2014 (2) TMI 1108 - AT - Income Tax

Set off of loss u/s 70(1) of the Act - Whether the assessee being partner in a partnership firm is entitled to set off the loss of firm qua his share (unabsorbed depreciation) against his other business income (in individual capacity) as per the provisions of section 70(1) of the Act Held that - AO held that the partnership firm is a separate entity and the assessee who is a partner cannot claim depreciation on the asset of the firm in view of the provision of section 32 of the Act, while computing his individual income - the AO disallowed the claim of unabsorbed depreciation while computing the income of the assessee - The Apellant is not justified in setting off proportionate share of unasborbed depreciation of his partnership firm from his income. If the partners have got other than the share income from that firm, such allocated depreciation shall be set off against their respective income of that year from any other source - But with amendment in provisions of the Act as regards to taxation of firms w.e.f. 01.04.1993 i.e. for and from AY 1993-94 the concept of registered firm was abandoned and it is the same position as a member of AOP or BOI that of the partner of the firm - The profits of partnership firm are itself taxed and whatever remains will be distributed among partners to the extent of proportion of their shares as tax free share The decision in ITO Vs. Ch. Atchaiah 1995 (12) TMI 1 - SUPREME Court relied upon - The firms as assessed u/s. 184 and 185 of the Act w.e.f. 01.04.1993 because the profit of the firm is taxed in the hands of the firm and share of the partner is never taxable in their individual assessment thus, the assessee is not eligible to claim unabsorbed depreciation of the firm against incomes of the assessee who is partner of the firm and assessed in individual capacity Decided against Assessee.

Issues Involved:
1. Entitlement of the assessee to set off the loss (unabsorbed depreciation) of a partnership firm against his other business income in individual capacity as per section 70(1) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Set Off Loss of Partnership Firm Against Individual Income:
The primary issue in this appeal is whether the assessee, being a partner in a partnership firm, is entitled to set off the loss of the firm, specifically unabsorbed depreciation, against his other business income in his individual capacity under section 70(1) of the Income-tax Act, 1961. The assessee argued that he should be able to set off his share of loss from the firm against his other business income, as provided in section 70(1) of the Act.

2. Over Assessment of Income:
The assessee contended that he was over-assessed under section 143(1) of the Act at a total income of Rs. 7,65,180/- and that his correct total income should have been assessed at Rs. 34,120/-. The assessee claimed his share of loss from the partnership firm M/s. Seva Cold Storage, which suffered losses, while he also earned profits from another partnership firm and his proprietary concern.

3. Validity of Assessment Order Under Section 143(3)/147:
The assessee challenged the assessment order passed under sections 143(3) and 147 of the Act, arguing that the CIT(A) should have quashed the assessment order. The AO had reopened the assessment on the grounds that income had escaped taxation and disallowed the claim of unabsorbed depreciation, holding that the partnership firm is a separate entity and the assessee cannot claim depreciation on the firm's assets while computing his individual income.

4. Interpretation of Section 70(1) and Set Off Provisions:
The CIT(A) held that there is no provision for a partner to claim his loss from the firm and set it off against any other income in his individual return of income for the relevant assessment year. The CIT(A) noted that after the amendment in the Income-tax Act by the Finance Act, 1992, the concept of a registered firm was abandoned, and the profits of the partnership firm are taxed in the hands of the firm itself. The CIT(A) concluded that the assessee was not justified in setting off the proportionate share of unabsorbed depreciation of his partnership firm from his income, and the AO was justified in disallowing the same.

Legal Precedents and Analysis:
The judgment referenced the Supreme Court case of ITO Vs. Ch. Atchaiah (1996) 218 ITR 239 (SC), which clarified that the Income-tax Officer must tax the right person according to law and that there is no option to tax either the firm or its partners individually under the present Act. The judgment also discussed the unamended provisions of sections 182 and 183 of the Act, which allowed for the allocation of unabsorbed depreciation to partners, but noted that this is no longer applicable after the amendment.

Conclusion:
The tribunal concluded that the assessee is not eligible to claim unabsorbed depreciation of the firm against his individual income. The appeal of the assessee was dismissed, and the orders of the lower authorities were confirmed. The judgment emphasized that the profits of the partnership firm are taxed in the hands of the firm, and the share of the partner is not taxable in their individual assessment.

Final Order:
The appeal of the assessee was dismissed, and the order was pronounced in the open court on 19th February 2014.

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