COMMISSIONER OF INCOME TAX Vs. N RUDRAPPAN

JUDGEMENT

(1.) RUDRAPPAN, who is the assessee in this income-tax reference, is since deceased and his legal representatives have been brought on record. The assessee, RUDRAPPAN, was a partner in registered partner ship firm of eight persons called "Universal Paper Tube Company", Coimbatore.

(2.) THE partners' shares in that firm were equal. THE assessee contributed Rs. 15, 000 as and towards his share of capital in the firm. Under the terms of the partnership, this amount had to be returned at the time when the assessee left the firm. Actually, the assessee retired from the firm with effect from April 1, 1971. During the period of three preceding years ending with March 31, 1971, the firm had run into losses. THE assessee's share of the losses amounted to Rs. 20, 831.28. Under the agreed terms of the retirement of the assessee, the capital contribution of Rs. 15, 000 paid by him was returned to him And his share of accumulated loss, namely, Rs. 20, 831.28 was also forgone.. THE ITO treated this sum of Rs. 20, 831 as income derived by the assessee from the firm and subjected it to assessment as part of his assessable profits under the head business.

(3.) THIS was the argument addressed to us by Mr. Jayaraman as wellWe do not agree with this submission. The expression "loss" is used in business jargon as well as in the I.T. Act in at least two different senses. Where the result of a year's trading is a minus quantity) that is called a loss. The accountant would describe it as a debit balance in the P & L account, THIS is one sense in which the expression "loss" is used. But even where the net result of a year's trading is a profit or a credit balance in the P & L account, there may be individual items of losses incurred by the person carrying on the business which might get embedded in that account. Easy illustrations of these losses, which may be called itemised losses for the sake of distinguishing them from the other kind, are loss of stock-in-trade by natural process or by fire, loss of circulating capital or money by embezzlement of an employee, and the like. What s. 41 (1) deals with are losses of the latter kinds, namely, item used losses. For, it is only in respect of the losses incurred by the assessee in the course of a business that a "deduction" or "allowance" is given or can be given. Where the year's trading result in a net loss, that loss is not such a loss with respect to which any "deduction" or "allowance", properly so called, is or can be given either under the I.T. Act or under any accountancy principle. That loss is a computed loss, not a loss incurred. If it is regarded in a loose sense, as a loss incurred, it is a loss incurred in the carrying on of the business as a whole, which is the result of a year's trading. Itemised losses incurred in this or that item of business transaction would come in for deduction or allowance in the computation of business results for the year as a whole which may happen to result in net loss or a net profit for the year. Where itemised losses incurred by an assessee are allowed or deducted by the Income-tax Department in any given assessment year, then such a loss would properly enter into consideration for the purpose of application of s. 41(1) in any subsequent year should the assessee come by some benefit or remission with respect to that very item of lossIn the present case, assuming that the assessee was compensated for his earlier years' share of losses when he was given Rs. 20, 831 by the continuing partners, that amount can hardly be regarded as a benefit or a remission given to him in respect of any loss incurred by him and in respect of which any allowance or deduction had been granted to him in any earlier assessment year, within the meaning of s. 41(1) of the Act, since the loss was the outcome of the trading result of the firm in the past years and not an item of loss incurred by him in the course of any business carried on by him.An argument was addressed by Mr. Jayaraman to the effect that if under the partnership law, a firm is to be regarded, in the broad sense, only as a compendious term to describe the constituent partners, any loss in the business of the firm must be regarded, to the extent of the share of each partner, as a loss incurred by that partner.