# COMMISSIONER OF INCOME-TAX, U.P v. J, P. KANODIA & CO

- **Citation:** [1971] 1 S.C.R. 418
- **Court:** Supreme Court of India
- **Decided:** 1970-04-28
- **Bench:** J. c. SHAH, K. s. HEODli, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-u-p-v-j-p-kanodia-co-5064
- **Pages:** 4

## Headnote

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,
A
B
c
D
E
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
I
partners represented other persons. He must allocate the profits in accord-
·ancc with deed of partnership.
Therefore, the order of the Income-tax
F
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

## Text

418
COMMISSIONER OF INCOME-TAX, U.P.
v.
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,
A
B
c
D
E
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
I
partners represented other persons. He must allocate the profits in accord-
·ancc with deed of partnership.
Therefore, the order of the Income-tax
F
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.
G
H
0
E
F
G
H
C.l.T. v. J, P. ltANODIA & CO. (Shah, J.1
4U
The Judgment of the Court was delivered by
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.
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.
\
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.
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.
(I) SS 1.T .R. SOI.
I,
420
SUPREME COURT REPORTS
[197Ij l S.C.R.
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 :
B·
(ii) the total income of each partner of the
firm.
c
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."
,.
.. ( 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
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.
On the second contention not much .need be said. The Hi"h
Court purported to follow the judgment in Jagannath Mahad;o
E
F
G
H
B
C'.I.T. V. J. P. KAN(>DIA & CO. (Shah, J.)
421
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
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 Undivided Families to which they belonged is
confirmed.
There
will be no order as to costs ..
V.P.S.
(I) SS l.T.R. SOI.
(2) 71 1.T.R. 296
LI 2S"p.Cl/i0 ~ 13.
Appeal partly allowed.