COMMISSIONER OF INCOME-TAX VS LALITA M. BHAT, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 1729 (1998)

Income-tax---

---Loss---Set off---Association of persons---Is an independent assessable entity different and distinct from its members---Loss of association of persons---Can be set off only against its own profits and not against profits of its members---Member of an AOP cannot claim in his personal assessment set off of loss of AOP---Distinction between provisions of Indian Income-tax Act, 1922 and Indian Income Tax Act, 1961, in regard to assessment of income of AOP---Indian Income Tax Act, 1961, Ss. 2(31), 4(-1), 70 & 71.

It is clear from a plain reading of sections 70 and 71 of the Income Tax Act, 1961 that the assessee is entitled to set off the loss where the net result of computation for any assessment year in respect of any source falling under any head of income is a loss. The loss which can be set off, therefore, must be a loss determined in the assessment of the assessee himself. In other words, if loss is determined in the assessment of the assessee from any source of income falling under one head, such loss can be adjusted against his income, if any, assessable under the same head or under another head.

It is also clear from a conjoint reading of sections 2(31) and 4(1) of the Act that the charge 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 sections 70 and 71 only when the assessee is the same. Loss of one assessee cannot be set off against the income of another. 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. 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.

There is a very important distinction between the provisions of the Indian Income-tax Act, 1922, and the provisions of the Income Tax Act, 1961, in regard to the assessment of the income of an association of persons, section 3 of the Indian Income-tax Act, 1922, provided that in respect of the total income of an association of persons, the income-tax shall be charged either on the association of persons or the members of the association of persons individually. No such option is provided under the Income Tax. Act, 1961. Under section 4 of the Income Tax Act, 1961, if it is the income of the association of persons, the association of persons alone has to be taxed. The members of the association of persons cannot be taxed individually in respect of the income of the association of persons. As a natural corollary, the loss of an association of persons also cannot be regarded as the loss of its members individually. That being so, it is clear that the member of an association of persons cannot claim in his personal assessment set off of loss of the association of persons, which is a different taxable entity under the Income Tax Act, 1961, against his individual income.

ITO v. Ch. Atchaiah (.1996) 218 ITR 239 (SC) and Ramanlal Madanlal v. CIT (1979) 116 ITR 657 (Cal.) fol.

Abida Khatoon (Smt.) v. CIT (1973) 87 \ ITR 627 (AP); Arunachalam Chettiar v. CIT (1936) 4 ITR 173 (PC); CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC); CIT v. Murlidhar Jhawar and Puma Ginning and Pressing Factory (1966) 60 ITR 95 (SC); CIT v. Rajamani Nadar (S. K. S.) (1977) 109 ITR 258 (Mad.); Ganga Metal Refining Co. (Pvt.) Ltd. v. CIT (1968) 67 ITR 771 (Cal.) and Seth Jamnadas Daga v. CIT (1961) 41 ITR 630 (SC) ref

R. V. Desai with B. M. Chatterjee for the Commissioner.

J. D. Mistry instructed by Purohit and Purohit for the Assessee.

JUDGMENT

DR. B. P. SARAF, J.---By this reference under section 25(1) of the Income Tax Act, 1961 ("the Act"), made at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to set off of share of loss suffered by her in the association of persons known as Nova & Co.?"

???????????

This reference pertains to the assessment year 1978-79. The assessee is an individual. In her assessment for the assessment year 1978-79, the assessee claimed set off of her share of loss in an association of persons known as Nova & Co. of which she was a member, against her individual income. The Income-tax Officer did not allow this claim for set off as, according to him, the share of loss from the association of persons could not be set off against the other income of the assessee. The assessee challenged this order of the Income-tax Officer before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner reversed the finding of the Income-tax Officer and upheld the claim of the assessee for set off of the share of loss ~ from the association of persons against her other income of that year. The Revenue, appealed against the above order of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal ("the Tribunal). Following the decision of the Andhra Pradesh High Court in Sint. Abida Khatoon v. CIT (1973) 87 ITR 627 and the Madras High Court in CIT v. S. K. S. Rajamani Nadar (1977) 109 ITR 258, the Tribunal confirmed the finding of the Appellate Assistant Commissioner and dismissed the appeal of the Revenue. Hence, this reference at the instance of the Revenue.

