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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI C.N. PRASAD, JM & SHRI MANOJ KUMAR AGGARWAL, AM
आदेश /O R D E R
Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeals by assessee for Assessment Year [AY] 2009- 10 contest separate orders of Ld. first appellate authority, which we dispose-off by way of this common order for the sake of convenience & brevity. First, we take up which contest the order &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 of Ld. Commissioner of Income-Tax (Appeals)-42 [CIT(A)], Mumbai, Appeal No.CIT(A)-42/IT-47/11-12 dated 06/10/2016 qua confirmation of certain additions. The assessment for impugned AY was framed by Ld. Income Tax Officer -24(3)(4), Mumbai [AO] u/s 143(3) of the Income Tax Act,1961 on 29/12/2011 wherein the income of the assessee has been determined at Rs.19,67,570/- after certain additions as against ‘Nil’ return filed by the assessee on 30/09/2009. During the impugned AY, the assessee was engaged in the business of manufacturing of chlorinators, evaporators & flexible connectors etc. 2.1 The first issue under appeal is addition of Rs.7,33,565/- on account of legal expenses since the same, in the opinion of Ld. AO, were not incurred for the purpose of business and moreover, TDS deducted there-from was not deposited within the stipulated time limit. The Ld. Authorized Representative for assessee [AR] pleaded for admission of additional evidences in support of the claim on this account. Keeping in view the principle of natural justice, the issue stands remitted back to the file of Ld. AO with a direction to assessee to substantiate his claim and demonstrate that these expenses were incurred for the purpose of assessee’s business and further the provisions of TDS has duly been complied with against the same. Ground Nos. 1 & 2 stands allowed for statistical purposes. 2.2 Ground No. 3 & 4 contest adhoc disallowance against telephone expenses, motor expenses & depreciation and sundry expenses debited to the profit & Loss Account. Keeping in view, the reasonable disallowance &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 rate of 10% & 20%, the same do not require any interference on our part and hence, dismissed. 3.1 Ground Numbers 5 & 6 plead for allowance of brought forward losses of AY 2007-08. The facts of the same are that the assessee, in the return of income, claimed brought forward business loss of earlier years amounting to Rs.42,72,212/- and after adjusting the current income of Rs.11,62,964/-, carried forward the balance amount of Rs.31,09,248/-. It was noted that the loss was incurred in AY 2006-07 and since assessee failed to furnish sufficient documentary evidences including loss returns of earlier years, the same was denied to the assessee. Aggrieved, the assessee carried the matter before Ld. CIT(A). 3.2 The Ld. CIT(A) noted that the correct figures of brought forward losses was Rs.26,93,383/-. The Ld. CIT(A), on page numbers 3 to 5 of the impugned order, noted the constitution / re-constitution history of an erstwhile firm namely Babubhai Narottamdas & Co. and noted that w.e.f. 22/09/2006, the assessee carried on the business of the said firm as sole surviving partner / proprietor as well the agent of court receiver. The financials of the firm were prepared on 22/09/2006 and the total loss arising from the business was determined and the business was taken by the assessee who filed return of income in the capacity of proprietor for the balance period of six months of FY 2006-07 under his own individual name. The total loss so determined up-to 22/09/2006 was Rs.42,72,212/- and accordingly the assessee’s 50% share therein came to Rs.21,36,108/-. &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 After adding further loss of Rs.5,55,990/- incurred by the assessee after 22/09/2006, the total loss thus worked out to Rs.26,92,096/-. The set-off of the same has been claimed by the assessee in AY 2008-09 onwards by placing reliance on the decision of Apex court in Sakthi Trading Co. [250 ITR 871]. The amount of Rs.6,28,694/- has already been set-off by the assessee against the same in AY 2008-09 and accordingly the balance amount of Rs.20,63,402/- has been left to be set-off in subsequent years. 3.3 However, upon perusal, Ld. CIT(A) noted that the details filed did not match with the returns of income for respective AY and the claim of brought forward losses has not been clearly mentioned in returns for AYs 2007-08 & 2008-09. Finally, after perusing the provisions of Section 78 and placing reliance on the decision of Hon’ble Delhi High Court rendered in Pramod Mittal Vs. CIT [2012 205 Taxman 444], the set-off of the same has been denied to the assessee against which the assessee is in further appeal before us. 3.4 The primary argument of Ld. AR revolves around the fact that it was the case of succession by inheritance and therefore, the provisions of Section 78 were not applicable to the facts of the case and hence, the set- off of the losses was allowable to the assessee. The Ld. DR placed reliance on the stand of Ld. CIT(A). 3.5 We have carefully heard the rival contentions and perused the impugned order. At the outset, it is noted that loss of Rs.5,55,990/- incurred &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 by the assessee in the capacity of proprietor for AY 2007-08 has completely been set-off in AY 2008-09 and the same is, undisputedly, in order. 