT v. G.K. Devarajulu : [1991]191ITR211(Mad) , and the beginning part of section 2 of the Act saying, 'in this Act, unless the context otherwise requires,' and contends that the term 'unregistered firm' under section 2(48) of the Act should be given the abovesaid restrictive meaning in the context, in which the abovesaid proviso is placed. But, we are unable to see any such context in the placement of the abovesaid proviso, requiring any such restrictive interpretation. Further, if the abovesaid interpretation of learned counsel for the assessee is accepted, the following words appearing in the above referred to rider in rule 5 will have no meaning :

'and which in the previous year has either no income chargeable to tax... but has any agricultural income'.

12. Further we also find that the following passage relied on by the said learned counsel appearing in Garden Silk Weaving Factory v. CIT : [1991]189ITR512(SC) will also not help the said counsel :

'Unregistered firms are distinct assessees which are liable to pay tax on their total income.'

13. This observation was made in a different context and it does not mean that only firms which are liable to pay tax could be 'unregistered firm' within the meaning of the term in section 2(48).

14. No doubt, learned counsel for the assessee also argues why a loss from the abovesaid source of agricultural income, viz., partnership in the above referred to firm alone could not be set off against the income of the assessee from another source of agricultural income. To this, learned counsel for the Revenue answers by saying that such a loss could be carried forward by the said firm itself and set off against succeeding years' income. Whatever it is, when a Legislature has chosen to enact the abovesaid proviso, prohibiting one kind of set off, we cannot be behind it and say that the Legislature should not have done it or that it should be interpreted in the way in which the assessee wants it to be interpreted.

15. Then, coming to the above referred to second question referred to us in Tax Cases Nos. 408 and 409 of 1982, which has been extracted in paragraph 3 (page 135) above, the contention of learned counsel for the Revenue is that against the levy of interest alone, by the assessing authority, under sections 139(8) and 215 of the Act, a first appeal by the assessee to the Appellate Assistant Commissioner would not lie at all. No doubt, in this regard, he referred to section 246 and relies on Central Provinces Manganese Ore Co. Ltd. v. CIT : [1986]160ITR961(SC) . On the other hand, learned counsel for the assessee contends that it is not a case of first appeal against the levy of the said interest alone, but even against the rate of tax, which is only a part of the assessment itself, and that hence the said first appeal would lie. In this connection, he relies on Rajyam Pictures v. Addl. CIT : [1978]114ITR847(Mad) . It is clear to us that the contention of learned counsel for the assessee has to be accepted, since the first appeal was not merely against the levy of the abovesaid interest, but also against the rate of tax, which is a part of the assessment. Even as per Central Provinces Manganese Ore Co. Ltd. v. CIT : [1986]160ITR961(SC) , if the levy was a part of the assessment, appeal would lie. In the present case, since the rate of tax was challenged in the first appeal, the first appeal lies and there is no prohibition, in such appeal, for canvassing the correctness of the interest question also. In Rajyam Pictures v. Addl. CIT : [1978]114ITR847(Mad) also, this court held that in an appeal filed against the assessment, the levy of penal interest also could be challenged.

16. The net result is, the first question in Tax Cases Nos. 408 and 409 of 1982 and the sole question in Tax Case No. 978 of 1986 are answered in the negative and in favour of the Revenue. However, the second question in Tax Cases Nos. 408 and 409 of 1982 is answered in the affirmative and against the Revenue. No costs.