Income Tax Appellate Tribunal - Kolkata
Birla Tyres vs Joint Commissioner Of Income-Tax on 28 May, 2003
Equivalent citations: [2004]88ITD1(KOL)
ORDER
G. Chowdhury, Judicial Member
1. This is an appeal filed by the assessee for the assessment year 1985-86 against the order passed by the Commissioner of Income-tax under Section 263 of the Act by which it was held that unabsorbed loss of the AOP should be apportioned amongst the members of the AOP.
2. The assessee is an Association of Persons (AOP) constituted by four members who are limited companies viz., M/s. Century Textiles & Industries Ltd.; M/s. Kesoram Industries Ltd.; M/s. Jayashree Tea & Industries Ltd.; and M/s. Bharat General & Textiles Industries Ltd. The assessment was framed under Section 143(3) of the Act where the claim of loss of Rs. 25,51,31,859 was set off in the hands of AOP.
3. Ld. CIT, by passing an order dated 31-3-2000, held that according to Sections 67A and 167B(2) of the Act, the loss is not to be carried forward in the hands of AOP. Further, it was directed that such loss be apportioned amongst the members of AOP. 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 AOP 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 AOP are indeterminable, tax shall be charged on the total income of the AOP at the maximum marginal rate of the AOP exclusive of his shares of AOP exceeds the maximum amount which is not chargeable to tax, the total income of the AOP is taxable at the maximum marginal rate. Under Clause (ii) of Section 167B(2), where income of the member of the AOP is chargeable to tax at a rate which is higher than the maximum marginal rate, tax would be charged on the portion or portions of the total income of the assessee which is relatable to the share of such member at such higher rate, as the case may be, and the balance of the total income of the AOP would be taxed at the maximum marginal rate.
5. According to the counsel, in the present case, the shares of the AOP are very much determinable. Each of the members is limited company which is taxable for the assessment year 1995-96 at the rate applicable for a company i.e., 46% including surcharge which was higher than the maximum marginal rate specified for this year i.e., 40%. Therefore, in view of Section 167B(2)(ii) of the Act, the entire income of the AOP was taxable for the assessment year 1995-96 at the rate of 46% which was higher than the maximum marginal rate. According to, the counsel, the provisions of Section 67A should not be considered alone for deciding the taxability of the member-share in the income of AOP. For the purpose of deciding the issue, Section 86 of the Act should have been considered by ld. Commissioner. Section 86 of the Act envisages 3 different situations which are as follows: (a) The first situation is envisaged by Clause (a) of the first proviso to Section 86 of the Act, where the AOP is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any of the provisions of the Act. It has been provided in the said Clause (a) of the first proviso to Section 86 of the Act that in such event, the share of the member as computed under the provisions of Section 67A of the Act shall not be included in the total income of the member even for "rate purposes"; (b) The second situation is envisaged by Clause (b) of the first proviso to Section 86 of the Act, where the AOP is chargeable to tax on its total income at the normal rates as may be applicable to an individual, Hindu undivided family, body of individuals, etc. The said clause provides that in such situation, 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 for the purpose of Section 86 of the Act, i.e., for "rate purposes"; (c) The third situation is envisaged by the second proviso to Section 86 of the Act, where no income-tax is chargeable on the total income 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 rate for this year. Therefore, its case is covered by Clause (a) of Section 86 of the Act and accordingly the share of loss of the members of the AOP from the income of Birla Tyres could not be included in the total income of the said members. Therefore, the members were not entitled to the benefit of set off and carry forward of the loss suffered by the AOP but the entire loss suffered by the AOP had to be carried forward and set off against the income of the AOP. Ld. counsel has placed reliance on the Board Circular bearing No. 551 dated 23-1-1990 which was reported in 183 ITR (St.) 7, 53, wherein it has been stated that there is no provision in the 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 Circular issued by the CBDT is binding on the IT 'Department. Reliance was placed on the decision of the Supreme Court in the cases of State of MP v. G.S. Dal & Flour Mills [1991] 187 ITR 478 at 498; UCO Bank v. CIT[1999] 237 ITR 889' at 896; and Paper Products Ltd. v. CCE[2001] 247 ITR 128 at 130). According to the ld. counsel, there are two direct decisions, in favour of the assessee, in such circumstances which are ITO v. Ch. Atchaiah [1996] 218 ITR 239 and CIT v. (Sic) Income-tax Act, 1961, loss suffered by an AOP can be carried forward for set off only in the hands of the AOP and not its members.
8. On the other hand, Mr. Ukil, ld. Departmental Representative, has supported the order under Section 263 passed by the ld. Commissioner. Our attention was drawn to the notice at page 1 of the paper book before invoking the provisions of Section 263 by the Commissioner which goes to show that the Commissioner sought to revise the order for the purpose of carry forward of loss. Our attention was also drawn to the provisions of Sections 70, 71 and 72 of the Act and submitted that set-off of loss and carry forward and set-off of business loss are two different things. Carry forward and set-off of loss in the case of an AOP can be made only in the hands of its members which is not permitted in the hands of AOP. According to ld. Departmental Representative, there is no specific provision for carry forward of earlier year's loss of an AOP. But on perusal of Section 67 along with Section 167B(2), ld. Commissioner has rightly directed to set off the loss in the hands of the members of the AOP. It was submitted that if there is 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 assessee was allowed while framing the assessment under Section 143(3) of the Act. Ld. Commissioner invoked the power under Section 263 of the Act and held that the loss could not be carried forward in the hands of the assessee and the same should be apportioned amongst the members of the AOP, as per profit sharing ratio of the members. There is no dispute that the shares of the members of the AOP are determinate under Section 86 of the IT Act.
10. The first situation, as provided in Clause (a) of the first proviso to Section 86, is that where the AOP is chargeable to tax on its total income at the maximum marginal rate or any higher rate, in such event the share of the members, is computed under the provision of Section 67A of the Act, shall not be included in the total income of the member even for rate purposes. [Emphasis supplied]
11. Under Clause (b) of the first proviso to Section 86, an AOP is chargeable to tax on its total income at the normal rates as applicable to an individual, HUF, etc. In the said clause it has been provided that in such a situation, the share of the member in the income of the AOP as computed under Section 67A of the Act, shall be included in the total income of the member for the purpose of Section 86 of the Act - that means for rate purposes only.
12. The third situation envisages in the second proviso to Section 86 is that where no income-tax is chargeable on the total income of an AOP, which is otherwise chargeable to tax at the normal rates, falls below the minimum threshold of taxation under the relevant Finance Act, in such a situation though the share of the member in the income of an AOP, as computed under Section 67A of the Act, shall be included in the total income of the member.
13. On a careful consideration of the aforesaid provisions of Section 86 of the Act, it emerges that where the AOP is chargeable to tax with respect to its income at the maximum marginal rate, or at a higher rate, the share of a member in such income of the AOP is not to be included in the total income of such member even though for rate purpose. However, where the AOP is chargeable to tax at the normal rate, as prescribed for individual, HUF, etc. this share of member is to be included in the total income of such member only for rate purpose, but such member shall not pay income-tax on such share in the income of the AOP because the AOP is otherwise chargeable to income-lax. 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 it is the income of the AOP, members cannot be taxed individually and the AOP is to be taxed alone. As a natural corollary, the loss of AOP also cannot be regarded as a loss of individuals because now AOP and its members are different entities under the IT Act. Hence, the loss claimed by the AOP cannot be directed to be set off against the individual hands of members of the AOP. The aforesaid view was laid down by the decision of Bombay High Court in the case of CIT v. Smt. Lalita M. Bhat [1998] 234 ITR 319'. While deciding the said case, the Hon'ble High Court placed reliance on the decision of the Supreme Court in the case of Ch. Atchaiah (supra). In that Supreme Court decision it has been specifically held that under the 1961 Act, there is no option to assess either the AOP or its members individually. The contention of ld. departmental representative appears to be not correct in view of the aforesaid decisions.
16. With regard to the objection raised by the revenue, we do not find any merits. Ld. Departmental Representative has pointed out that the submission of the assessee is based on presumption is not correct only because in one sentence it has been mentioned that ld. CIT was probably influenced by the provision of Section 67A(2) of the Act. That does not mean that the submissions of the assessee is based on probability. By the aforesaid words, the assessee tried to point out the basis for compliance under which ld. CIT passed that order under Section 263 of the Act. Further, the decision of Karnataka High Court, which was relied upon by the assessee, in G.E. Narayana's case (supra), is not applicable in the present circumstances of the case because the Tribunal has not filled up the lacuna as mentioned in the said judgment.
17. On the basis of the discussion above, particularly in line of the Board Circular, coupled with the decisions of Supreme Court and Bombay High Court, we are constrained to hold that under the new Act, there is no option to assess either the members or the AOP like the old Act. Once the income is assessed in the hands of the AOP, the loss is to be carried forward in the same hand and not against another assessee. In view of the discussion above, the impugned order under Section 263 cannot be sustained.
18. In the result, the appeal is allowed.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there is a difference of opinion between the Judicial Member and the Accountant Member, the matter is being referred to the Hon'ble President of the IT AT 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 rato 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?
N.S. Saini, Accountant Member
1. 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 hence, I refrain from repealing the same except to the extent that in this case assessee is an AOP wherein the share of its members are determinate and known and it suffered a loss during the year under appeal.
There is only one issue which requires our consideration and the same is that whether the loss suffered by the assessee-AOP is to be carried forward in the hands of the AOP or is to be apportioned amongst its members as per the provisions of Section 67 of the Act.
3. At the outset, be it stated that the taxation of AOP and its members under the Income-tax Act, 1961, have undergone a radical change w.e.f. the assessment year 1989-90. A new section viz., Section 67A was inserted by the Legislature under Chapter VI of the Act. Chapter VI (sic) Section 67A is "Method of computing a member's share in income of association of persons or body of individuals". This section reads as under :-
67A. (1) In computing the total income of an assessee who is a member of an association of persons or body of individuals wherein the shares of the members arc determinate and known (...), whether the net result of the computation of the total income of such association or body is a profit or a loss, his share (whether a net profit or net loss) shall be computed as follows, namely :-
(a) ..
(b) ...
(c) ...
(2) The share of a member in the income or loss of the association or body, as computed under Sub-section (1), shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income.
(3)...
4. From a reading of the aforesaid section, it transpires that the Legislature has expressed their intention very clearly that which effect from the assessment year 1989-90, even when loss is suffered by an AOP, the share of the member in the loss of the AOP shall be computed in the manner laid down in Sub-section (1) of Section 67A and the same shall be, for the purpose of assessment in the hands of the members, apportioned under the various heads of income in the same manner in which the loss of the AOP has been determined under each head of income.
5. The learned counsel though admitted the above reading of the Section 67A of the Act but, submitted that the provisions of the Act relating to the taxability of a member'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 counsel is that as all the members of the assessee-AOP are limited companies who are chargeable to tax at a rate higher than the maximum marginal rate, in view of Section 167B(2)(ii), the total income of the assessee-AOP is chargeable to tax at a rate higher than the maximum marginal rate. He submitted that notwithstanding the fact that the assessee AOP has actually suffered a loss during the year under consideration, still as otherwise the tax was chargeable at the higher rate, the case of the assessee is covered by Clause (a) of the first proviso to Section 86. He submitted that second proviso to Section 86 covers only those cases where the total income of an AOP, which is otherwise chargeable to tax at the normal rates as applicable to an individual, HUF, BOI etc. falls below the minimum taxable limit specified in the Finance Act of the relevant assessment sic this interpretation. In the first proviso to Section 86, two situations are envisaged viz., in Clause (a), a case where an AOP is chargeable to tax on its total income at the maximum marginal rate or any higher rate and in Clause (b), a case where the AOP is chargeable to tax on its total income at the normal rates prescribed under the Finance Act of the relevant assessment year. The second proviso to Section 86 carves out an exception in respect of what has been provided in the main section and as well as what has been provided in both the clauses of the first proviso. There is no word in the second proviso which restricts the applicability of that proviso only to the cases specified in Clause (b) of the first proviso as the learned counsel tried to interpret. It is well-settled rule of interpretation that when the words of a statute are precise and unambiguous, they must be accepted as declaring the express intentions of the Legislature. Nothing is to be read in and nothing is to be implied. Thus, I find no reason as to why the second proviso to Section 86 should not be applicable in both the types of AOP whether covered by Clause (a) or (b) of the first proviso to Section 86, when total income of the AOP falls below the maximum amount not chargeable to tax specified in relation to that AOP. In other words, even when an AOP when is otherwise chargeable to tax on its total income at the maximum marginal rate or any higher rate if its income is below the maximum amount which is not chargeable to tax i.e., nilor 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 assessce-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 67A 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 Section 67A of the Act and such allocated income (loss) should form part of the total income of the members.
10. The Ld. counsel of the assessce relied upon the decision of the Hon'ble Supreme Court in the case of Ch. Atchaiah (supra) to submit that under the provisions of the Act of 1961, there is no option available with the Revenue to either tax the AOP or its members. The unit of taxation under the Act is the AOP and therefore, the income of an AOP is to be assessed only in the hands of the AOP and not its members. I have gone through the above judgment and in my considered view the above judgment does not support the case of the assessee. As stated earlier, with effect from the assessment year 1989-90, the scheme of taxation of an AOP and its members have undergone a change under the Income-tax Act, 1961. Now, with the insertion of the second proviso to Section 86 and Section 67A in the Act, it has been provided that in circumstances where no income-tax is chargeable on the total income of an AOP under the Act then, the share of income (loss) of members in the AOP shall be charged to tax in the hands of the members as part of their total sic Smt. Lalita M. Bhat (supra) wherein it was held that the loss suffered by an AOP can be carried forward for set off only in the hands of the AOP and not its members. I have gone through this judgment too. This judgment was rendered in respect of the assessment year 1978-79. Their Lordship in the aforesaid judgment at page 323 held that "She would not be entitled to claim set-off of the amount of loss determined in the assessment of the AOP of which she is a member, because that is a different assessee, unless there is an express provision in the Act to provide for the same. Admittedly, there is no such provision."
11. As discussed above, with effect from the assessment year 1989-90, specific provision in form of Section 67A and second proviso to Section 86 has been inserted in the Act which provides that under certain circumstances, the share of income (loss) in an AOP shall form part of the total income of the member of the AOP. Thus, the above judgment in my considered opinion, in view of change in law, supports the case of the Revenue and not of the assessee.
12. At last the Ld. counsel also placed reliance on para 11.6 of the circular No. 551 dated 23-1-1990 of Hon'ble CBDT and placed reliance on several decisions to submit that 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 arc 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 Corporation 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 (AIL), 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 binding upon us.
13. Viewed as above, on conjoint reading of second proviso to Section 86 and Section 67A of the Act, the order passed under Section 143(3) by the Assessing Officer in the instant case allowing carry forward of the loss of the assessee-AOP in the hands of the AOP and not apportioning the total loss of the assessee-AOP to its members in the manner provided under Section 67A so as to be included in their total income was an error prejudicial to the interest of the Revenue. Thus, no interference with the order of the CIT passed under Section 263 to correct the aforesaid error in the order of assessment, in my considered opinion, is called for.
14. In the result, the appeal of the assessee is dismissed.
ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 There being difference of opinion between the Members in this appeal the matter is being referred to the Hon'ble President of the Income-tax Appellate Tribunal under Section 255(4) of the Income-lax Act, 1961, for the opinion of the Third Member. As I am not in agreement with the question as framed by my learned brother, Judicial Member, separate question is framed by me for reference to the 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 and on a proper interpretation of Sections 67A, 86 and 167B of the Income-lax Act, 1961, the order passed under Section 263 of the said Act by the Commissioner of Income-lax 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 their profit sharing ratio, is in accordance with the law whereas the claim of the assessee was to carry forward the loss in the hands of the AOP ?
THIRD MEMBER ORDER M.A. Bakhshi, Vice President
1. The appeal of the assessee for assessment year 1995-96 was earlier heard by 'E' Bench of the Tribunal. However, in view of the difference of opinion between the Ld. Members of the Bench, the Hon'ble President has been pleased to nominate me as Third Member in regard to the following point of difference :-
Whether, on the facts and in the circumstances of the case, the order passed under Section 263 of the Income-lax Act, 1961 by the Commissioner of Income-lax 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 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 the return was claimed to be carried forward in the hands of the AOP. The Assessing Officer completed the assessment under Section 143(3) vide order dated 27-3-1998 determining the loss of Rs. 25,51,31,859. Subsequently, the CIT (Admn.), Range-14 was of the view that the order passed by the Assessing Officer under Section 143(3) in the case of the assessee was erroneous and prejudicial to the interests of Revenue insofar as the loss determined in the case of the assessee was not to be carried forward in the hands of the AOP. A show-cause notice was issued to the assessee as to why action may not be taken under Section 263 of the Act. The assessee objected to the proposed action. However the CIT vide order dated 31-3-2000 held that the taxability of the AOP and apportionment of the income/loss thereof in a case where shares of a member of the AOP are determined are guided by Sections 67A and 16713(2) of the Income-tax Act, 1961. He was of the view that in view of the aforementioned provisions of the Income-tax Act, 1961, the assessee is not entitled to carry forward of loss in the hands of AOP and that the loss should be apportioned amongst the members of the AOP and the loss not to be allowed to be carried forward. The assessment order passed by the Assessing Officer was, accordingly, set aside and the Assessing Officer directed to modify the order. Incidentally, the Assessing Officer vide order dated 5-7-2001 has given effect to the order of the CIT passed under Section 263.
3. On appeal to the Tribunal against the order under Section 263 of the CIT, the Ld. Judicial Member of "B" Bench proposed an order expressing the view that the assessee was entitled to carry forward of loss in the hands of the AOP. The Ld. Accountant Member, however, did not agree with the proposed view of the Ld. Judicial Member. He has, accordingly, passed a dissenting order to hold that the order passed under Section 143(3) by the Assessing Officer allowing carry forward of loss in the hands of the AOP was erroneous and prejudicial to the interests of revenue. He, accordingly, proposed to dismiss the appeal of the assessee against the order under Section 263.
4. The issue involved in this appeal is essentially as to whether AOP is entitled to the carry forward the loss determined for assessment year 1995-96 for set off in subsequent year(s). The learned counsel for the assessee contended:- 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 Act makes a departure from such normal position in certain specific circumstances. It was contended that under Section 16713(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 67A(2) speaks about the apportionment of the income/loss of an AOP under the various heads of income of a member in the same manner in which the income or loss of AOP has been determined under each head of income. That the CIT seems to have been influenced by the provisions of Section 67A(2) in coming to the conclusion that the loss in the case of AOP was to be apportioned amongst the members for assessment in their hands. That Section 67A is not exhaustive but has to be read in conjunction with Section 86 of the Act. That Section 86 ensures that an individual member of the AOP does not pay any income-tax on his share income in an AOP in such cases where the income of an AOP is otherwise chargeable to income-tax at maximum marginal rate or at a higher rate than the maximum marginal rate, the share of the member is not included in the assessment of members even for rate purposes. In case AOP pays tax at normal rates, the share in an AOP is included in the income of individual member for increasing the rate of tax in the hands of the individual member. That Section 86 also provides for extracting the maximum amount of tax from the income of an AOP, but at the same time attempts to avoid double taxation of the said income, once in the hands of the AOP and again in the hands of the individual members. It was contended by the learned counsel that Section 86 provides for a situation where all the members of the AOP are individuals and none of the members have any income exceeding the maximum income not chargeable to tax and further the total income of the AOP is also less than the maximum income not chargeable to tax, then the share of member in such income of the AOP is to be included in the total income of such member and the member is required to pay income-tax, inter alia, on such income and no rebate is available to such member under Section 86 of the Act. That in the case of the appellant Section 86(1) is attracted and, accordingly, Sub-section (3) of Section 86 is inapplicable. My attention was invited to the CBDT Circular No. 551 dated 23-1-1990 reported in 183 ITR (St.) 7 and 53 in which the Board has clarified that there is no provision in the Income-tax Act, 1961 for the set off or carry forward of the share of loss of a member in an AOP, in the assessment of the member. Relying upon the following decisions of the Supreme Court, the learned counsel contended that no officer is competent to take a different view than expressed by the CBDT in its circular which is benevolent to the assessee :-
G.S. Ball & Flour Mills' case (supra) UCO Bank's case (supra) Paper Products Ltd. s case (supra) CST v. Indra Industries [2001] 248 ITR 338,340 (SC) CIT v. Anjum MIL Ghaswala [2001] 252 ITR 1, 16 (SC) That recently in the case of Anjum M.H. Ghaswala (supra), 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 Corporation 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 (supra) and Anjum M.H, Ghaswala (supra) are by a Bench of five judges. Similarly, the decisions of the Supreme Court in the cases of G.S. Dall & Flour Mills (supra), UCO Bank (supra) and Indra Industries (supra) are all by three judge Bench(es). Relying upon the judgment of the Supreme Court in the case of Union of India v. Raghubir Singh [1989] 178 ITR 548, 567 (SC), and in the case of CIT v. Trilok Nath Mehrotra [1998] 231 ITR 278 , 280 (SC), it was contended that it is now settled law that in the case of conflict, the decision of the larger Bench of the Supreme Court shall override the decision delivered by a smaller Bench. It was accordingly, pleaded that the order of the CIT is clearly in violation of the CBDT circular referred to above and hence without jurisdiction.
6. The learned counsel further pointed out that in the case of Ch. Atchaiah (supra), the Supreme Court held that the department does not have option under the 1961 Act to either tax the AOP or its members and that their Lordships have held that the unit of taxation under the Act is the AOP and, therefore income of an AOP is to be assessed only in the hands of AOP and not its members. That accordingly on the basis of the same analogy the losses suffered by an AOP can only be carried forward and set off by the AOP and not by the members of such AOP. Reliance was also placed on the decision of the Bombay High Court in the case of Smt. Lalita M. Bhat (supra), wherein it has been held that the loss suffered by an AOP can be carried forward for set off only in the hands of the AOP and not its members. It was, accordingly, pleaded that the order of the CIT under Section 263 dated 31-3-2000 may be quashed.
