Income Tax Appellate Tribunal - Cochin
Island Sea Foods (P.) Ltd. vs Income-Tax Officer on 15 February, 1988
Equivalent citations: [1988]27ITD247(COCH)
ORDER
--Setting off of unabsorbed depreciation against business income of current year. Ratio:
Setting off of unabsorbed depreciation against income of current year under heads other than `Business' was in accordance with law, therefore, no revision, called for.
Held:
In order to assume lawful jurisdiction, the Commissioner must have jurisdictional facts and these facts include that the order of the assessing officer is erroneous as well as prejudicial to the interests of revenue and record exists evidence to support this inference. However, when one examines the order made by the assessing officer in accordance with the relevant provisions of law, it is found that the assessing officer had acted in accordance with the provisions of law. When an order is made in accordance with law, it is neither erroneous nor prejudicial to the interests of revenue because the law invests the assessing officer to make such an order. Therefore, The Commissioner had no jurisdictional facts to assume lawful jurisdiction under section 263 and his order is bad in law.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263 Revision under s. 263--ERRONEOUS AND PREJUDICIAL ORDER--Setting off of unabsorbed depreciation against the head other than `Business income'.
Ratio :
Assessing officer's order computing the income at nil by setting off of unabsorbed depreciation against the income other than business income was according to the law and not revisable.
Held :
In order to assume lawful jurisdiction the Commissioner must have jurisdictional facts and these facts include that the order of the Income Tax Officer is erroneous as well as prejudicial to the interests of revenue and record exists evidence to support this inference. However, when one examines the order made by the Income Tax Officer in accordance with the relevant provisions of law, it is found that the Income Tax Officer had acted in accordance with the provisions of law. When an order is made in accordance with law, it is neither erroneous nor prejudicial to the interests of revenue because the law invests the Income Tax Officer to make such an order. Therefore, the Commissioner had no jurisdictional facts to assume lawful jurisdiction under section 263 and his order is bad in law.
Application :
Also to current assessment years.
Income Tax Act 1961 s.28 Income Tax Act 1961 s.263 ORDER Chandar S.K.
1. This appeal by the assessee is directed against the order of the Commissioner of Income-tax made under Section 263 on 16-2-1984 for the assessment year 1979-80. As to how the Commissioner of Income-tax came to pass this order would be clear from the following background of the case.
2. The assessee is a private limited company and carries on the business of running a freezing and cold storage plant. For the assessment year under appeal the Income-tax Officer completed the assessment under Section 143(3) of the IT Act, 1961 on 19-2-1982. In the computation of total income the Income-tax Officer determined income under the statutory heads of total income, namely, 'Income from house property', 'Income from business' and 'Capital gains'. Income from house property was determined at Rs. 46,591. Income from business came to Rs. 53,643. There was profit under Section 41(2) amounting to Rs. 48,200. The business income before depreciation thus came to Rs. 1,01,852. From this figure the Income-tax Officer deducted Rs. 55,455 being depreciation allowance for the year under appeal. The balance net business income came to Rs. 46,397. Under the head 'Capital gains' the figure determined was Rs. 25,586. Thus, the income from house property, income from business and capital gains were available to the Income-tax Officer for set off of carry forward losses and depreciation pertaining to earlier years. The Income-tax Officer proceeded to do so.
3. He set off against business income of Rs. 46,397 brought forward loss of equal amount from the assessment years 1971-72 and 1974-75. Thus, the business income for the year under appeal was reduced to nil. This left the Income-tax Officer with the income under the heads 'House property' and 'Capital gains' totalling to Rs. 72,177 (Rs. 46,591 + Rs. 25,586). The Income-tax Officer set off brought forward depreciation relating to assessment year 1968-69 amounting to Rs. 72,177 against this sum and determined the total income at nil.
4. The Commissioner of Income-tax thereafter called for the record and on examination thereof came to the conclusion that the order of assessment passed therein for the assessment year 1979-80 was erroneous as well as prejudicial to the interests of revenue. He, therefore, issued a notice to the assessee to show cause why an order under Section 263 need not be made as he thought fit. The error projected to the assessee in this show-cause notice was that the Income-tax Officer was in error in so far as he had set off unabsorbed depreciation against income other than under the head 'Business income'. According to the Commissioner of Income-tax, the combined effect of Section 72(1) and 72(2) of the Act was that business losses which were carried forward should have first been set off against the profits of a business and if some profits remained, then alone the unabsorbed depreciation of earlier years could be deducted so that the business income was reduced to nil. On this line of reasoning the Commissioner of Income-tax further observed that in the present case there was no positive income under the head 'Business' when the earlier years' losses were set off and, therefore, the Income-tax Officer's action in setting off unabsorbed depreciation against income of the current year under other heads was erroneous and prejudicial to the interests of revenue. To this show-cause notice the assessee objected and pointed out that the provisions of Section 32(2) read with Section 72(1) and 72(2) justified the course of action taken by the Income-tax Officer in dealing with the brought forward losses and depreciation. Since the order of the Income-tax Officer is in accordance with law, it cannot be called erroneous and prejudicial, or either, to the interests of revenue. Therefore, the Commissioner of Income-tax was requested to drop the proceedings. However, the Commissioner of Income-tax proceeded with the order and directed the Income-tax Officer to enhance the assessment for the assessment year 1979-80 by Rs. 72,177 by withdrawing set off allowed in the original assessment order. The Commissioner of Income-tax also advised the Income-tax Officer to modify subsequent assessmentsUnder Section 154(if necessary) to adjust the unabsorbed depreciation. The assessee is aggrieved and is before us.
