ORDER
M.A. Ajinkya, Accountant Member
1. This is an appeal against the order of the CIT Under Section 263 of the Income-tax Act relating to the assessment year 1984-85.
2. The relevant facts may briefly be stated. The appellant Anubhav Family Trust is a trust which was created by one Renudevi Aggarwal on 13-5-80 by settling a sum of Rs. 20,000 for the benefit of her nieces and nephews. S/Shri Narendra Pal Gupta and Anil Kumar Aggarwal were appointed as trustees under the aforesaid trust. The first assessment of the trust was completed for the assessment year 1981-82 on a total income of Rs. 16,64,441. The shares of the four beneficiaries were indicated in the order of assessment and taxed in the hands of the beneficiaries. For the assessment year 1982-83 the assessment was completed on a total income of Rs. 3,71,956. The appellant filed an appeal against this order and the total income determined by the ITO was converted into a loss of Rs. 2,22,812. This was because the CIT(A) by his order dated 2-1-87 gave substantial relief in the estimate of G.P. and the ITO by his order dated 21-1-87 gave effect to the order of the CIT(A) resulting in the computation of the aforementioned loss. We were informed in the course of appeal hearing that the revenue had filed appeal against the order of the CIT(A) on quantum and the matter is pending before the Tribunal. For the assessment year 1983-84 the trust filed a return showing loss of Rs. 1,52,40,560 on 29-10-83. On completion of the assessment the loss was determined at Rs. 79,38,563. The ITO in his order dated 19-2-86 observed that the loss was allowed to be carried forward in the hands of the trust. This figure of loss was modified to Rs. 81,61,475 by an order Under Section 155 passed by the ITO on 21-1-87. The assessment for the assessment year 1984-85 was first completed by the ITO, CC-XXX on 28-7-86. He determined the total income of the trust at Rs. 70,90,113 and adjusted out of loss of assessment year 1983-84 amounting to Rs. 79,38,563 the loss to the extent of Rs. 70,90,113 which was set off against the total income to arrive at ‘nil’ net income. It is this order passed by the ITO on 28-7-86 which has been considered as erroneous and prejudicial to the interest of the revenue by the CIT.
3. The CIT started proceedings Under Section 263 of the Act because he came to the conclusion that the order passed by the ITO on 28-7-86 was prima facie erroneous and prejudicial to the interest of revenue, inasmuch as, the loss had been allowed to be set off in computing the income of the appellant although the loss computed for the earlier years was not to be carried forward for set off against income of subsequent years. The CIT in a very detailed order took note of various arguments advanced before him. He took the stand that since for the assessment year 1981-82 the ITO had computed the income of the trust and allocated it to the beneficiaries for being included in their respective assessments, the department elected to make the assessment of the beneficiaries and this election could not be varied in subsequent years. According to the CIT, the benefit of carry forward of loss for the intervening years would be available for the assessment year 1984-85 in the hands of the trustees only if such a benefit was available to the beneficiaries. He observed that in the years when the business carried on by the trustees resulted in a loss, the beneficiaries at best could be said to have received nothing or had become entitled to nothing. He further observed that but for the provisions of Chapter VI of the I.T. Act relating to set off or carry forward of loss, there would be no right to adjust loss under one head against income from another head or set off of loss of one year against income of another year. The right of set off or carry forward of loss was available only under Chapter VI of the Act and if the conditions specified in those provisions were not satisfied, this right would not be available. The CIT further observed that the right to carry forward and set off of business loss Under Section 72 of the Act would be available to the assessees if and only if any such business loss was suffered in any earlier year and so computed in their cases. Since all the beneficiaries were minors, no loss could be determined in their case for any of the relevant years because under the law governing their rights and obligations vis-a-vis the business carried on by the trustees, no such loss was suffered by them. Finally the CIT observed that the beneficiaries who were the only assessees in the real sense being not responsible for the losses suffered by the business in earlier years, could not have any loss computed under the I.T. Act for an earlier year which could be available for set off Under Section 72 of the Act. Therefore, the entire profits of the business pertaining to the previous year relevant to the assessment year 1984-85 were to be treated as income chargeable to tax in the hands of the beneficiaries for the assessment year 1984-85. Since the ITO while framing the assessment order dated 23-7-86 had failed to do so, this order was erroneous. The order was also prejudicial to the interest of the revenue. The beneficiaries should have been charged to tax on the entire amount of their shares in the profits of the year without any adjustment on account of losses of earlier years because since they were not responsible for the loss of the business, no such loss could have been computed in their cases. It is this order of the CIT that is challenged in the present appeal.