3.6 Now, we are concerned with set-off of balance amount of Rs.20,63,402/- which is nothing but assessee’s own share of loss to the extent of 50% in erstwhile firm as on the date of dissolution i.e. 22/09/2006. In our opinion, this loss has been incurred by the firm and exclusively belongs to the firm only and is not available for set-off to the partner in individual capacity. Clearly, the firm and individual are separate legal / taxable entities in the eyes of law. From the facts culled out by Ld. first appellate authority, it is evident that the assessee was admitted as partner of the firm since 22/10/1968 and continued as partner up-to 22/09/2006 when the other partner of the firm (assessee’s brother) died and the firm was continued as proprietorship concern of the assessee. Therefore, we do not find any strength in the argument that it is a case of succession by inheritance since nothing has been inherited by the assessee rather he was already a partner in the firm since inception stage of the firm. Hence, on factual matrix, we find that the assessee’s share in the losses of the erstwhile firm belonged to that firm only and could not be set-off by assessee in individual capacity. Our view is duly supported by the judgment of Hon’ble Delhi High Court rendered in Pramod Mittal Vs. CIT [19 Taxmann.Com 24] wherein the matter has been adjudicated by the Hon’ble court in the following manner:- 3. We have considered the contentions raised by the petitioner but do not find any merit in the same. Partnership firm is a separate and distinct unit of assessment. The &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 petitioner and his brother constituted a partnership firm, which was dissolved w.e.f. 18.9.2004. The partnership firm will have to be assessed on the income for the period 1.4.2004 to 18.9.2004. After the dissolution of the partnership firm, it ceased to exist. The petitioner in terms of the dissolution deed became entitled to fixed assets, current assets and liabilities of the firm. The other partner was paid the current account balance and capital balance standing to his credit. After 18.9.2004, the appellant continued to carry on the business as a sole proprietor. As a sole proprietor the income earned was taxable in his hand as an individual and as a separate unit/person.
Section 78(2) of the Act reads: - "78. Carry forward and set off of losses in case of change in constitution of firm or on succession-- (1)** ** ** (2) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income."
Section 78(2) will apply to the facts of the present case as the partnership firm was dissolved and ceased to exist w.e.f. 18.9.2004. The partnership firm after the said date did not continue. This is not a case of inheritance due to death under the law of succession. The loss suffered by the appellant as an individual can be included and accounted for but not the loss suffered by a different person/unit i.e. the partnership firm. Section 78(2) of the Act does not permit the said set off or diminution.
The Madhukant M. Mehta (supra) the sole proprietor had expired and after his death his heirs had succeeded and carried on business in partnership. In this case the losses suffered by the deceased proprietor were allowed to be set off in terms of Section 78(2) of the Act. Section 78(2) carves out an exception in case of succession by inheritance. The general rule is that it is only the person who has suffered the loss is entitled to set off and account for the same and not a different or a third person. In the case of Madhukant M. Mehta (supra) it was succession by inheritance. In the case of Saroj Aggarwal (supra) there was a partnership firm and on death of one of the partners, the legal heirs of said partner were inducted as partners. It was noticed that the partnership was not dissolved on the death of the partner. In such circumstances, Section 78(2) was interpreted and benefit of carry forward of the loss was given. The partnership firm which suffered the losses continued throughout with induction of legal heirs of the deceased partners. This again is a case of succession by inheritance.
It will be appropriate to refer to Section 170(1) of the Act, which reads: - "Section 170. Succession to business otherwise than on death. (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession, - &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession; (b) the successor shall be assessed in respect of the income of the previous year after the date of succession."
Section 170(1) is very lucid and clear. The partnership firm has to be assessed in respect of profit and gains from the business for the period up to 18th September, 2004. After the said date and after the partnership firm was dissolved, the sole proprietor has to be assessed in respect of profits and losses. The income earned by the appellant, as an individual, would include his share of loss as an individual but not the losses suffered by the partnership firm. The losses suffered by the partnership firm cannot be set off from the income of the appellant as an individual, in the absence of any specific provision in the Act. The partnership firm and individual are two separate taxable entities or persons under the Act.
There is no contradiction between Section 78(2) and Section 170(1). They provide for different situations. Section 170(1) provides for a situation where a person carrying on business or profession is succeeded to by another person, who continues to carry on that business. In such a situation, the sub-section says that predecessor in business shall be assessed in respect of the income of the previous year up to the date of succession and the successor in business shall be assessed in respect of the income after the date of succession. This sub-section only provides as to who will be assessable in respect of the income of the previous year from business, when there is a change in the person carrying on the business by succession. Section 78(2) provides for a different situation. It speaks only of carry forward of the losses of a person who was carrying on a business or profession and who was succeeded to by another person. It makes no provision for the division of the income of the previous year between the predecessor and successor. It says that it is only the person who incurred or suffered the loss who will be entitled to carry forward the same and set it off, and no other person. An exception to this rule is the case of succession by inheritance.
In the present case the assessee has claimed to set off the loss of Rs. 22,40,193/- against his income earned for the period from 18.09.2004 to 31.03.2005. The loss is not the loss suffered by him. It is the loss suffered by the erstwhile partnership firm before 18.09.2004 on which date the firm was dissolved. When the assessee took over the business of the erstwhile partnership firm, it was not a case of succession by inheritance. The appeal is accordingly dismissed. No costs. Upon perusal of the same, we find that the court after considering various judicial pronouncements including that of Hon’ble Apex Court rendered in CIT v. Madhukant M. