1984 (2) TMI 123 - AT - Income Tax

Business Income, Business Loss, Carry Forward And Set Off, Income From Other Sources, Profits And Gains Of Business Or Profession, Set Off Of Loss

Summary

Issues Involved:
1. Addition of Rs. 10,000 as income from undisclosed sources and penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961.
2. Carry forward and set off of business loss for the assessment years 1977-78 and 1978-79 under sections 71(1) and 72(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Addition of Rs. 10,000 as Income from Undisclosed Sources and Penalty Proceedings:
Facts:
- For the assessment year 1967-68, the Income Tax Officer (ITO) added Rs. 10,000 as income from undisclosed sources and initiated penalty proceedings, levying a penalty of Rs. 10,000 under section 271(1)(c) of the Act.
- The assessee initially claimed the amount as a loan from his wife, later revising the explanation to state that he had repaid his wife an amount which she returned to him.
- The Appellate Assistant Commissioner (AAC) accepted the assessee's explanation based on prima facie evidence from passbook entries and canceled the penalty.

Arguments:
- The department argued that the assessee's changing explanations indicated manipulation and justified the penalty.
- The assessee maintained that the revised explanation was due to an initial oversight and was supported by passbook entries.

Judgment:
- The Tribunal upheld the AAC's decision, finding no reason to differ. The Tribunal noted that the assessee's explanation was supported by prima facie evidence, and the mere mistake in interpreting passbook entries did not warrant a penalty. The departmental appeal for the assessment year 1967-68 was dismissed.

2. Carry Forward and Set Off of Business Loss for Assessment Years 1977-78 and 1978-79:
Facts:
- For the assessment year 1977-78, the ITO set off the business loss of Rs. 9,109 against income from other sources of Rs. 8,204, resulting in a total loss of Rs. 905.
- For the assessment year 1978-79, the ITO set off the carried forward losses from previous years against the total income, resulting in a net income of Rs. 2,954.
- The assessee claimed that the business loss for 1977-78 should be carried forward and not set off against income from other sources.

Arguments:
- The AAC accepted the assessee's claim, interpreting sections 71(1) and 72(1) to allow the assessee to carry forward the business loss instead of setting it off against other income.
- The department contended that the ITO was statutorily required to set off the loss under section 71(1).

Judgment:
- The Tribunal, by majority, upheld the AAC's decision, stating that section 71(1) confers a right on the assessee to set off losses, which the assessee can choose to waive. The Tribunal emphasized that the ITO cannot compel the assessee to set off the loss if the assessee does not wish to do so.

Dissenting Opinion:
- The Judicial Member disagreed, asserting that section 71(1) mandates the ITO to set off the loss and does not provide an option to the assessee. The member cited the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which mandates the computation of total income in accordance with the provisions of the Act, including mandatory set-offs.

Third Member's Order:
- The Third Member agreed with the Accountant Member, stating that section 71(1) provides a right to the assessee, which can be waived. The Third Member also affirmed that section 72(1) mandates the carry forward of any loss not set off under section 71(1), supporting the AAC's interpretation.

Conclusion:
- The Tribunal, by majority, dismissed the departmental appeals for the assessment years 1977-78 and 1978-79, allowing the assessee to carry forward the business loss as claimed.

Summary:
The Tribunal dismissed all departmental appeals, upholding the AAC's decisions on both the penalty for the assessment year 1967-68 and the carry forward of business losses for the assessment years 1977-78 and 1978-79. The Tribunal emphasized the rights conferred on the assessee under sections 71(1) and 72(1) and rejected the department's contention of mandatory set-off of losses. The dissenting opinion highlighted the statutory duty of the ITO under section 71(1), but the majority, including the Third Member, favored the interpretation that the assessee could waive the right to set off losses.