4. Sri Dastur, learned counsel of the appellant, firstly pointed out that the ITO who completed the assessment for the assessment year 1983-84 had determined the loss in the case of the trust and had given direction that such loss should be carried forward. Similar direction has been given by the ITO for earlier years also. Although these assessments were in appeal, the direction given by the ITO on the issue of carry forward of loss in the hands of the trust was not the subject matter of appeal in any of the two cases. Therefore, according to Sri Dastur, unless the orders for the earlier two years in which such direction was given by the ITO were modified, the CIT could not have modified or revised the order for the assessment year 1984-85. Sri Dastur then referred to Section 80 of the I.T. Act. This section specifically provided that no loss which has not been determined in pursuance of a return filed Under 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) of Section 74 or Sub-section (3) of Section 74A. Sri Dastur argued that no loss had been determined in the cases of the beneficiaries in pursuance of returns filed by them. Therefore, there was no question of carry forward and set off of any loss in the cases of the beneficiaries. On the other hand, the loss was determined in the case of the trust from year to year and, therefore, it could only be carried forward in the hands of the trust in the year in which there was a positive income of the trust. Sri Dastur then referred to Section 72 of the Act which deals with carry forward and set off of business losses. The first condition in Section 72(1) was that the business or profession for which the loss was originally computed continued to be carried on by the assessee in the previous year relevant for that assessment year and the second condition was that if loss was not wholly set off, the loss not so set off can be carried forward to the following year and the limit laid down in Section 72(3) was 8 years immediately succeeding the assessment year for which the loss was first computed. According to Sri Dastur, both these conditions were satisfied in the case of the assessee-appellant. The condition laid down in Section 80 was also satisfied in the case of the appellant and, therefore, the ITO had committed no error in setting off of the loss determined in earlier years carried forward to this year. Sri Dastur argued that it is not open to the department to now try to set off of loss determined in the case of the trust in the hands of the beneficiaries. The department cannot be permitted to take contrary stand or change its stand. It causes prejudice. In this context Sri Dastur referred to the decision of the Bombay High Court in the case of CIT v. Anny & Navy Stores Ltd. [1957] 31 ITR 959. In that case the assessee-company had obtained a particular benefit and escaped a particular obligation by reason of a representation made by it to the Taxing Department. It had contended that it was liable to excess profits tax to United Kingdom and had succeeded in inducing the Department to attract to its case to proviso to Section 10(1) of the Indian Finance Act, 1946. But for this representation and but for the statement that it was liable to pay excess profits tax in the U.K., the company would have been liable to make a compulsory deposit. It could escape the obligation to make compulsory deposit only if its profits were liable to excess profits tax in the U.K. and it escaped that liability because it represented to the department that its profits were liable to excess profits tax in the U.K. when the question arose Under Section 11(11) of the Finance Act, 1946 as to how the refund should be brought to tax, the company completely changed its stand and took up the attitude that its profits were not liable to excess profits tax in the U.K. and, therefore, the case did not fall under the proviso to Section 11(11). In this context the Bombay High Court observed as under:
It is difficult to understand how the assessee can be permitted to deny the truth of the representation made by it in its letter of the 24th of November, 1946, when on the strength of it it obtained a certain benefit and when on the strength of it the Taxing Department relieved it of a certain obligation. The Taxing Department having changed its position to its prejudice by reason of this representation, the assessee company cannot be permitted to deny the truth of that representation when the question arises of assessing its refund to tax under the proviso to Section 11(11).
Sri Dastur also relied upon another decision of the Bombay High Court in the case of HA. Shah & Co. v. CIT [1956] 30 ITR 618. The Bombay High Court observed that since the principle of estoppel or res judicata does not strictly apply to the Income-tax Authorities, it is not open to a Tribunal to come to a different conclusion to the one arrived at by that very Tribunal earlier without any limitation whatsover and what were the limitations upon the right of an Income-tax Authority not to be bound by the earlier decision or the right to revise the earlier decision. If the first decision was not an arbitrary decision or a perverse decision, if the first decision was arrived at after due inquiry and if no fresh facts were placed before the Tribunal giving the second decision, would it be open to the second Tribunal to come to a contrary conclusion? Deriving support from this observation Sri Dastur argued that the CIT cannot take the stand that would amount to a change in the stand that the department had taken in the earlier year. He, thereafter, referred to a decision of the Madras High Court in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129. The Madras High Court observed that the expression “prejudicial to the interests of the revenue” is not to be construed in a petty-fogging manner, but must be given a dignified construction. It further went on to observe that the expression “prejudicial to the interests of the revenue” must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the ITO which might set a bad trend or pattern for similar assessments, which on a broad reckoning might think to be prejudicial to the interests of revenue administration. If an order of the ITO is in accordance with law, such order cannot be said to be erroneous and prejudicial to the interest of revenue. Sri Dastur therefore argued that the original order of the ITO which was in accordance with law, inasmuch as, it was in accordance with the provisions of Sections 72 and 80 read together was not erroneous nor prejudicial to the interest of the revenue.
