ORDER
George Cheriyan, Vice President
1. This appeal by the .asses-see relates to the assessment year 1982-83 and is against an order passed by the CIT under the provisions of Section 263 of the Income-tax Act. For this assessment year, the assessee had filed a return showing ‘nil’ income. The computation in this regard, as seen from the order of the CIT, was as follows :
Business income for the calendar year 1981
relevant to the assessment year 1982-83 as per
the computation for income-tax purposes. Rs. 1,17,197
Less : Losses relating to the assessment years
1978-79 to 1980-81 brought forward. Rs. 1,56,870
out of the same set off restricted to. Rs. 1,17,197
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Balance Income Rs. Nil
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The assessee sought carry forward of balance of loss of Rs. 39,673. In completing the assessment, the income was computed as under by the ITO :
Business : Income returned Rs. 1,17,197
Deduct : Loss to be carried forward
for the asst. year 1978-79
Loss determined Rs. 20,000
Less : Business income for 1981-82 Rs.14,398 Rs.5,692
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Rs. 1,11,505
Less : Loss relating to assessment
year 1979-80 Rs. 1,29,560
out of which loss to the
extent of Rs. 1,11,505 is set
off here Rs. 1,11,505
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Balance income Rs. Nil
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and he directed carry forward of losses as under :
Loss relating to the assessment
year 1979-80 Rs. 18,055
1980-81 Rs. 17,310
The Commissioner, on a perusal of the records was of the view that the business losses relating to the assessment years 1978-79 to 1980-81 brought forward and claimed to be set off against the income for the assessment year 1982-83, related to contract business carried on by the assessee herself in the construction of buildings at Madras under the name and style of M/s. Parthy Constructions.
2. However, during the previous year relevant to the assessment year 1980-81 onwards, the assessee had stopped carrying on such business of construction of buildings and was only admitting supervision charges which were received by the assessee from her husband, Shri Ramaswamy in terms of an agreement entered into with him dated 10-3-1980 and related to building contracts undertaken by him. The CIT was of the view that the contract business which was earlier carried on by the asssssee of construction of buildings was not continued in the assessment year 1982-83 and, therefore, under the provisions of Section 72(1)0), the business loss of earlier years could not be carried forward and set off against income for this year. This factor, the Commissioner stated, had been overlooked by the ITO in framing the assessment and, therefore, there was an error prejudicial to the revenue which called for being set right.
3. In reply to the show-cause notice, the assessee had relied on the decision of the Madras High Court in the case of GIT v. S.S.M. Ahmed Hussain [1986] 28 Taxman 124, which the Commissioner distinguished on the ground that there was a composite business activity and only one limb of the same had been discontinued. The Commissioner finally directed the ITO to disallow in the assessment year 1982-83 the set off allowed earlier of business losses relating to the assessment years 1978-79 and 1979-80 and to issue a demand notice.
4. Before us, the learned counsel submitted that the business done in the earlier years and in this year was the same, namely, the business of construction work on contract basis. He filed a list of the work done for several years from 1967 onwards right up to 1982. This is as under :
1967 (1) Construction of 22 Nos. Type IV Quarts, at Madras. Atomic power project Kalpakkam, Us. 2.65 lakhs. 1969 (2) Construction of Credit House Complex, Kalpakkam.
Rs. 3.25 lakhs.
1971 (3) Construction of Type 9 Quarts 52 Nos. Rs. 9.19 lakhs.
1973 (4) Construction of Hostel Rs. 13,00,000 appxly.
1975 (5) Construction of Type IV Quarts Rs. 6.25 lakhs.
1976 (6) Providing finishing works at FBTR, Kalpakkam
Rs. 4.45 lakhs.
1977 (7) Construction of Type IV Quarts Rs. 6.75 lakhs.
1978 (8)
1979 (9) No fresh contract.
1980 1 Tiruchendur Flats 18 Nos. A Block
1981 Construction of Apartments 6 Nos. B Block
1982 Complex 9 Nos. C Block
According to him, the mere fact that in earlier years the construction was done for outsiders and in this year the construction was done for a project of fiats which scheme was started by the assessee’s husband, did not make any difference. He also filed copies of the trading account and profit and loss account and submitted that merely because a lump sum was paid as “supervision charge” for what was done by the assessee, it would not cease to be a business of construction contract. He, therefore, submitted that the finding of the ITO was in order.
5. The learned Departmental Representative stated that the assessee was earlier doing business in construction contracts. The business involved, in particular, an element of risk. In the present year, the nature of the work done by the assessee was really agency work. The assessee was paid a fixed remuneration which was 10 per cent of the gross expenditure. The assessee did not have to provide finance. All expenses incurred by the assessee were reimbursable and there was absolutely no risk in the type of work which the assessee was doing which clearly made it a different type of business from what was done earlier. The learned Departmental Representative emphasised that according to him and on the facts on record, it was clear that the earlier business of construction contract had come to an end or discontinued and was not carried on in the current year. He, therefore, stated that the action of the Commissioner was fully in accordance with law and no interference was called for.
6. We have considered the rival submissions. Under the provisions of Section 72(1), if there are profits and gains from any business in a particular year, the losses from any business in an earlier year can be set off against the profits of the current year’s business provided that the business from which the loss was originally computed continued to be carried on by the assessee in the previous year relevant for the assessment year in which set off was claimed.
