1. The assessee is in appeal against order dated 24-3-1992 of the learned Commissioner of Income-tax, Delhi-VIII passed under section 263 of the Income-tax Act setting aside the order of the assessment dated 31-12-1990 of the Assessing Officer under section 143(3) of the Income-tax Act being erroneous insofar as it is prejudicial to the interest of the revenue.
2. The relevant facts are that the assessee is a partnership engaged in contract business. On a perusal of relevant record, the learned CIT noted that the order of assessment was prima facie erroneous insofar as it was prejudicial to the interest of the revenue on the following counts : (a) The Assessing Officer had allowed set off of loss suffered by the assessee in the joint venture business with an AOP, namely, M/s.
Unitech Ltd. against its business income; (b) It was unjustifiably allowed deduction of Rs. 46,972 being machinery and equipment written off; (c) Its income from interest ought to have been assessed as income under the head 'Other sources'; and (d) partners' current account showed considerable debit balance but no proportionate disallowance of interest paid was disallowed to the extent interest bearing loans and utilised for the purpose of assessee's business.
3. On the above counts the learned CIT was prima facie of the view that action of he Assessing Officer was erroneous insofar as it was prejudicial to the interest of the revenue. The learned CIT accordingly issued a show cause notice in response to which assessee furnished its reply contesting the opinion formed by the learned CIT and submitted that the order of assessment was neither erroneous nor for that matter it was prejudicial to the interest of the revenue. The learned CIT on a consideration of assessee's submissions found explanation furnished by the assessee with regard to points (b) and (c) as acceptable. However, he was not satisfied with the assessee's explanation on point Nos.(a) and (d), leading to passing of the impugned order. The assessee is aggrieved.
4. With regard to point No.(a), the relevant facts are the assessee-firm has entered into a joint venture with a company, namely, M/s. Unitech Ltd. as an AOP. The assessee's share was 50%. In its profit and loss account the assessee disclosed loss of Rs. 12,39,271 being the loss suffered by the AOP with assessee's share at Rs. 6,19,635. This was claimed as a business loss by the assessee. The Assessing Officer computed loss in the case of the joint venture while framing assessment of the assessee at Rs. 11,53,886 after disallowing various expenses as also after carrying out necessary adjustment. Thus, the assessee's share of loss from joint venture was computed at Rs. 5,76,943, which was allowed as business loss. Thus, according to the learned CIT, rendered the order of assessment erroneous insofar as it was prejudicial to the interest of the revenue. In response to show-cause notice, the assessee submitted its reply that apart from the loss incurred the earlier year from same source duly allowed and set off against business income of the assessee, it was obligatory on a the part of the Assessing Officer to compute assessee's share of profit or loss from the said joint venture as contemplated under section 67A of the Income-tax Act for the purpose of set off such loss under section 70 of the Income-tax Act. The learned CIT, however, took the view that the Assessing Officer was legally not competent to compute loss of the AOP to determine assessee's share therein as this could be done only after the AOP has not filed the return of loss. Thus, according to the CIT, action of the Assessing Officer was without jurisdiction rendering the order of assessment erroneous insofar as it was prejudicial to the interest of the revenue.
5. As regards point (d), the assessee submitted that there was no occasion for any disallowance of interest there being no nexus between the interest bearing funds raised by the assessee in its C.C. A/c and debit balance in partner's Current account. The assessee submitted that closing debit balance in its C.C. A/c. was less than the opening debit balance (Rs. 12,60,900) against which the contract receipts during the relevant previous year amounted to Rs. 7.25 prior apart from other income of nearly 25 lakhs, on which no payment of interest was claimed.
The assessee explained that approximately Rs. 2.70 crore out of these receipts stood credited in the C.C. A/c and partner's withdrawals were also made from these very accounts, in all aggregating to only about Rs. 2.27 lakhs. It was, thus, urged that on this count also the order of assessment was neither erroneous not it was prejudicial to the interest of revenue. However, the learned CIT noted that the over draft account of the assessee showed debit balance throughout the year, as also partners' accounts. The learned CIT took the view that profits for a particular year is determined only after accounts are closed and balance-sheet drawn and the fact that assessee had receipts from contract as also other receipts on which it did not have to pay interest was not material. Therefore, the CIT held that Assessing Officer's order in not disallowing proportionate interest on advances made to partners and others was erroneous insofar as it was prejudicial to the interests of the revenue. He placed reliance on CIT v. Sridev Enterprises [1991] 192 ITR 165/59 Taxman 439 (Kar.) and Shankar Theatres v. CIT [1984] 146 ITR 547 [1983] 15 Taxman 225 (Bom.). Thus, on these two learned CIT held the order of the assessment erroneous insofar as it was prejudicial to the interest of the revenue. The assessee is aggrieved.