5. Referring to the merits of the case Sri Dastur argued that Section 161 is to be interpreted to mean that it refers to cases where positive income is earned because it speaks of liability to tax upon representative assessee in the like manner and to the same extent. According to Sri Dastur, provisions of Section 161(1) do not affect the carry forward of loss in the hands of the trustees. The loss earned by the trust till it is set off is to be assessed in the hands of the trust. Sri Dastur also referred to the provisions of Indian Trust Act and cited certain authorities like Rangachari and Scott on Trust in support of his argument that the trustee is not personally liable for acts done in good faith. Since in the present case the loss was sustained by the trust, it was determined in the case of the trust in the earlier years. Such loss was rightly carried forward and adjusted against the profits of the trust, according to Sri Dastur, for the assessment year 1984-85.
6. Sri Minocha, the learned Commissioner, who argued for the department, briefly states the history of the case. He pointed out that the assessment for the assessment year 1981-82 was made on a positive income and the department had elected to assess the beneficiaries. In subsequent two years loss was returned by the trust. The beneficiaries in these returns had not shown any connection with the trust. According to Sri Minocha the trust can never be an assessee in its own right. The de facto or the real assessee in this case or in a case of this type are the persons who are entitled to income, namely, the beneficiaries. Sri Minocha argued that there was no inherent right of carry forward of loss as the carry forward was available to the assessee only if the conditions prescribed in Sections 70,71,72 and 80 are satisfied. We have to see to whom the benefits really belong. The beneficiaries are not responsible for the loss and, therefore, the loss was never determined in the case of the beneficiaries. Referring to Section 75 of the I.T. Act Sri Minocha argued that in the case of registered firm there was a specific provision that the loss sustained by the firm which cannot be set off against any other income of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off and carried forward for set off. Sri Minocha pointed out that the position was not much different in the case of an AOP. Sri Minocha referred to a decision of the Andhra Pradesh High Court in the case of Hyderabad Deccan Cigarette Factory v. CIT [1981] 127 ITR 460 in which the Andhra Pradesh High Court has held that the benefit conferred by Sections 70 to 80 of the I.T. Act which deal with carry forward and set off of loss, can be invoked and allowed only once as provided therein. It cannot be allowed twice over – once against individual income of the members of an association of persons and again against the income of the association of persons. He relied on the decision of the Bombay High Court in the case of Western India Oil Distributing Co. Ltd. v. CIT [1980] 126 ITR 497, wherein the Bombay High Court has held that the question whether the loss of any year can be carried forward to the following year and set off against the profits and gains of the same business is to be determined by the ITO who deals with the assessment of the subsequent year. It was for the ITO who dealt with the assessment for the assessment year 1984-85 to decide whether the carry forward of the loss in the trust case was correct. Since he had erred in setting off the loss of the earlier years against the profits of the trust without adjusting such profits between the beneficiaries, he had committed an error and the CIT was fully justified in proceeding Under Section 263 of the Act.
7. In reply, Sri Dastur argued that if the department had elected to tax the beneficiaries in the assessment year 1981-82 it should have adopted the same stand to the subsequent years. The loss had not been apportioned in the case of beneficiaries in subsequent years. He argued that all the cases cited by Sri Minocha were under the Old Act. There was a sea change in the provisions relating to the carry forward and set off of losses. Section 80 was not on the Statute Book when these decisions were given. Sri Dastur pointed out that the Bombay High Court in Western India Oil Distributing Co. Ltd. ‘s case (supra) had explained the ratio of the Supreme Court in the case of CIT v. Manmohan Das [1966] 59 ITR 699 which had been relied on by Sri Minocha earlier. Finally, Sri Dastur pointed out that Section 161 was also not on the Statute Book. Under the Old Act, the trustees would have been taxed and not the beneficiaries. There was no condition prescribed in Section 72 or Section 80 which was not satisfied in the present case and, therefore, the original order passed by the ITO was correct and need not have been revised. According to Sri Dastur, the department should have allocated the losses determined in the earlier years (assessment years 1982-83 and 1983-84) among the beneficiaries since according to the Commissioner the election, in favour of taxing the beneficiaries had already been made by the department. Sri Dastur finally relied on a decision of the Bangalore Bench of the Tribunal in 3.5 TTJ 333.