7. The Ld. Departmental Representative, on the other hand, contended. That there are two issues involved in this case. One is that as to whether the CIT has erred in holding that AOP was not entitled to carry forward the loss for set off against income in the subsequent year(s). That the second issue is as to whether the circular of the CBDT was binding on the revenue. That Section 67A falls under Chapter-VI and deals with aggregation of income. That the said section provides for computation of share of a member of an AOP where the shares of member are determinate and known. That Sub-section (2) of Section 67A provides that the share of a member in the income or loss of an association is for the purposes of assessment to be apportioned under the various heads of income 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 167 B 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 income and nothing contained otherwise in Section 86 would apply. That Section 167B also does not help the assessee insofar as by no stretch of imagination it can be accepted that the appellant was chargeable to tax at the rate of 46 per cent in the year under appeal as the returned income was negative.
8. The Ld. Departmental Representative further contended:- That the decision of the Supreme Court in the case of Ch. Atchaiah (supra) is of no help to the assessee insofar as their Lordships have explained the difference between 1922 and 1961 Acts. That in this case, their Lordships held that under the provisions of the Act of 1961 even if the individual members were separately assessed, there was no bar for assessment of AOP in the hands of the right person and that their Lordships have decided the only issue which was referred to them and had not touched upon other issues. That the said decision of the Supreme Court deals with the provisions of the Act as applicable prior to 1 -4-1989 and the law has since been radically changed. That the Hon'ble Supreme Court has not adjudicated on the matter of loss being carried forward in the hands of AOP in contrast with the distribution of the same amongst the members.
9. Referring to the decision of the Bombay High Court in the case of Smt. Lalila M. Bhat (supra), the Ld. Departmental Representative contended that the decision rests on the provisions of the Act prior to 1989 and is inapplicable to the facts of this case. In regard to the CBDT circular No. 551 (supra), it was contended that this circular also does not help the assessee because the income of the assessee was below the taxable limit on which no income-tax was chargeable in the case of the AOP and, therefore, share of each member was taxable in their respective assessments, as explained in the said circular. That in para 16.6 of the circular it has been explained that there are no provisions in the Income-tax Act for the set off or carry forward of the share of loss of a member in the AOP in his own assessment. It was contended by the ld. Departmental Representative that the mere fact that there is no provision for set off and carry forward of the losses in the cases of individual members in respect of the share of loss in AOP may be a case of hardship but that itself is not to be taken into consideration is deciding the appeal and that the issue whether the share of loss of 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 (supra) is applicable, but the interpretation given to it by the appellant is distorted and unacceptable. The Ld. Departmental Representative relied upon the decision of the Delhi High Court in the case of CIT v. Deep Chand[2002] 257 ITR 756 where it has been laid down that a literal meaning should be attributed to a Statute. Reliance was also placed on the decision of the Supreme Court in the case of Gurudevdatta VKSSS Maryadit v. Slate of Maharashtra AIR. 2001 SC 1980 wherein it has been laid down that "golden rule is that the words of a statute must primarily be given their ordinary meaning" and "when the words of the statute arc clear, plain and ambiguous, then the courts arc bound to give effect to that meaning, irrespective of the consequences." That this principles has been reiterated in the case of Harshad S. Mehta v. State of Maharashtra [2001] 107 Comp. Cas. 365 (SC) and in Dental Council of India v. Hari Prakash AIR 2001 SC 3302. Relying upon another decision of the Supreme Court in the case of CST v. Modi Sugar Mills Ltd. AIR 1961 SC 1047, 1051, it was contended that in interpreting the statute equitable considerations are out of place and that neither the Courts nor the Tribunal can import provisions in the statute so as to supply any assumed deficiency. The Ld. Departmental Representative pointed out to the conduct of the assessee in first having filed the return of income where the loss was distributed amongst the members and later on, on finding profit in assessment year 1996-97 a revised return was filed claiming the set off and carry forward of business loss suffered by the assessee-AOP. It was, accordingly, pleaded that the appeal of the assessee may be decided strictly in accordance with provisions of sections 67A, 167B and 86 of the Income-tax Act, 1961 and the appeal may be dismissed by concurring with the view expressed by the Ld. Accountant Member.
10. I have given my careful consideration to the rival contentions. In order to appreciate the issue involved in this appeal, it would be necessary to consider the scheme of the Act for taxation. Section 4 of the Income-tax Act, 1961 is the charging section. It reads as under :-
4(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rales shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in 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 charged either on the association of persons or on the members of the association of persons individually. Though the section expressly treated an association of persons and individual members of the association as different assessable entities, the language of Section 3 was such that it gave an option to the Assessing Officer to levy tax on either the association of persons or the members of the association individually. On the terms of Section 3 of the 1922 Act, it was held that if anyone or members of an association of persons had already been assessed to tax in respect of his or their share income, assessment thereafter could not be made on the association itself because the option to the ITO exhausted with the assessment of the member or members. The decision of the Supreme Court in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225, 228 (SC) is relevant for this proposition of law. Similar was the position in the case of the firm which was sought to be assessed as unregistered firm. However, in 1956 there was an amendment in Section 23(5) of the 1922 Act by virtue of which both firm as well as its individual partners were made exigible to tax in the manner provided therein. As a result thereof, an assessment could well be made on the registered firm even after the individual partners had been assessed on their respective share income. Under the Income-tax Act, 1961, the option of assessing either AOP or its members is not available to the Assessing Officer. The position relating to the option available to the Assessing Officer of assessing, either the association of persons of the individual members, was explained by their Lordships of the Supreme Court in the case of Ch. Atchaiah (supra), wherein the distinction between the provisions of 1922 Act and the provisions under 1961 Act is explained. It was held by their Lordships that under the 1961 Act even in the case of collective entities, the ITO has no option to assess either such entity itself or its individual constituents. Thus, it is abundantly clear that the association of persons being recognised as an entity in itself is separately assessable to tax de hors the assessment of the individual members. As per the-scheme under the 1961 Act(>the individuals, HUFs, companies or others being partners of a firm or members of an association of persons are also separately assessable to tax besides the assessment 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) or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate :
Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.
(2) Where, in the case of an association of persons or body of individuals as aforesaid not being a case falling under Sub-section (1).
(i) the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rale;
(ii) any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged 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 at such higher rate or rales, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate.
Explanation - For the purposes of this section, the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) arc indeterminate or unknown on the date of formation of such association or body or at any time thereafter.
13. It is evident from the language of Section 167B quoted above that the Legislature has ensured levy of tax on association of persons at maximum rate under various circumstances. It thus becomes evident that the Legislature has treated an association of persons as a separate assessable entity de horse the members of the association of persons. The association of persons being a separate assessable entity is obliged to file the return of income and also pay taxes as per the provisions of the 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-section (2) of Section 73, or Sub-section (1) or Sub-section (3) of Section 74, or Sub-section (3) of Section 74A, he may furnish, within the time allowed under Sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under Sub-section (1).
15. Since the assessee had suffered loss in the previous year relevant to the assessment year under appeal, it had filed the return of income within the time allowed under Sub-section (1) of Section 139 as required under Section 139(3). Section 139(3), it is relevant to note, does not discriminate between several persons. It applies to all the persons including association of persons. At this stage it would be relevant to refer to Sections 71,72 and 80 of the Income-lax Act, 1961 which read as under :-
71. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has no income under the head "Capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head."
"72. (1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of Section 71, so much of the loss as has not been so set off or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and -
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
"80. Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of Sub-section (3) of Section 139, 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 necessary to examine the scope and purpose of these provisions of law. These provisions are quoted hereunder for the sake of ready reference :
67A. (1) In computing the total income of an assessee who is a member of an association of persons or a body of individual wherein the shares of the members are determinate and known other than a company or a cooperative 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, whether the net result of the computation of the total income of such association or body is a profit or a loss, his share (whether a net profit or net loss) shall be computed as follows, namely :-
(a) any interest, salary, bonus, commission or remuneration by whatever name called, paid to any member in respect of the previous year shall be deducted from the total income of the association or body and the balance ascertained and apportioned among the members in the proportions in which they are entitled to share in the income of the association or body;
(b) where the amount apportioned to a member under Clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be added to that amount, and the result shall be treated as the member's share in the income of the association or body;
(c) where the amount apportioned to a member under Clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member's share in the income of the association or body.
(2) The share of a member in the income or loss of the association or body, as computed under Sub-section (1), shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income.
(3) Any interest paid by a member on capital borrowed by him for the purposes of investment in the association or body shall, in computing his share chargeable under the head "Profits and gains of business or profession" in respect of his share in the income of the association or body, be deducted 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 this section shall apply to the case.
17. Section 67A inserted by the Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1-4-1989, i.e., for assessment year 1989-90 provides for method of allocating a member's share in the income of association of persons or body of individual. Section 67A(1) starts with the words "in computing the total income of the assessee who is a member of an association of persons etc," Thus it is abundantly clear that Section 67A regulates the assessment of the member of the association of persons and does not affect the assessment of the AOP. Section 67A(2) provides that the share of a member in the income or loss of the association or body as computed under Section 67A(1) shall, for the purpose of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income (underlining mine). for the purpose of assessment' has to be read in the context of Sub-section (1) to be for the purpose of assessment of a member of the association of persons.
18. Sub-section (3) of Section 67A allows a deduction in respect of interest on borrowed capital by the member for investment in the association or body of individuals etc. It is thus clear that Section 67A provides the manner of compulation of share of a member in the assessment of persons and the purpose is as indicated "for purposes of assessment of the member". It thus appears from the conjoined reading of Section 67A and other relevant provisions of the Act that whereas the association of persons is a separate assessable entity, the law also requires apportionment of its income under separate heads amongst the members for the purposes of the assessments in their hands. As pointed out earlier, in the case of registered firms, taxation of the firm as an entity was permissible simultaneously with the assessment of a share of a partner in the firm in the individual hands of the partners. Section 67A also provided that in the case of a partner of a registered firm, the share of a partner in the income or loss of the firm would be assessed in the hands of the partner and the loss, if any, also to be set off against the other income. There is no such corresponding provision permitting the setting off of losses in the case of a member of association of persons in his individual assessment.
19. Reference to 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. Piggies & 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 67A 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 unabsorbed for being set off against the profits of such firm in a subsequent year subject to the provisions of Sections 70 to 74 of the Income-tax Act, 1961. It is equally well-settled that no individual partner has the right to set off his or her share of the firm's loss against his or her personal income of the same year or carry forward such loss.
In the case of CIT v. Angadi Bros. [1986] 157 ITR 426, 434 (Kar.) their Lordships of Karnataka High Court held as under :-
The basis for this distinction has been explained in The Law and Practice of Income Tax by Kanga and Palkhivala (Vol. I at p. 1004) as follows :
The reason is that an unregistered firm is a distinct assessable, entity for the purpose of the Act and pays the tax in discharge of its own liability and not on behalf of its partners.