6. According to the learned Authorised Representative, Shri. G.C.Sharma, Sr. Advocate the order of the assessment is neither erroneous nor for that matter it is prejudicial to the interest of revenue. He submitted that no material existed on record which could enable the learned CIT to assume jurisdiction under section 263. He submitted that there is no dispute that the assessee as a member of the AOP, M/s.
Unitech suffered a loss, which was shown as per profit and loss account and claimed as such. He submitted that the AOP did not file the return of its loss and not did the department call upon the same to file its return. Shri Sharma submitted that the assessee declared its income from all sources, including share from AOP and the Assessing Officer was bound to allow the same for the purpose of set off in the absence of assessment of the AOP and take recourse to the provision of section 155(2) of the Income-tax Act to carry out necessary rectification, if required. Shri Sharma posed a query as to what would be the position if the assessee had declared profit, for this very source. According to Shri Sharma, the obvious answer is that Department would have taxed the same subject of application of the provisions of section 155(2). He submitted the fact that assessee had disclosed its share of loss in the AOP did not alter the legal position. On the other hand, the Assessing Officer to determine assessee's share in the said AOP carried out necessary adjustments and computed the loss at a lesser figure. Shri Sharma, therefore, submitted that there was no error in the order of the assessment insofar as it was prejudicial to the interest of the revenue since the statute itself provides remedy for rectification under section 155(2) of the Income-tax Act, Shri Sharma submitted that the only reason which pre-valid with the learned CIT in holding the order of assessment on the issue as erroneous insofar as it is prejudicial to the interest of revenue is that the Assessing Officer computed assessee's share in the loss suffered by the AOP. This, according to Shri Sharma, did not render the order of assessment erroneous insofar as it is prejudicial to the interest of revenue, inasmuch as the Assessing Officer was legally bound to allow the loss, as declared subject of course to variation, if any, warranted on completion of assessment of the AOP, as contemplated under section 155(2). Thus, according to Shri Sharma, the basic condition which could legally entitle the CIT to assume jurisdiction under section 263 that the order of assessment should be erroneous insofar as it is prejudicial to the interest of the revenue is not satisfied Shri Sharma also submitted that the order of assessment dated 31-12-1990 got merged with that of the learned CIT(A) passed on 29-5-1991 and, therefore, the notice of the learned CIT under section 263 dared 31-1-1992 is also without the authority of law. Shri Sharma submitted that in para 4 of his order the learned CIT(A) has also dealt with the disallowance of Rs. 42,962 out of the joint venture expenditure.
7. As regards point (d), Shri Sharma invited out attention to reply of the assessee in response to notice under section 263 and submitted that the view taken by the learned CIT that on this count also the order of assessment is erroneous insofar as it is prejudicial to the interest of the revenue is not justified. He submitted that undoubtedly the assessee is having a opening debit balance in its C.C. A/c amounting to Rs. 12,60,899, but in this very account all the receipts and outgoing as relating to assessee's business are accounted for on day-to-day basis and it is also a matter of record that contract receipts of the assessee for the relevant assessment year are merely Rs. 7.25 crore, apart from other income of nearly 25 lakhs, on which no interest is paid. Against this an amount of Rs. 2.70 crores was credited in the said C.C. A/c and partner's withdrawals were also made from this very account, in all aggregating to Rs. 2.27 lakhs. He submitted that the view of the learned CIT that there could be no income too the close of the year in unjustified in facts of the case, inasmuch as the assessee is maintaining a mixed which also reflects its receipts and outgoing for the entire previous year and it is a matter of fact, which is not even controverted that receipts outstrips the outgoing as advance to partners. Shri Sharma submitted that there is no nexus either between the interest bearing loan raised by the assessee in its C.C. A/c. and debit balance in the partners' Current Accounts and even the learned CIT has not established the same and, therefore, the view taken by him is unjustified. Shri Sharma invited out attention to Hon'ble Calcutta High Court judgement in the case of Alkali & Chemical Corpn. of India Ltd. v. CIT [1986] 161 ITR 820/28 Taxman 423, which was also cited before the learned CIT, wherein it has been held : "If money has been deposited by an assessee out of its profits in an overdraft account for which all payments including that of income-tax are made, the fact that the said overdraft had a continued debit balance would make no difference to the presumption that income-tax had been paid out of the profits and not out of the borrowings.
Where the net profit of the assessee in the relevant accounting year exceeded the income-tax paid by the assessee and the entire profits were deposited in an overdraft account from which all expenditure of the assessee including that on account of payment of income-tax were incurred.
Held, that the interest paid on the overdraft could not be disallowed." He submitted that this is what exactly that happened in assessee's case, inasmuch as admittedly approximately Rs. 2.7 crore out of receipts of the assessee stood credited in the said CC Account from where the partners' withdrawals were only to the extent of Rs. 27 lakhs. As such there could be no question of any proportionate interest being disallowed by the Assessing Officer.
