1998 (7) TMI 77 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of the assessee to set off the share of loss from an association of persons (AOP) against her individual income.

Summary:

Entitlement to Set Off Loss:
The primary issue was whether the assessee, an individual, could set off her share of loss from an association of persons (AOP) known as Nova and Co. against her individual income for the assessment year 1978-79. The Income-tax Officer disallowed this claim, but the Appellate Assistant Commissioner reversed this decision, allowing the set off. The Revenue appealed to the Income-tax Appellate Tribunal, which upheld the Appellate Assistant Commissioner's decision, leading to this reference.

Legal Provisions and Interpretations:
The court examined sections 70 and 71 of the Income-tax Act, 1961, which allow for the set off of losses from one source against income from another source under the same head or different heads of income. However, it was emphasized that the loss must be determined in the assessment of the same assessee. The definitions of "assessee" u/s 2(7) and "person" u/s 2(31) were also considered, highlighting that an AOP is a separate assessable entity distinct from its members.

Distinction Between the 1922 Act and the 1961 Act:
The court noted a significant distinction between the Indian Income-tax Act, 1922, and the Income-tax Act, 1961. Under the 1922 Act, income tax could be charged either on the AOP or its members individually, but the 1961 Act mandates that the AOP alone is taxed for its income. Consequently, the loss of an AOP cannot be set off against the income of its individual members.

Relevant Case Law:
The court referred to the Supreme Court decision in ITO v. Ch. Atchaiah [1996] 218 ITR 239, which clarified that under the 1961 Act, the income of an AOP must be taxed in the hands of the AOP itself, not its members. This decision invalidated the contrary views held in earlier High Court decisions such as Smt. Abida Khatoon v. CIT [1973] 87 ITR 627 and CIT v. S. K. S. Rajamani Nadar [1977] 109 ITR 258, which were based on the 1922 Act.

Conclusion:
The court concluded that the assessee could not set off her share of loss from the AOP against her individual income, as the AOP is a distinct taxable entity. The question was answered in the negative, in favor of the Revenue and against the assessee, with no order as to costs.