1996 (10) TMI 131 - AT - Income Tax

Assessing Officer, Assessment Order, Assessment Year, Business Loss, Business Receipt, Commissioner To Set Aside Assessment, Interest On Borrowed Capital

Summary

Issues Involved: Set off of loss in joint venture, deduction of machinery and equipment written off, assessment of interest income, disallowance of interest paid due to partners' debit balance.

Issue-wise Detailed Analysis:

1. Set off of Loss in Joint Venture:
The assessee, a partnership engaged in contract business, entered into a joint venture with M/s Unitech Ltd. as an AOP, with a 50% share. The assessee disclosed a loss of Rs. 12,39,271 from the AOP, with its share being Rs. 6,19,635, which was claimed as a business loss. The Assessing Officer computed the loss at Rs. 11,53,886, allowing the assessee's share of Rs. 5,76,943 as a business loss. The CIT deemed this action erroneous and prejudicial to the revenue, arguing that the Assessing Officer was not competent to compute the AOP's loss without its return being filed. The CIT held that the Assessing Officer's action was without jurisdiction. However, the tribunal found that the assessee was entitled to claim the loss, and the Assessing Officer's computation did not prejudice the revenue's interest. The tribunal noted that the provisions of section 155(2) could rectify any necessary adjustments post the AOP's assessment.

2. Deduction of Machinery and Equipment Written Off:
The CIT initially challenged the deduction of Rs. 46,972 for machinery and equipment written off but later accepted the assessee's explanation. Therefore, this point was not a matter of contention in the final judgment.

3. Assessment of Interest Income:
The CIT also initially questioned the assessment of interest income under the head 'Other sources' but accepted the assessee's explanation. Consequently, this issue was not pursued further in the final judgment.

4. Disallowance of Interest Paid Due to Partners' Debit Balance:
The CIT observed that the partners' current accounts showed considerable debit balances without proportionate disallowance of interest paid on loans not utilized for the business. The assessee argued that there was no nexus between the interest-bearing funds and the partners' debit balances, explaining that the contract receipts and other income were credited to the C.C. A/c, and partners' withdrawals were minimal compared to the total receipts. The CIT, however, held that the Assessing Officer's failure to disallow proportionate interest was erroneous and prejudicial to the revenue. The tribunal found the assessee's explanation satisfactory, noting that the business receipts outstripped the partners' withdrawals and there was no direct link between the interest-bearing loans and the debit balances. Thus, the tribunal vacated the CIT's order on this count.

Conclusion:
The tribunal concluded that the order of assessment dated 31-12-1990 was neither erroneous nor prejudicial to the interest of the revenue. The tribunal vacated the CIT's order, allowing the assessee's appeal.