The main legal principle established was that an unregistered firm, under clause (e) of the proviso to section 24(2) of the Indian Income Tax Act, was not entitled to carry forward the entire loss, including the share of the loss of retiring partners.

Hegde, J.—This is a reference under section 66 (1) of the Indian Income Tax Act, 1922, to be hereinafter referred to as the "Act", at the instance of the Commissioner of Income Tax. The question of law referred for the opinion of this court is :

"Whether, having regard to clause (e) of the proviso to section 24 (2), the assessee, an unregistered firm, was entitled to carry forward the whole of the loss including the share of the loss of the two retiring partners ?"

2. The question of law arising for decision in this case, we were told, is not covered by any decision either of the Supreme Court or any of the High Courts.

3. The assessee is an unregistered firm by name "The Bharat Engineering and Construction Company, Udipi". It carries on business as engineering contractors. The firm in question was constituted as per the partnership deed dated 25th September, 1950. During the assessment years 1956-57, 1957-58 and 1958-59, it incurred losses. The losses so incurred amounted to Rs. 1,41,180. But, during the assessment year 1959-60, it earned Rs. 25,103 as profits. It claimed that it should be permitted to set of its earlier losses towards the profits earned during the assessment year 1959-60. But, even before the commencement of the assessment year 1959-60, there had been a change in the constitution of the firm, two of its partners having left the firm earlier, Originally, the firm had four partners, namely, (i) U. Srinivasa Rao, (ii) Rosario Mathew Andrade, (iii) P. Sripati Acharya, and (iv) N. V. Shanbogue. U. Srinivasa Rao and Rosario Mathew Andrade retired from the partnership on April 3, 1958, and April 4, 1958, respectively.

4. One further fact needs to be noted that during the assessment year 1956-57, the assesses firm was registered under section 26A of the "Act" and assessed as such but during all the other assessment years it was assessed in the status of an "unregistered firm."

5. The question before the Income Tax Officer was, whether in determining the loss to be carried over by the firm, he should exclude the share of loss of the partners that had retired or whether the firm was entitled to carry forward the entire loss incurred by it during the previous years. The Income Tax Officer held that, in view of section 24 (2) (c) read with section 26 (1) of the "Act", the firm is not entitled to set off so much of the loss proportionate to the share of the retired partners computed in accordance with law. Dealing with that aspect this is what the Income Tax Officer observed :

"Since the unabsorbed loss of Rs. 1,41,168 (correct figure is Rs. 1,41,180) has to be carried forward and set off, there will be no taxable income for 1959-60. During the year of account, there was a change in the constitution of the firm in that two of the partners, Sri U. Srinivasa Rao and Rosario Mathew Andrade, were released on April 3, 1958, and April 4, 1958. Therefore, the share of profits of each partner will be computed proportionately in accordance with the proviso to section 26 (1) for the purpose of setting off the unabsorbed loss of previous years under section 24 (2). In accordance with clause (e) of the proviso to section 24 (2), so much of the loss proportionate to clause (e) of the proviso to section 24 (2), so much of the loss proportionate to the share of the retired partners cannot be carried forward and set off against the profits of the subsequent years.

6. Aggrieved by the order of the Income Tax Officer, the assessee went up in appeal to the Appellate Assistant Commissioner. That Officer differing entitled to carry forward the entire loss despite the fact that there was change in its constitution. He took the view that in the case of an unregistered firm, the assessee is the firm and not its partners and, therefore, the change in its constitution is immaterial for the purpose of assessment. He was of the opinion that clause (c) of this proviso to section 24 (2) governs the provisions contained in clause (a) of the sa