7. We have set out the list of works executed from 1967 onwards. The work of the assessee was construction business. The construction contracts were taken from 1967 right up to 1977 from outside and independent parties, such as Autonomous Bodies, etc. In these contracts, as is usual, the assessee would have to fulfil the same and whatever surplus or deficit resulted would be the assessee’s recompense. This would be either profit or loss from business. The agreement of 10th March, 1980 reads as under :
This agreement entered into this 10th day of March, 1980, between Shri AR. Ramaswami of Pallathur, Ramnad District hereinafter referred to as Party of the First Part and M/s. Partial Constructions, by Proprietrix Smt. Parvathi Ramaswamy of 13, Leith Castle Street, Santhome, Madras-28 hereinafter referred to as the Party of the Second Part Witnesseth :
Whereas the Party of the First Part has acquired the vacant land measuring 9025 sq. ft. known as “Plot A (in which the ‘Block A’ is to be constructed consisting of 18 Flats) and 5797 sq.ft. known as Plot B (in which ‘Blocks B & C’ are to be constructed consisting of 6 Flats and a shopping complex respectively) both situated in T.S. No. 2 in Block No. 6 at door No. 1 Babu Rajendra Prasad Street, in West Mambalam, Madras-33 with a view to construct flats to be sold to various persons, whereas the party of the First Party has been finding it difficult to proceed with the construction due to various reasons.
Whereas the party of the First Part has approached the Party of the Second Part to attend to the construction of the Flats on the abovesaid land in view of their previous experience for over 10 years in this line.
Whereas the party of the Second Part has agreed to attend to construction for the Party of the First Part, whereas the party of the First Part has agreed to pay as Supervision Charges 10 per cent, (ten) of the cost of Construction of the Flats on the abovesaid land ;
And Whereas the party of the Second Part has agreed to receive the abovesaid Supervision Charges ;
This Agreement Witnesseth :
1. M/s. Parthi Constructions will attend to the construction of the Flats in the lands at T.S. No. 2 Block No. 6 in West Mambalam, Madras-33 for the Party of the First Part.
2. The Party of the First Part agrees to pay 10 per cent of the total cost of construction as supervision charges to the party of the Second Part for attending to the constructions of the Flats.
3. The Party of the First Part agrees to advance money for the construction as and when required by the Party of the Second Part.
4. The Party of the Second Part has agreed to the above terms and conditions and undertake to proceed with the construction work immediately.
In witness whereof the parties hereto have set their hands on the day above written.
For Parthi Constructions
Sd/-
Proprietrix
Party of the First Part. Party of the Second Part
From the coming into force of this agreement, the assessee did not do any contract business for other third parties. We have now to decide whether first of all any business was carried on by the assessee in terms of the contract and, secondly, whether the business done was the same as in the earlier years. The assessee’s husband, i.e., the party of the first part to the agreement had acquired certain vacant land and he had a project for putting up three blocks of flats, i.e., Block ‘A’, Block ‘B’ and Block ‘C’. It was stated that he found it difficult to proceed with the construction due to various reasons. He, therefore, approached the assessee to attend to the construction of the flats in view of her experience in the line for over 10 years. The assessee agreed to this. The consideration to be paid is described in the agreement as “supervision charges 10 per cent of the cost of construction of the flats on the abovesaid land”. Clause 2 particularly states that this amount is to be paid for attending to the construction of the flats to the assessee. The husband was to advance money for the construction as and when required by the assessee and finally it was agreed that the assessee proceed with the construction work immediately. There is no finding that the agreement was collusive or did not reflect the true state of affairs in the order of the C.I.T. Therefore, we have to proceed on the basis that this was an agreement entered into between two independent parties in the usual course of commerce though it is between husband and wife. The assessee was carrying out the contract work for which of course she did not have to finance expenditure immediately or ultimately from her pocket because, whatever money was expended was reimbursed by the husband. What the assessee got was a fixed amount with reference to the total expenditure incurred. This was paid on completion of the work. Thus, the expenditure on ‘A’ Block was Rs. 8,95,850 and the amount received by the assessee at 10 per cent was Rs. 89,585. The expenditure incurred on ‘B’ Block was Rs. 3,13,593 and what the assessee received was Rs. 31,359. The assessee was the contractor. Labour charges were disbursed by the assessee. So, the entire contract work was done by the assessee. Merely because expenditure was reimbursed by the husband after it was spent or even prior to it money may have been advanced expenditure was incurred on various items, such as bricks, timber, tiles, cement, etc. It did not result in the assessee ceasing to carry on contract business. In terms of the agreement, the assessee was entitled to a fixed amount which was described as “supervision charges”, but this, in reality, is profit which the assessee got by carrying on the contract business. Earlier, the assessee had carried on contract business by undertaking contracts for third parties in which there was no reimbursement of expenses. In this year, the assessee continued to carry on contract business for which of course expenditure was reimbursed and there was an agreement in terms of which the assessee was entitled to a fixed amount as recompense which, though described as “supervision charges”, is nothing but profit for undertaking the contract work. In this state of factual evidence, we have to hold that the assessee did carry on contract business in building construction in earlier years and continued to carry on the business of building construction on contract basis even in the year now under consideration. Therefore, we give the finding that the surplus received by the assessee this year and offered for tax was income from business and further, it was income from the same business as in earlier years in which, a loss had been incurred and which was continued to be carried on in this year. We are unable to agree that the earlier business was distinct and separate and had been discontinued and what was done in terms of the agreement was a new business or what the asses-see received was in the nature of commission on the basis of what was in reality an agency agreement. We accordingly set aside the order of the Commissioner and restore that of the I.T.O. The appeal is allowed.