2003 (5) TMI 199 - AT - Income Tax

Issues Involved:
1. Apportionment of unabsorbed loss of an Association of Persons (AOP) among its members.
2. Interpretation and application of sections 67A, 86, and 167B of the Income-tax Act, 1961.
3. Validity of the Commissioner of Income-tax's order under section 263 of the Income-tax Act, 1961.
4. Binding nature of the CBDT Circular No. 551 dated 23-1-1990.

Issue-wise Detailed Analysis:

1. Apportionment of Unabsorbed Loss of an AOP Among Its Members:
The primary issue in this case is whether the unabsorbed loss of an AOP should be apportioned among its members or carried forward in the hands of the AOP. The Commissioner of Income-tax (CIT) held that the loss should be apportioned among the members of the AOP as per sections 67A and 167B(2) of the Income-tax Act, 1961. The assessee, however, contended that the loss should be carried forward in the hands of the AOP.

2. Interpretation and Application of Sections 67A, 86, and 167B of the Income-tax Act, 1961:
- Section 67A: The section deals with the method of computing a member's share in the income or loss of an AOP. It states that the share of a member in the income or loss of the AOP shall be computed and apportioned under various heads of income in the same manner as the income or loss of the AOP.
- Section 86: This section provides that no income-tax shall be payable by a member of an AOP on his share in the income of the AOP if the AOP is chargeable to tax at the maximum marginal rate or a higher rate. However, if the AOP is not chargeable to tax, the share of the member shall be included in his total income and taxed accordingly.
- Section 167B: This section specifies the tax rates applicable to an AOP. It states that if the shares of the members are indeterminate, the AOP shall be taxed at the maximum marginal rate. If the shares are determinate and a member is chargeable to tax at a rate higher than the maximum marginal rate, the AOP shall be taxed at such higher rate.

3. Validity of the Commissioner of Income-tax's Order Under Section 263:
The CIT invoked section 263 to revise the assessment order, directing that the loss incurred by the AOP should be apportioned among its members. The Tribunal, however, found that the CIT's interpretation was incorrect. The Tribunal held that the AOP is an independent assessable entity, different and distinct from its members. Therefore, the loss should be carried forward in the hands of the AOP and not apportioned among its members.

4. Binding Nature of the CBDT Circular No. 551 Dated 23-1-1990:
The assessee relied on the CBDT Circular No. 551, which stated that there is no provision in the Income-tax Act for the set off or carry forward of the share of loss of a member in an AOP in the assessment of the member. The Tribunal noted that the circular is binding on the Income-tax Department and supports the assessee's contention that the loss should be carried forward in the hands of the AOP.

Conclusion:
The Tribunal concluded that the AOP is an independent assessable entity and the loss incurred by the AOP should be carried forward in the hands of the AOP and not apportioned among its members. The Tribunal quashed the order passed by the CIT under section 263, allowing the appeal of the assessee. The Tribunal's decision was based on the interpretation of sections 67A, 86, and 167B of the Income-tax Act, 1961, and the binding nature of the CBDT Circular No. 551.

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