Mr. R. V. Desai, learned counsel for the Revenue, submits that the assessee being an individual can claim set off of loss suffered by her in the status as individual in respect of one source failing under any head of income against her income from any other source under the same head or against her income for that assessment year under any other head. -Learned counsel further submitted that under the Income Tax Act, 1961, an association of persons being a separate person than an individual and an assessee independently of its members, the loss of the association of persons can not be adjusted against the income of its members. In other words, according to learned counsel, the loss of the association of persons can be set off only against the other income of the association of persons and not against the income of its individual members. In this connection, our attention was drawn by learned counsel to the definition of "assessee" contained in section 2(7) and "persons" in section 2(31) of the Act. In support of this contention, learned counsel relied upon the ratio of the decisions of the Calcutta High Court in Ganga Metal Refining Co. (Pvt.) Ltd. v. CIT???? (1968) 67 ITR 771 and Ramanlal Madanlal v. CIT (1979) 116 ITR 657 and the latest decision of the Supreme Court-in ITO v. Ch. Atchaiah (1996) 21& ITR 239. As regards the decision of the Andhra Pradesh High Court in Smt, Abida Khatoon v. CIT (1973) 87 ITR 627 and the Madras High Court in CIT v. S. K. S. Rajamani Nadar 11977) 109 ITR 258, which were relied upon by the Tribunal in support of its decision, learned counsel submitted that the ratio of the said decisions would not apply to assessment under the Income Tax Act, 1961 ("the 1961 Act"), in-view of the provisions of that Act, which, unlike the Indian Income-tax Act, 1922 ("the 1922 Act"), do not provide for assessment of the individual members of an association of persons in respect of income of the association of persons: Our attention was also drawn to the decision of the Supreme Court in ITO v. Ch. Atchaiah (1996) 218 ITR 239 where this distinction has been noticed ad explained.

Mr. Mistry, learned counsel for the assessee, can the other hand, submits that the assessee is entitled to set off the share of loss of the association of persons against her other income. He relies upon the decision of the Andhra Pradesh High Court in Sint. Abida Khatoon v. CIT (1973) 87 ITR 627 and the Madras High Court in CIT v. S. K. S. Rajamani Nadar (1977) 109 ITR 258 in support of this contention. He submits that the decisions of the Calcutta High Court in Ganga Metal Co. (Pvt.) Ltd. v. CIT (1968) 67 ITR 771 and Ramanlal Madanlal v. CIT (1979) 116 ITR 657 wherein a contrary view has been taken, are not correct. According to learned counsel, the above decisions of the Calcutta High Court are contrary to the decision of the Privy Council in Arunachalam Chettiar v. CIT (1936) 4 ITR 173 and the decision of the Supreme Court in Seth Jamnadas Daga v CIT (1961) 41 ITR 630. The latest decision of Supreme Court in ITO v. Ch. Atchaiah (1996) 218 ITR 239, according to him, has no bearing on the law laid down by the Andhra Pradesh High Court and the Madras High Court in the decisions cited above.

We have carefully considered the rival submissions. Section 70 of the Act provides for set off of loss of an assessee from one source against, his income from another source under the same head of income. This section, as it stood at the material time, so far as relevant, reads:

"70, Set off of loss from one source against income from another source under the same head of income.---(1) Save as otherwise provided in this Act, where the net result of any assessment year in respect of any source failing under any head of income other than 'capital gains' is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head..."

Section 71 provides for set off of loss from one head against income from another head. It reads:

"71. Set off of loss from one head against income from another.---(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..."

It is clear from a plain reading of the above sections, that the assessee is entitled to set off the loss where the net result of computation for any assessment year in respect of any source falling under any head of income is a loss. The loss which can be set off, therefore, must be a loss determined in the assessment of the assessee himself. In other words, if loss is determined in the assessment of the assessee from any source of income falling under one head, such loss can be adjusted against his income, if any, assessable under the same head or under another head. The assessee in this case being an individual, in her assessment she will be entitled to set off only such loss as is determined in her own assessment. She would not be entitled to claim set off of the amount of loss determined in the assessment of the association of persons 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.

This position becomes further clear from the definition of "assessee" and "person" in clauses (7) and (31) of section 2, respectively, and section 4 of the Act which is the charging section. "Assessee" has been defined in section 2(7) of the Act to mean a person by whom any tax or any other sum of money is payable under this Act, and includes.---

(i) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he. is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

(ii) every person; who is deemed to be an assessee under any, provisions of this Act;

(iii) every person who is deemed to be an assessee in default under any provisions of this Act;

"Person" has been defined in clause (3.1) of section 2 of the Act to include,

(i) a 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 artifical juridical person, not falling within any of the preceding sub-clauses;

Section 4 of the 1961 Act, which is the charging section, at the material time, read as follows:

"4. Charge of income-tax. ---(I) 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 rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of that total income of the previous year or previous years, as the case may be, of every person."

?

It is clear from a conjoint reading of the above provisions that the charge 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 sections 70 and 71 only when the assesee is the same. Loss of one assessee cannot be set off against the income of another. 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. That being the legal position, in the instant case, the assessee is not entitled to adjust her share of loss in the association of persons of which she was a member against the profits made by her in the business carried on by her individually.

It may be pertinent in this connection to take note of the fact that there is a very important distinction between the provisions of the 1922 Act and the 1961 Act in regard to the assessment of the income of the association of persons. Section 3 of the 1922 Act provided that in respect of the total income of an association of persons the income-tax shall be charged either on the association of persons or the members of the association of persons individually. No such options provided under the 1961 Act. Under section 4 of the 1961 Act, if it is the income of the association of persons, the association of persons alone has to be taxed. The members of the association of persons cannot be taxed individually in respect of the income of the association of persons. As a natural corollary, the loss of an association of persons also cannot be regarded as the loss of its members individually. That being so, it is clear that a member of an association of persons cannot claim in his personal assessment set off of loss of the association of persons, which is a different taxable entity under the 1961 Act, against his individual income.

