9911796707
TMI Blog2003 (5) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... ADP. Further, it was directed that such loss be apportioned amongst the members of ADP. Against the said finding, the assessee is in appeal before the Tribunal. 4. Mr. Mitra, Ld. counsel appearing on behalf of the assessee, has submitted that the finding of the Commissioner is against the law. He brought to our notice the provisions of sections 67A, 86 and 167B and submitted that for the purpose of deciding the issue, ld. Commissioner should have considered the cumulative effect of the aforesaid sections. According to the counsel, an ADP is normally subjected to tax at the rates which are applicable to an Individual, HUF as specified in the Finance Act for the relevant assessment year. However, section 167B is a departure from such normal position. Under section 167B(1), where the individual shares of the members of an ADP are indeterminable, tax shall be charged on the total income of the ADP at the maximum marginal rate of the ADP exclusive of his shares of ADP exceeds the maximum amount which is not chargeable to tax, the total income of the ADP is taxable at the maximum marginal rate. Under clause (ii) of section 167B(2), where income of the member of the ADP is chargeable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of an AOP, obviously in a case where the total income of the AOP, which is otherwise chargeable to tax at the normal rates as may be applicable to an individual, Hindu undivided family, body of individuals, etc. falls below the minimum threshold of taxation specified in the Finance Act of the relevant assessment year. The said clause provides that in such a situation, though the share of the member in the income of an AOP as computed under the provisions of section 67A of the Act shall be included in the total income of the member, the rebate envisaged under section 86 of the Act shall not be available to the individual member. 6. According to the ld. counsel, the whole idea of section 86 of the Act is that an individual member does not pay income-tax on its share of income in an AOP where the income of the AOP is otherwise chargeable to tax. The said share of income in an AOP, however, is included in the income of an individual member of the AOP only increasing the rate of tax in the hands of the individual member. 7. In the present case, the AOP was otherwise chargeable to tax with respect to its entire income at the rate of 46% which is higher than the maximum marginal r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lacuna under the Act, that cannot be fulfilled by the Tribunal by passing an order which is not provided under law. Reliance was placed on the decision of the Karnataka High Court in the case of CWT v. G.E. Narayana [1992] 193 ITR 41. Ld. Departmental Representative has further pointed out to page 2 of the written submission filed by the assessee wherein it has been stated as follows: "The learned CIT was probably influenced by the provisions of section 67A(2) of the Act in coming to the conclusion that the loss suffered by an AOP has to be distributed among its members and the members themselves are only allowed to carry forward such loss suffered by the AOP." and pointed out that the submission of the assessee is based on presumption and probability which should not be accepted by the Tribunal. According to the ld. Departmental Representative, there is no infirmity in the order passed under section 263 by the ld. Commissioner. 9. We have heard both the sides and perused the material on record. The fact of the case is not in dispute that during this year the assessee-AOP claimed to carry forward the loss suffered by it in the assessment year 1995-96. The claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to income-tax. The provision has been enacted with a view to avoid double taxation. The only situation when the AOP is not chargeable to tax where the income of the (sic). 14. In the present circumstances we have seen that the present AOP is chargeable to tax with respect to its entire income at the rate of 46% i.e., higher than the maximum marginal rate for the present assessment year. Therefore, the situation is covered by clause (a) of the first proviso to section 86 of the Act, according to which, the share of income of the members of the AOP cannot be included in the total income of such members. Consequently, the members are not entitled to the benefit of set off and carry forward of the loss suffered by the AOP and the entire loss suffered by the AOP is to be carried forward in the hands of the AOP to be set off against income in subsequent assessment year. 15. While deciding the issue it is to be noticed that section 3 of Indian Income-tax Act, 1922 provided an option that total income of an AOP shall be charged either on the AOP or members of the AOP individually. That option is not available under the Act of 1961 and under section 4 of the Income-tax Act, 1961, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n between the Judicial Member and the Accountant Member, the matter is being referred to the Hon'ble President of the ITAT with a request that the following question may be referred to a Third Member or to pass such orders as the Hon'ble President may desire-- "Whether, on the facts and in the circumstances of the case, the order passed under section 263 of the Income-tax Act, 1961 by the Commissioner of Income-tax by which it was directed that the loss incurred by the assessee-AOP is to be apportioned among the members of the AOP as per the profit-sharing ratio of the members, is justified in law whereas the claim of the assessee was to carry forward the loss in the hands of the AOP?" Per Shri N.S. Saini, Accountant Member.-- I have the benefit of going through the proposed order of my learned brother in this case. Despite my best efforts and great pursuasion to myself I have not been able to agree with the conclusions as arrived at by the learned Judicial Member. The reasons for the same are incorporated in the present order of mine which is as under:-- There is no dispute about the facts of the case which has been narrated in the order of the learned brother and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber's share in the income of an AOP are not exhausted in section 67A itself, but have the roots in section 86 of the Act as well. For the sake of understanding the issue clearly, the relevant provisions of section 86 is extracted as hereunder: "Section 86--Where the assessee is a member of an association of persons or body of individuals (.....), income-tax shall not be payable by the assessee in respect of his share in the income of the association or body computed in the manner provided in section 67A": Provided that-- (a) where the association or body is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any of the provisions of this Act, the share of a member computed as aforesaid shall not be included in his total income; (b) in any other case, the share of a member computed as aforesaid shall form part of his total income: Provided further that where no income-tax is chargeable on the total income of the association or body, the share of a member computed as aforesaid shall be chargeable to tax as part of his total income and nothing contained in this section shall apply to the case." 6. The main argument of the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., nil or negative, such cases will be governed by the second proviso to section 86 only. 7. In the instant case, as the total income of the assessee-AOP is a loss and no income-tax is chargeable under the Act on such total income. Hence, the case of the assessee-AOP falls under the second proviso to section 86 and not the clause (a) of the first proviso to section 86 of the Act. 8. Thus, in view of the second proviso to section 86 of the Act, the share of income (loss) of a member of the assessee-AOP computed in the manner provided in section 67 A of the Act shall be chargeable to tax as part of his total income. 9. My above opinion is further fortified by absence of any provisions in the Act for carry forward and set-off of losses in the case of AOP similar to that of section 78 applicable in case of a firm and section 79 applicable in case of a company. This also shows that the Legislature intended that when there is a loss in the hands of an AOP, and consequentially no income-tax is payable by the AOP on such total income, wherein the shares of members are determinate and known, such loss should be allocated in the hands of its members in the manner provided under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the circular of the CBDT is binding upon the officers of the IT Department. It is true that in para 11.6 of the said circular it has been opined that there are no provisions in the Act for the set off or carry forward of the share of loss of a member in an association or body in his own assessment. In the case of K.V. Produce v. CIT [1992] 196 ITR 293 (Ker.) it has been held that though the circulars issued under section 119 may have the force of the law, they may not override the law itself. Concepts like ultra vires would come into play if a notification or a rule runs derogatory to the parent law. Similar was the view expressed by the Hon'ble Supreme Court in the case of Kerala Financial Corpn. v. CIT [1994] 210 ITR 129. Further, the Tribunal is not bound to take judicial notice of the circular which is contrary to the status. In saying so I derive support from the decisions in Bela Singh Daulat Singh v. CIT [1966] 62 ITR 250 (All.), Motor Industries Co. Ltd. v. CIT [1987] 163 ITR 659 (Kar.) and CWT v. Balbhadradas Bangur [1983] 148 ITR 149 (Cal.). As has been observed above in view of the second proviso to section 86 read with section 67A, the above opinion of the CBDT is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers of the AOP as per profit sharing ratio of the members, is justified in law whereas the claim of the assessee was to carry forward the loss in the hands of the AOP?" Parties have been heard and record perused. 2. The relevant facts briefly stated are that the appellant, an Association of Persons (hereinafter referred to as 'AOP'), was constituted under an agreement dated 31-3-1994 by four members (all limited companies), as under:-- Name of member Share in AOP M/s. Century Textiles Industries Ltd. 60% M/s. Kesoram Industries Ltd. 20% M/s. Jayshree Tea Industries 10% M/s. Bharat General Textile Inds. Ltd. 10% For assessment year 1995-96, the return of income was filed by the assessee on 31-10-1995 in the status of AOP disclosing loss of Rs. 28,39,36,036. In the statement of computation of income filed along with the return, the said loss was apportioned amongst four members of the AOP as per their respective share ratio. On 4-3-1997, the assessee filed a revised return declaring loss of Rs. 25,84,51,241 along with the revised statement of income in which the loss disclosed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended:- That the order under section 263, passed by the CIT is on the basis of misreading of the relevant provisions of the Income-tax Act, 1961. That the relevant provisions are sections 67A, 86 and 167B of the Act. That AOP is normally taxable at the rates which are applicable to an individual, Hindu undivided family, body of individual, etc. as may be specified in the Finance Act of the relevant assessment year. However, section 167B of the Actmakes a departure from such normal position in certain specific circumstances. It was contended that under section 167B(2) it is provided that if any member or members of AOP is/are chargeable to tax at higher than the maximum marginal rate, the tax shall be charged on that portion of the total income of the AOP as relatable to such member(s) at such higher rate or rates. That in the case of the appellant-company the maximum leviable rate in assessment year 1995-96 was 40 per cent, whereas in the case of the members, who are all companies, the rate of tax including surcharge was 46%. Therefore, the Association of Persons was liable to tax @ 46% as per provisions of section 167B. 5. The learned counsel further contended:--That section 67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer is competent to take a different view than expressed by the CBDT in its circular which is benevolent to the assessee:-- C.S. Dall Flour Mills' case UCO Bank's case Paper Products Ltd.'s case CST v. Indra Industries [2001] 248 ITR 338, 340 (SC) CIT v. Anjum M.H. Chaswala [2001] 252 ITR 1, 16 (SC) That recently in the case of Anjum M.H. Chaswala, their Lordships have held that the CBDT circulars which are beneficial to the assessee are binding on all income-tax authorities that the said view has been reiterated by the Supreme Court in the case of CIT v. Dhiren Chemicals Industries [2002] 254 ITR 554, 557 (SC). That the Supreme Court in the case of Kerala Financial Corpn. v. CIT [1994] 210 ITR 129, 135 (SC) by a Bench of two judges held that a circular detracting from the provisions of the law could not be accepted. However, firstly the circular does not detract from the provisions of the law, it was contended. That in any case, this decision of the Supreme Court by a Bench of two judges cannot be preferred to the decisions of the Supreme Court by larger Benches. It was pointed out that the decision in the cases of Dhiren Chemicals Industries and Anjum M.H Chaswala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the same manner in which the income or loss of the association has been determined under each head of income. That section 67A provides for distribution of income of the AOP amongst its members and, accordingly, the same cannot be retained by the AOP for set off in the subsequent year. That the plea advanced on behalf of the assessee presents a distorted interpretation. That provisions of section 86 as well as section 167B do not provide any help to the assessee. That section 86 forms part of Chapter- VII and it provides for the income forming part of the total income on which no income-tax is payable. That this section also indicates that the income of each member in an AOP is assessable in the hands of the respective members. That second proviso to section 86 squarely covers the case of the assessee as in the year under appeal no income-tax was chargeable on the appellant's income as the returned income was negative and, therefore, not chargeable to tax. It was further contended that section 86 clearly provides that where no income-tax is chargeable on the total income of the assessee, the share of a member computed under section 67A is chargeable to tax as part of his total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a member in AOP can be set off and/or carried forward is not an issue to be examined and decided in this case. That the only issue to be decided in this case is as to whether the AOP is entitled to carry forward of loss suffered by it. It was further contended that had it been the intention of the law makers to allow carry forward of loss in the case of AOP, there is no reason why the same would not have been explicitly provided under the Act. It was contended that sections 70 to 79 of the Income-tax Act, 1961 exhaustively deal with various situations in which the losses are to be set off and carried forward. That these provisions do not provide for the set off and carry forward of loss in the case of AOP. My attention was also invited to section 182 dealing with assessment of registered firm prior to its omission w.e.f. 1-4-1993. It was pointed out that sub-section (2) of section 182 provided that the share of any partner in the loss of a firm would be set off against his other income or carried forward and set off in accordance with the provisions of sections 70 to 75. That circular No. 551 is applicable, but the interpretation given to it by the appellant is distorted and unacce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act, income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly." From the plain reading of the charging section quoted above, it is evident that the charge is in respect of the total income of the previous year of every person. The person is also defined under section 2(31) of the Act which reads as under:-- "(31) 'Person' includes-- (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses: The above definition of person is inclusive definition and it is noteworthy for the purpose of present controversy that a company is also included in the definition of person as also an association of persons. 11. Section 3 of the Indian Income-tax Act, 1922 provided that in respect of the total income of an association of persons the tax shall be char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of firm or AOP. In the case of the registered firm as per the law as existed prior to the change in the scheme of taxation of firms from assessment year 1993-94, the tax was payable by the firm on its total income and its partners were also separately assessable to tax in respect of the share income from the firm. In the case of unregistered firm, whereas the firm was to be assessed as a separate entity, share income of the partners from unregistered firm was to be included in their individual assessments for rate purposes only. It is thus evident that the taxation of collective entities and individual entities is provided separately under the provisions of the Act of 1961 and it is, therefore, necessary to examine the other provisions of the Act relating to the association of persons and its members for determining the issue involved in this appeal. 