8. We have carefully considered the submissions made on either side. In our opinion, there is no mistake in law committed by the ITO who passed the order on 28-7-86 adjusting the loss of the assessment year 1983-84 against the profit of the assessment year 1984-85. The conditions prescribed Under Section 72 were satisfied in the present case, inasmuch as, the loss was determined in the case of a trust in response to a return filed Under Section 139 for the assessment year 1983-84. The same business was carried on by the trust for the assessment year 1984-85. Therefore, the ITO’s order, in our opinion, was in accordance with the provisions of law. He was fully justified adjusting the loss determined in the case of the trust against the profits determined in the same case for the assessment year 1984-85. Section 161 which deals with representative assessee, only provides for the machinery to recover tax from such assessee in the like manner and to the same extent assuming that the assessment resulted in the demand of tax. When there is no demand of tax, Section 161 cannot, in our opinion, come into operation. On the other hand, we cannot accept the argument which says that the loss should have been carried forward in the case of the beneficiaries who are the real assessees. This is because the loss has not been determined in the case of the beneficiaries for the earlier years and Section 80 clearly says that no loss which has not been determined in accordance with the return filed will be allowed to be carried forward. Therefore, the question of adjustment of loss of the earlier year in the hands of the beneficiaries does not arise in the present case at all. No doubt, the right of carry forward and set off of loss is not inherent. It is subject to the conditions prescribed under the Act. But the learned CIT has not been able to show before us that the conditions prescribed Under Sections 70, 71, 72 and 80 have not been fulfilled in the present case. The only two conditions which are required, in our opinion, to be seen in this context are that the loss should have been determined in the earlier year and that the business in which the said loss was sustained should have been carried on by the same assessee in the year in which the set off of loss is allowed. These two conditions have been fulfilled. Sri Minocha relied on the Supreme Court decision in the case of Manmohan Das (supra).
9. This decision, in our opinion, does not really support the case of the department on the main issue. No doubt it is true that in the present case the ITO who made the assessment for the assessment year 1984-85 had to determine whether the set off of loss determined in the trust case for the earlier years was available to it in the assessment for the assessment year 1984-85 In that sense, we agree that the CIT had jurisdiction to proceed Under Section 263 for the assessment year 1984-85 without having to modify necessarily the finding of the ITO regarding the carry forward of loss for the assessment year 1983-84. When we come to the merits of the case, however we find that the benefit of set off of loss of the earlier years can be denied to the assessee under the Act, if and only if, the conditions prescribed for such set off of loss contained in Sections 72 and 80 are found not to have been fulfilled by the assessee. In the present case, there is nothing in the order of the CIT, nor in the argument advanced by Sri Minocha to suggest that the trust had not fulfilled these conditions. When we asked Sri Minocha about what would happen to the loss determined in the trust case for earlier years, he had nothing to say except to state that the right of carry forward was not inherent. We are not prepared to accept the argument that in the present case the beneficiaries are the real assessees and that the benefit of carry forward and set off of loss is available only in the hands of the beneficiaries. We are also not prepared to accept the further argument that since the beneficiaries in the present case are minors, they can never be assessed on their shares of the loss and, therefore, carry forward and set off of loss is neither available to the trust nor to the beneficiaries. This, in our opinion, would be a farfetched interpretation of the provisions concerned. The Bangalore Bench of the Tribunal in the case cited before us have held that when the trustees have filed returns of loss and have been assessed thereon, they alone have the right to carry forward the loss in the subsequent year. We have seen this decision and we are in full agreement with the proposition laid down therein. In the present case we find that the loss was determined in the case of the Trust for the assessment years 1982-83 and 1983-84 and was carried forward to the subsequent assessment year. It was not allocated amongst the beneficiaries. Therefore, the trust alone can get the benefit of set off of such loss in the assessment year 1984-85.
10. Since the conditions laid down in Sections 72 and 80 have been fulfilled in the present case and since further there is no dispute about the genuineness of the loss sustained, in our opinion, the order passed by the ITO on 28-7-1986 for the assessment year 1984-85 was a correct order in Law. It was not erroneous nor prejudicial to the interest of the revenue and as decided by the Madras High Court in the case of Venkatakrishna Rice Co. (supra), an order which is correct in law cannot be erroneous nor prejudicial to the interest of the revenue. We, therefore, reverse the order of the CIT Under Section 263, restore the order of the ITO and allow this appeal of the assessee.
11. In the result, the appeal is allowed.