This distinction between the provisions of the 1922 Act and the 1961 Act in regard to the assessment of associations of person has been noticed and explained by the Supreme Court in the latest decision in ITO v. Ch. Atchaiah (1996) 218 ITR 239. The Supreme Court in that case compared the relevant provisions on the two enactments and observed (page 245):

"A comparison of the provisions of both the enactments immediately brings out the difference between them. Section 3 of the 1922 Act provided that in respect of the total income of a firm or an association of persons, the income-tax shall be charged either on the firm or the association of persons or on the partners of the firm or on the members of the association of persons individually. It is evident that this option was to be exercised by him keeping in view the interests of the Revenue. Whichever course was more advantageous to the Revenue, he was entitled to follow it. In such a situation, it was generally held that once the Income-tax Officer opted for one course, the other course .was barred to him. But no such option is provided to him under the present Act. Section 4 extracted hereinabove says that income-tax shall be charged on the total income of every person' and the expression 'person' is defined min clause (31) of section 2. The definition merely says that the expression 'person' includes, inter alia, a firm and an association of persons or a body of individuals whether incorporated or not. There are no words in the present Act, which empower the Income-tax Officer or give him an option to tax either the association of persons or its members individually or for that matter to tax the firm or its partners individually. 1f it is the income of the association of persons in law, the association of persons alone has to be taxed; the members of the association of persons cannot be taxed individually in respect of the income of the association of persons. Consideration of the interests of the Revenue has no place in this scheme. When section 4(1) of the present Act speaks of levy of income-tax on the total income of every person, it necessarily means the person who is liable to pay income-tax in respect of that total income according to law. The tax has to be levied on that person, whether -an individual, Hindu undivided family, company, firm, association of persons/body of individuals, a local authority or an artificial juridical person. From this, it follows that if income of A is taxed in the hands of B, A may be legitimately aggrieved but that does not mean that it is exonerated of his liability on that account. B cannot say, when he is sought to be taxed in respect of the total income which is lawfully taxable in his hands, that since the Income-tax Officer has taxed the very same income in the hands of A, he himself cannot be taxed with respect to the said total income. This is not only logical, but is consistent with the provisions of the Act. In this connection, it may be pointed out that where Parliament wanted to provide an option; a discretion, to the Income-tax Officer, it has provided so expressly. Section 183 (which has since been omitted with effect from April 1, 1993, by the Finance Act, 1992) provided that in the case of an unregistered firm, it is open to the Income-tax Officer to treat it, and make an assessment on it, as if it were a registered firm, if such a course was more beneficial to the Revenue---in the sense that such a corse would fetch more tax to the public exchequer. "

Referring to the decisions of the High Courts, which had taken a contrary view, the Supreme Court observed (page 249):

"The decisions of the High Court taking the contrary view appear to have been influenced largely by the decisions of this Court in CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225, and CIT v. Murlidhar Jhawar and Puma Ginning and Pressing Factory (1966) 60 ITR 95, which were rendered under the 1922 Act and have not given due weight to the marked difference in the language of the relevant provisions in the two enactments. "

We have perused the decision of the Calcutta High Court in Ramanlal Madanlal v. CIT (1979) 116 ITR 657. The ratio of the said decision now stands approved by the decision of the Supreme Court in ITO v. Ch. Atchaiah (1996) 218 ITR 239.

We have also considered the decision of the Andhra Pradesh High Court in Sint. Abida Khatoon v. CIT (1973) 87 ITR 627, wherein it was held that there was no provision preventing a member of the association of persons from setting off his share of the loss in the association of persons against his other income and that the assessee was entitled to set off her share of loss in the association of persons against her income under other heads and the decision of the Madras High Court in CIT v. Rajamani Nadar (S. K. S.) (1977) 109 ITR 258, wherein also it was held that there was no provision preventing the members of the association of persons from setting off their share of loss in the association of persons against their individual income from other sources. These decisions were rendered following the ratio of the decision of the Privy Council -in Arunachalam Chettiar v. CIT (1936) 4 ITR 173 and the decision of the Supreme Court in Seth Jamnadas Daga v. CIT (1961) 41 ITR 630, which were cases under the 1922 Act. In those cases, the distinction between the provisions of the 1922 Act and the 1961`Act was not brought to the notice of their Lordships. The ratio of the above decisions of the Andhra Pradesh High Court and the Madras High Court is, therefore, no more valid in view of the decision of the Supreme Court in ITO v. Ch. Atchaiah (1996) 218 ITR 239.

In the premises, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. This reference is disposed of accordingly with no order as to costs.

M.B.A./4003/FC ??????????????????? ??????????????????????????????????? Reference answered.