8. On the other hand, the learned Departmental Representative broadly supported the order of the learned Commissioner of Income-tax. The Departmental Representative placed reliance on Hindustan Aluminium Corpn. Ltd. v. CIT [1989] 178 ITR 74/[1986] 26 Taxman 475 (Cal.) and submitted that the doctrine of merger has no applicability on facts of assessee's case, inasmuch as the learned Commissioner of Income-tax (Appeals) was not seized of the issue relating to assumption of jurisdiction by the Assessing Officer to compute assessee's share of loss in the Association of Persons. He submitted that the amendment of section 263 w.e.f. June 1, 1988 is explicit and, therefore, the doctrine of merger is not applicable in the case of the assessee. The D.R. also referred to judgement of Calcutta High Court in the case of Ganga Metal Refining Co. (P.) Ltd. v. CIT [1968] 67 ITR 771 and submitted that assessee was not entitled to set off of the loss suffered by it in the joint venture against its other business income.
9. In reply, Shri Sharma submitted that the judgement of Ganga Metal Refining Co. (P.) Ltd.'s case (supra) was rendered under 1922 Act when, on other hand, the claim of the assessee is permissible under section 70 of the Income-tax claim of the assessee is permissible under section 70 of the Income-tax Act, 1961 and this is not the point in dispute either as is apparent from the notice given by the learned CIT under section 263.
10. Learned representatives of the parties are heard and relevant record see. The case laws relied upon by the respective parties have also been gone through.
10.1 As the Department cannot of in appeal against order of assessment framed by the Assessing Officer, section 263 of the Income-tax Act arms the CIT with the powers to revise an order of assessment which is erroneous insofar as it is prejudicial to the interest of the revenue.
Therefore, what is to be seen is whether on facts of the case the order dated 31-12-1990 passed by Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue. In out considered view, the said order is neither erroneous not for that matter it is prejudicial to the interest of the revenue. The learned CIT has held the order as coming within the ambit of section 263 on two counts : (a) the computation of loss done by the Assessing Officer as relating to the AOP to determine the share of the assessee for the purpose of set off against its other business income was without authority of law, there being no return of loss filed by the AOP and as such the order of assessment was rendered erroneous insofar as it is prejudicial to the interest of the revenue; and (b) the Assessing Officer's order in not disallowing proportionate interest on advances made to partners and others was erroneous and prejudicial the interest of the revenue.
10.2 As regards (a) undoubtedly the AOP did not file the return of its loss, as the revenue also did not call upon the AOP to furnish the return of its loss. On the other hand, the assessee is disclosing the loss suffered by it in the joint venture undertaken with the AOP and has claimed the same as business loss for set off against its other business income. It is not in dispute that the assessee, in fact, is entitled to the claim of set off of the said loss. The mere fact that the Assessing Officer assumed jurisdiction in computing the loss of the AOP on the basis of information furnished by the assessee to determine the share of loss of the assessee, in our opinion, did not render the action of Assessing Officer as without authority of law, this, in turn rendering the order of assessment erroneous insofar as it is prejudicial to the interest of the revenue. As already mentioned, the assessee has disclosed its income/loss from all sources, including loss from the AOP and has claimed the same against its other business income. It is nobody's case that it is not entitled to claim same. As rightly pointed out by Shri Sharma, the loss so returned could not have been ignore by the Assessing Officer as he could not have ignore profit, if any, which accrued to the assessee out of that joint venture. If the profit could be brought to charge without determining the assessee's share in the income of the AOP, by this very logic the assessee was entitled to claim the loss as suffered in that joint venture against its other income. Further, the provisions of section 155(2) clearly come to the rescue of the revenue in case the share of profit/loss returned by the assessee undergoes any change consequent to assessment of income/loss in the hands of the AOP. Admittedly there is no return filed by the AOP for the relevant assessment year and under these circumstances, the action of the Assessing Officer in computing the loss of the AOP to determine assessee's share therein did not amount to any prejudice being caused to the interest of the revenue even if his action is termed as erroneous. Since no prejudice was caused to the interest of revenue by the action of the Assessing Officer, in our view, the learned CIT was not justified in holding that the order of assessment was rendered erroneous insofar as it is prejudicial to the interest of revenue.
10.3 As regards point (b) above, here again we find that explanation rendered by the assessee was such which should have left no doubt in the mind of the learned CIT that on the facts of the case, no interest was liable to be disallowed when the assessee in its C.C. A/c is crediting its business receipts/profits on day-to-day basis and the incoming are more than the amount advanced to the partners. On these fact and under these circumstances, we vacate the order of the learned CIT. As it is we do not consider it necessary to go into the other arguments taken by the learned A.R. for the assessee.