We share this view and reject the contention of Mr. Srinivasan. We hold that the assessee in this case having regard to the contention that it should not be assessed as an unregistered firm 'denies its liability to tax' and so the assessment order is appealable under Section 246(1)(c).
20. In the case of Mukund Lal Malik v. Union of India[1984] 148 ITR 461, 466 (All.), it was held that taxation of the firm separately and thereafter assessment of share income in the hands of the partners does not amount to double taxation. It is thus evident that taxation of association of persons as a separate entity and assessment of its members individually is permissible in law.
21. This takes me to Section 86 of the Act. This section quoted above provides the treatment of share of a member in the income of association of persons or body of individuals. As a general rule, it provides that no income-tax is chargeable by any member of the association of persons in respect of his share income in the association of persons. It also provides that where the income of the association of persons attracts tax at the maximum marginal rate or any higher rate under any provisions of the Act, the share of the member in such association of persons shall not be included in the total income of that person.
22. In the case of an association of persons which has paid tax at normal rates, Section 86 provides that the share income of the member shall be included in his total income but no tax shall be chargeable on such share income. In other words, the share income of the member of such association 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. According to the Revenue, once the share of loss is apportioned amongst the members of the association in accordance with provisions of Section 67A and is included in the income of the member of the association of persons, there is no room for the association of persons to be entitled to the carry forward of loss. This interpretation of proviso to Section 86 would be a possible interpretation if the language of the proviso is not carefully taken into account along with the context in which the proviso has been enacted. The proviso though starts with the words "where no income-tax is chargeable on the total income of the association...", but it ends with a command that a share of a member shall be chargeable to tax as part of his total income in such a case. It is thus seen that Section 86 when read carefully provides the extent to which a member would be liable to tax in his/its own assessment on the share income. The Legislature has consciously used the words "shall be chargeable to tax as part of his total income" in comparison to the words "shall be included in his total income" : In my view, for attracting the proviso to Section 86, two conditions must be satisfied. One condition is that in the case of association of persons, no income-tax is chargeable. Other condition is that such income shall be chargeable to tax as total income of the member. The second condition will be satisfied only when the share income in the association of persons of a member is chargeable to tax in the hands of the member. When there is no income of the association of persons, one cannot visualize any such income to be chargeable to lax as part of the total income of the member of the association of persons. Section 86 is part of Chapter-VII and the heading of Chapter-VII is "Incomes forming part of total income on which no income-tax is payable". This gives a clear indication as to the purpose of enactment of Section 86. It essentially provides for exemption of the share income of the member of the association of persons in certain circumstances. As already explained, in certain circumstances the share income is not even includible in the total income of the member of the association of persons. In certain circumstances the share in the income of the association of persons is to be included for rate purposes only and in the third circumstance the income is includible for purposes 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 individuals, tax shall be charged at the maximum marginal rate in the following circumstances :
(i) Where the shares of the association or body are indeterminate or unknown (this was the earlier position also).
(ii) Where the shares of the members of the association or body are determinate, but any' one of whose members has income above the maximum amount not chargeable to tax in the case of an individual.
It was also provided that if any member of such association or body was taxable at a rate higher than the maximum marginal rate, then the entire income of the association or body would be taxed at such higher rate.
Note : It may be clarified that the Amending Act, 1987, substituted the old Section 167A relating to taxation of certain association of persons at the maximum marginal rate by a new Section 167A, which provided for taxation of firms at the maximum marginal rate. This new Section 167A has, however, been omitted by the Amending Act, 1989, which has withdrawn the new scheme of taxation of firm and partners (refer to item 14 of the Table given in para 2.3 ante).
11.2 Insertion of a new Section 167B by the Amending Act, 1989.-A number of representations were received against the provisions of Section 167B, as inserted by the Amending Act, 1987. It was pointed out that the provision to tax the entire income of an association of persons or body of taxable at such a higher rate would cause hardship in many cases. Some other anomalies in the provisions were also pointed out. The Amending Act, 1989, has, therefore, omitted Section 167B inserted by the Amending Act, 1987, and has inserted a new Section 167B in its place, which removes the hardships and anomalies of the earlier section. The provisions of the new Section 167B are as under :
(1) Sub-section (1) provides that where the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate.
A proviso to sub-section provides that where the total income of any member of such association or body is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged at such higher rate on the total income of the association or body.
(2) Sub-section (2) provides that 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 arc 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 association of persons and body of individuals will be taxed at the normal rates applicable to individuals, etc. where the shares of the members are determinate and none of the members has taxable income or none of the members is taxable at a rate higher than the maximum marginal rate. Thus, only small associations of persons or body of individuals formed by persons who, themselves are not taxable will henceforth be taxed at the normal rates. Persons who are taxable in the high income brackets or are taxable at a rate higher than the maximum marginal rate shall no longer be tempted to form an association of persons or body of individuals for being taxed at a lower rates.
11.4 Amendments in the provisions of other sections connected with the taxation of association of persons, body of individuals and their members.-The Amending Act, 1987, also amended the provisions of Sections 40, 67 and 86 of the Income-tax Act to bring forward new provisions for taxation of firm and partners as well as new provisions for taxation of association of persons, body of individuals and their members in these sections. However, since the Amending Act, 1989, withdrew the new scheme of taxation of firm and partners, it also further amended these three sections to withdraw from them the new provisions relating to the taxation of firm and partners but to retain the new provisions relating to taxation of association of persons, body of individuals and their members (refer to items 5, 7 and 11 of the Table given in para 2,3 ante). The combined effect of the amendments made by the Amending Act, 1987, and the Amending Act, 1989 in this respect is as follows :
(i) A new Clause (ba) has been inserted in Section 40, which disallows deductions for any interest or salary, etc. paid by an association of persons or body of individuals to its members.
