1990 (4) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the CIT's order under Section 263 of the IT Act.
2. Legality of the ITO's order allowing the set-off of losses.
3. Application of Sections 72 and 80 of the IT Act regarding carry-forward and set-off of losses.
4. Determination of whether the trust or the beneficiaries are the real assessees for the purpose of loss set-off.

Issue-wise Detailed Analysis:

1. Validity of the CIT's Order Under Section 263 of the IT Act:
The CIT initiated proceedings under Section 263 of the IT Act, asserting that the ITO's order dated 28th July 1986 was erroneous and prejudicial to the interests of the Revenue. The CIT argued that the loss allowed to be set off by the ITO was not eligible for carry-forward and set-off against the income of subsequent years. The CIT maintained that since the income for the assessment year 1981-82 was allocated to the beneficiaries, the election to assess the beneficiaries could not be varied in subsequent years. The CIT concluded that the entire profits for the assessment year 1984-85 should be taxed in the hands of the beneficiaries without any adjustment for earlier losses.

2. Legality of the ITO's Order Allowing the Set-Off of Losses:
The appellant's counsel, Sri Dastur, argued that the ITO had correctly determined the loss for the trust and directed its carry-forward. He cited Section 80 of the IT Act, which specifies that losses determined in pursuance of a return filed under Section 139 can be carried forward and set off. He contended that since the loss was determined for the trust and not the beneficiaries, it could only be carried forward in the trust's hands. He further argued that the ITO's order was in accordance with Sections 72 and 80, and the department could not change its stand on the matter.

3. Application of Sections 72 and 80 of the IT Act Regarding Carry-Forward and Set-Off of Losses:
The Tribunal found that the conditions under Section 72, which requires that the business in which the loss was originally computed should continue to be carried on, were satisfied. Additionally, Section 80 mandates that no loss can be carried forward unless it has been determined in accordance with a return filed under Section 139. The Tribunal concluded that these conditions were met in the case of the trust, and therefore, the ITO's order allowing the set-off of the loss was lawful.

4. Determination of Whether the Trust or the Beneficiaries are the Real Assessees for the Purpose of Loss Set-Off:
The CIT argued that the beneficiaries were the real assessees and the loss should have been determined and carried forward in their hands. However, the Tribunal disagreed, stating that since the loss was determined in the hands of the trust and not allocated to the beneficiaries, the trust alone could carry forward and set off the loss. The Tribunal also noted that the right to carry forward and set off losses is not inherent but subject to the conditions prescribed under the Act, which were fulfilled in this case.

Conclusion:
The Tribunal held that the ITO's order dated 28th July 1986, adjusting the loss of the assessment year 1983-84 against the profit of the assessment year 1984-85, was correct in law. The CIT's order under Section 263 was reversed, and the ITO's original order was restored. The appeal was allowed, affirming that the trust, having met the conditions under Sections 72 and 80, was entitled to carry forward and set off the losses against its income.