12. At this stage, it would be relevant to refer to section 167B which is quoted hereunder:-- "167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a cooperative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Section 139(1) makes it obligatory for the association of persons to file the return of income within the prescribed time if its income exceeds the maximum amount which is not chargeable to income-tax. The assessment in the case of an association of persons is required to be made under the provisions of the Act, such as section 143 or 144 and/or 147. 14. In the present appeal, the appellant had suffered losses. Therefore, strictly speaking there was no obligation for the association of persons to file the return under section 139(1) of the Act. However, section 139(3) requires the person who claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72 etc., to file within the time allowed under sub-section (1) of section 139 a return of loss in the prescribed form and verified in the prescribed manner. It will be useful to quote section 139(3) as under:-- "(3) If any person who has sustained a loss in any previous year under the head .Profits and gains of business or profession" or under the head "Capital gains" and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A." It is evident from the language of sections 71, 72 and 80 above that these sections apply to all the assessees irrespective of their status. 16. Thus, if the provisions like sections 67A and 86 of the Act are ignored for a while, it would not be difficult to appreciate that an association of persons being a collective assessable entity is required to file a return of income or loss and the Assessing Officer has to make an assessment on the basis of the return and supporting documents and if the association of persons claims the loss to be carried forward, it has to comply with the provisions of section 139(3) read with section 80 of the Act. In this case, it is not disputed that the provisions of section 139(3) and section 80 have been complied with. That being so, why the association of persons be not entitled to carry forward of loss suffered in business? The controversy arises merely because of the provisions of section 67A and section 86 of the Act. It would, therefore, be necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educted from his share. Explanation--In this section, "paid" has the same meaning as is assigned to it in clause (2) of section 43." "86. Where the assessee is a member of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India), income-tax shall not be payable by the assessee in respect of his share in the income of the association or body computed in the manner provided in section 67A: Provided that,-- (a) where the association or body is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any of the provisions of this Act, the share of a member computed as aforesaid shall not be included in his total income; (b) in any other case, the share of a member computed as aforesaid shall form part of his total income: Provided further that where no income-tax is chargeable on the total income of the association or body, the share of a member computed as aforesaid shall be chargeable to tax as part of his total income and nothing contained in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sections 182 183 as applicable to registered firm and unregistered firms prior to the modification of the scheme of the taxation of the firms w.e.f. assessment year 1993-94 will again be relevant. Section 182 deals with assessment of registered firms and section 183 deals with the assessment of unregistered firms. In the case of CIT v. A.W. Figgies Co. [1953] 24 ITR 405, 409 (SC) it was held that charging provision makes a firm as a separate unit of assessment. In the case of registered firm assessment was provided to be made in the case of the firm, tax payable by the firm to be determined and the remaining income to be apportioned amongst the partners under various heads of income section 67 A provided for inclusion of such share income in the assessment of partners for purposes of taxation. In the case of unregistered firm the share income was to be included only for rate purposes. In the case of CIT v. Smt. Sadhana Nayar [1994] 210 ITR 648 (Bom.), their Lordships of the Bombay High Court held as under:-- "It is well-settled that any loss incurred by an unregistered firm may be set off by such firm against its income in the same year or may be carried forward if unabsorb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociation of persons is to be included in the total income of the member of the association of persons for rate purposes only. 23. The proviso to section 86 carves out a third situation in which a member is required to pay tax on his share income in the association of persons. That category is an association of persons which has income but on which no tax is chargeable, i.e., an association of persons, the income of which does not exceed the maximum income which is not chargeable to tax. The proviso to section 86 ensures that the income of the association of persons which does not attract tax in the hands of the association of persons is liable to be included in the income of the member of the association of persons for the purpose of payment of tax. The purpose to be achieved is that not to allow any portion of income of the AOP to escape tax burnt. 