(ii) A new Section 67A has been inserted which deals with the method of computing a member's share in the income of the association of persons or body of individuals.
(iii) A new Clause (v) has been substituted in Section 86, which deals with the manner of taxation of share of a member of an association of persons or body of individuals.
These new provisions of Clause (ba) of Section 40, Section 67A and Clause (v) of Section 86 are discussed in the following paras.
11.5 Provisions of new Clause (ba) of Section 40.-The new Clause (ba) provides 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 (bd) 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 67A, which has Sub-sections (1) to (3) and an Explanation, provides for the method of computing a member's share in the income of an association of persons or body of individuals wherein the shares of the members arc determinate, in the same manner as provided for in Section 67 for computing a partner's share in the income of the firm. However, the provisions of Sub-section (4) of Section 67, which deals with set off or carry forward of share of loss of a partner in a registered firm do not find place in Section 67A, because there are no provisions in the Income-tax 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.
11.7 The old and the new provisions of Clause (v) of Section 86, under the old provisions of Clause (v) of Section 86 read with Section 110, although the share of a member of an association of persons or body of individuals received out of the income of such association or body on which income-tax had already been paid by the association or body, was included in the total income of the member, but a rebate of tax was given on such share at the average rate of tax applicable to the total income of the member including the said share. The share of a member in the income of an association of persons was so included in his total income even where the shares of the members in the association were indeterminate so that the association had been taxed at the maximum marginal rate. For this purpose, all the members of such association were deemed to be entitled to receive an equal share in the total income of the association.
11.8 Consequent upon the insertion of a new Section 167B in the Income-tax Act, which now levies tax at the maximum marginal rate on association of persons as well as body of individuals under various circumstances and even taxes them at a rate higher than the maximum marginal rate under certain circumstances, the old Clause (v) of Section 86 has also been substituted by a new Clause (v). Under the provisions of the new Clause (v) of Section 86 read with Section 110, the share of a member in the income of the association or body is treated in three different ways, depending upon whether the association or body is chargeable to tax at the maximum marginal rate or at the normal rate or is not chargeable to tax at all. These are :-
(i) Where the association or body is chargeable to tax at the maximum marginal rale or at a rate higher than the maximum 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.
[Emphasis by me] The contents of the above circular clearly demonstrate the view of the CBDT in regard to the purpose with which Sections 67A, 167B and Section 86 have been incorporated careful reading of the circular does not leave one in doubt that the loss suffered by the AOP is not to be assessed in the hands of the members of the AOP as per the opinion of the CBDT as well. Moreover, there is nothing in the Act for disqualification of AOP from taking the benefit of the provisions of Sections 71, 72 etc. in its own assessment. Thus the AOP, in my view, is entitled to carry forward and set-off of loss suffered in business.
25. The decision of the Bombay High Court in the case of Smt. Lalita M. Bhat(supra) also supports the above view. In this case their Lordships held that an association of persons being an independent assessable entity, different and distinct from its members, the loss of the association of persons can be set off only against its own profits-not against the profits of its members. There is no decision to the contrary brought to my notice. Their Lordships further held that the charge under the Income-tax Act, 1961 is on every person including an association of persons which is an assessable entity, different and distinct from its members. The benefit of set off is available under Section 71 only where the assessee is the same. That being the legal position, an assessee is not entitled to adjust his share of loss in the association of persons of which he was a member against the profits made by him in the business carried on by him individually.
26. Taking the totality of the facts and circumstances of the case on the basis of the analysis of the relevant provisions of law and relevant decisions considered in this order, I am of the view that there being no bar for the association of persons for the carry forward of the losses in its own hands, the order of the Assessing Officer allowing the loss assessed in the hands of AOP to be carried forward was not erroneous.
27. It may also be pertinent to mention that it is well-settled principle of law that the power of the CIT under Section 263 is available if two conditions are satisfied. In the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83' (SC), their Lordships of the Supreme Court held that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under Section 263 is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of 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 of loss in the hands of the AOP cannot be said to be erroneous especially in the light of the decision of the Bombay High Court in the case of Smt. Lalita M. Bhat (supra) where it has been laid down that the association of persons is an independent assessable entity, different and distinct from its members and that the loss can be set off only against its own profits and not against profits of its members. The view that the association of persons is a separate assessable entity under the Income-tax Act, 1961 is also supported by the decision of the Supreme Court in the case of Ch. Atchaiah (supra) where it has been held that under the Act of 1961 it is the association of persons alone which is to be taxed and the members of the association of persons cannot be taxed individually in respect of the income of the association of persons. In the light of this legal position, I reiterate that in the circumstances of this case it cannot be said that the view taken by the Assessing Officer was erroneous. I am, therefore, in respectful agreement with the conclusion recorded by the Ld. Judicial Member for my own reasons recorded herein.
28. As per this decision, the order under Section 263 of the CIT is quashed and the appeal of the assessee allowed.
29. Let the matter be placed before the regular Bench for passing the consequential order in accordance with the majority view.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 G. Chowdhury, Judicial Member
1. On a difference of opinion between the Members originally constituting this Bench, the point of difference was referred to Hon'ble Vice-President [KZ] as Third Member under Section 255(4) of the Income-tax Act, 1961.
2. In accordance with the majority view after duly taking into account the opinion expressed by the Ld. Third Member, we hold that the A.O.P. is an independent assessable entity, different and distinct from its members and the loss can be set off only against its own profits and not against profits of its members. Accordingly, the order passed under Section 263 by the CIT is cancelled.
3. In the result, the appeal of the assessee is allowed.