1990 (4) TMI 87 - AT - Income Tax

Summary

Issues Involved:
1. Whether the order passed by the Income Tax Officer (ITO) on 28-07-1986 was erroneous and prejudicial to the interest of the revenue.
2. Whether the loss determined in the case of the trust for earlier years can be carried forward and set off against the income of the trust for the assessment year 1984-85.
3. Whether the beneficiaries should have been taxed on their shares of the profits without any adjustment on account of losses of earlier years.
4. Whether the CIT was justified in invoking section 263 of the Income-tax Act to revise the ITO's order.

Detailed Analysis:

1. Erroneous and Prejudicial to the Interest of Revenue:
The CIT initiated proceedings under section 263 of the Income-tax Act, concluding that the ITO's order dated 28-07-1986 was "prima facie erroneous and prejudicial to the interest of revenue." The CIT argued that the loss allowed to be set off in computing the income of the appellant trust was incorrect, as the loss computed for earlier years was not to be carried forward for set off against the income of subsequent years. The CIT emphasized that the department had elected to assess the beneficiaries' income in the assessment year 1981-82, and this election could not be varied in subsequent years. Hence, the ITO's failure to charge the beneficiaries to tax on their shares of the profits without adjusting for earlier years' losses rendered the order erroneous and prejudicial to the revenue.

2. Carry Forward and Set Off of Loss:
Sri Dastur, representing the appellant, argued that the ITO had determined the loss in the case of the trust for earlier years and directed that such loss should be carried forward. He pointed out that the directions to carry forward the loss were not the subject matter of appeal in earlier years. Therefore, unless the orders for the earlier years were modified, the CIT could not revise the order for the assessment year 1984-85. He cited section 80 of the Income-tax Act, which provides that no loss that has not been determined in pursuance of a return filed under section 139 shall be carried forward and set off. Since the loss was determined in the case of the trust, it could only be carried forward in the hands of the trust. The conditions laid down in sections 72 and 80 were satisfied, justifying the ITO's decision to set off the loss determined in earlier years against the income of the trust for the assessment year 1984-85.

3. Taxation of Beneficiaries:
The CIT contended that since the department had elected to assess the beneficiaries' income in the assessment year 1981-82, the beneficiaries should have been taxed on their shares of the profits for the assessment year 1984-85 without any adjustment for earlier years' losses. The CIT argued that the beneficiaries, being minors, could not have any loss computed under the Income-tax Act for earlier years, and thus, the entire profits for the assessment year 1984-85 should be taxable in their hands. Sri Dastur countered that the department could not change its stand and that the loss determined in the case of the trust should be carried forward and set off in the hands of the trust, not the beneficiaries.

4. Justification of CIT's Invocation of Section 263:
Sri Minocha, representing the department, argued that the trust could never be an assessee in its own right, and the real assessees were the beneficiaries. He emphasized that the right to carry forward and set off of loss is not inherent and is subject to conditions specified in sections 70, 71, 72, and 80. He cited various court decisions to support his argument that the ITO's order was erroneous and that the CIT was justified in invoking section 263. However, the Tribunal found that the conditions prescribed under sections 72 and 80 were satisfied in the present case, and the ITO's order was in accordance with the provisions of law. The Tribunal held that the CIT had jurisdiction to proceed under section 263 but concluded that the ITO's order was not erroneous nor prejudicial to the interest of the revenue.

Conclusion:
The Tribunal reversed the CIT's order under section 263, restored the ITO's order, and allowed the appeal of the assessee. The Tribunal concluded that the ITO's order dated 28-07-1986, which adjusted the loss of the assessment year 1983-84 against the profit of the assessment year 1984-85, was correct in law and not prejudicial to the interest of the revenue. The Tribunal emphasized that the conditions laid down in sections 72 and 80 were fulfilled, and the trust was entitled to carry forward and set off the loss determined in earlier years against its income for the assessment year 1984-85.