5. The learned counsel for the assessee, Shri Sony Mathew, argued that in view of ratio decidendi of the Supreme Court judgment in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 and the judgment of the Allahabad High Court in the case of CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150 and the Karnataka High Court judgment in the case of Addl. CIT v. Kapila Textiles (P.) Ltd. [1981] 129 ITR 458, the order of the Commissioner of Income-tax is not in accordance with law because the order of the Income-tax Officer was in accordance with law in view of these judgments and the Commissioner of Income-taxerred in tampering with the order of the ITO and in issuing directions to the ITO as he did. On the other hand, the learned departmental representative, relying upon a judgment of this Bench of the Tribunal in the case of South India Corpn. (Travancore) (P.) Ltd. [IT Appeal No. 377 (Coch.) of 1974-75, dated 19-11-1977] supported the order of the Commissioner of Income-tax.
6. We have given careful consideration to the rival submissions and we find no justification whatsoever for the Commissioner of Income-tax to assume jurisdiction to make the order under Section 263 in the case of the assessee for the year under appeal. In order to assume lawful jurisdiction the Commissioner of Income-tax must have jurisdictional facts and these facts include that the order of the Income-tax Officer is erroneous as well as prejudicial to the interests of revenue and on record exists evidence to support this inference. However, when we examine the order made by the Income-tax Officer in accordance with the relevant provisions of law, we find that the ITO had acted in accordance with the provisions of law. If there be any doubt as to whether the ITO acted in accordance with law the judgment of the Hon'ble Supreme Court in the case of Jaipuria China Clay Mines (P.) Ltd. (supra) on which reliance has been placed from the side of the assessee dispels the same. In this judgment the Hon'ble Supreme Court had to deal with the case where the total income of the respondent for the assessment year 1952-53 before charging depreciation was Rs. 14,041. After deducting depreciation of Rs. 5,360 the Income-tax Officer computed the profit of Rs. 8,681 against the whole of which he set off losses of an earlier year. The Income-tax Officer then computed the dividend income of the respondent at Rs. 2,01,130, determined the total income at that figure and levied tax on it. The respondent claimed that unabsorbed depreciation aggregating to Rs. 76,857 in its favour should be deducted from the dividend income reducing the total income thereby to Rs. 1,32,955. The Income-tax Officer rejected the claim. However, the Hon'ble Court held that unabsorbed depreciation of past years had to be added to depreciation of current year and the aggregate unabsorbed and current year's depreciation had to be deducted from the total income of the previous year relevant to the assessment year 1952-53. According to the Hon'ble Court, the Act draws no distinction between various allowances and they have to be deducted from the gross profits and gains of a business. According to commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in its account. If the profits are not large enough to wipe off the depreciation the profit and loss account would show a loss. Carry forward of depreciation is provided in Section 10(2)(vii) and Section 24(2) of the Indian IT Act, 1922, only deals with losses other than losses due to depreciation.
7. A question may, however, arise that this judgment of the Hon'ble Court is under the provisions of the old Act and whether on such facts and circumstances it could be said that that is still a good law applicable to the provisions of the IT Act, 1961, in so far as they deal with issues that had been discussed therein. In this regard, the judgment of the same Hon'ble Court in the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 (SC), clarifies the issue. In this judgment the Hon'ble Court has at great length dealt with the relevant provisions of the two Acts and has come to a conclusion that the provisions of the 196.1 Act are in pari materia with the corresponding provisions under the 1922 Act. and the same conclusions must follow under the 1961 Act.
8. The reliance by the revenue on the judgment of the Tribunal delivered in 1977 carries its case no further because of the clear exposition of law from the Courts to which we have referred to supra and which clearly supports the order made by the Income-tax Officer as an order made in accordance with law. When an order is made in accordance with law, it is neither erroneous nor prejudicial to the interests of revenue because the law invests the ITO to make such an order. Therefore, the Commissioner of Income-tax had no jurisdictional facts to assume lawful jurisdiction under Section 263. His order is bad in law. It is cancelled. The order of the Income-tax Officer is restored.
9. In the result, the appeal is allowed.