24. The dispute involved in this appeal is centered around proviso to section 86. It is the case of the Revenue that the proviso to section 86 provides that where no income-tax is chargeable on the total income of the association, the share of the member computed under section 67A is to be included in the total income of the member. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses of assessment on which no rebate is allowable. This view gets strengthen in the light of the CBDT circular No. 551 dated 23-1-1990 explaining the scheme of taxation of association of persons and body of individuals. The circular being relevant is reproduced hereunder:-- "Taxation of association of persons and body of individuals 11.1 Insertion of section 167B to tax certain association of persons and body of individuals at the maximum marginal rate.--Under the provisions of the First Schedule to the annual Finance Acts, an association of persons or body of individuals is normally taxed at the rates applicable to individuals. However, under the old provisions of section 167A of the Income-tax Act, if the shares of the members of an association of persons were indeterminate or unknown, the entire income of the association was taxed at the maximum marginal rate. Since the instrumentality of the association of persons and body of individuals had been widely used in the past for tax evasion, the Amending Act, 1987, introduced a new scheme for their taxation by inserting section 167B in the Income-tax Act, which provided that in the case of an association of persons or body of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of other association of persons and body of individuals (i.e., where the shares of the members are determinate), (i) if the total income of any member of such association or body (excluding his share from the association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member, tax shall be charged on the total income of the association or body at the maximum marginal rate; (ii) if any member or members of such association or body is or are chargeable to tax at a rate which is or are higher than the maximum marginal rate, tax shall be charged at such higher rate or rates only on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members and the balance of the total income of the association or body shall be taxed at the maximum marginal rate. (3) An Explanation at the end of the section explains the circumstances in which the shares of the members of the association or body in the income of such association or body shall be deemed to be indeterminate or unknown. 11.3 The effect of the provisions of the new section 167B is that only those a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides that any payment of interest, salary, bonus, commission or remuneration by whatever name called, made by an association of persons or body of individuals to a member of such association or body shall not be allowed as a deduction while computing the total income of such association or body. These provisions are on the same lines as of clause (b), which disallows such payments made by a firm to its partners. Explanations 1 to 3 in the new clause (ba) deal with the treatment of interest paid by an association or body to its members or vice versa. These Explanations are also exactly on the same lines as Explanations 1 to 3 in clause (b), which deal with the treatment of interest paid by a firm to its partners and vice versa. It may be clarified that even before the insertion of this clause, such payments made by an association of persons or body of individuals to its members were not being allowed as a deduction in the hands of the association or body, as they were regarded as payments to self. This has now been given a statutory recognition. 11.6 Provisions of new section 67A.--The new section 67 A, which has sub-sections (1) to (3) and an Explanation, provides for the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aximum marginal rate, the share of a member therein shall not be included in his total income at all. (ii) Where the association or body is chargeable to tax at the normal rates applicable to individuals, etc., the share of a member therein shall be included in his total income, but a rebate shall be given on the same, as was being done under the old provisions. (iii) Where no income-tax is chargeable on the total income of the association or body, the share of a member therein shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon. Thus, where an association of persons or body of individuals is taxable at the normal rates applicable to individuals, etc., but has income below taxable limit so that no income-tax is chargeable on the total income of the association or body, the share of a member in such association or body shall be fully taxable in his own assessment. 11.9................ 11.10 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years." The contents of the above circular clearly demonstrate the view of the CBDT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous, and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue--recourse cannot be had to section 263 of the Act. It has further been laid down that section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. Their Lordships further held that when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law. In the light of the aforementioned principle laid down by their Lordships of the Supreme Court, the order passed by the Assessing Officer allowing the carry forward ..... 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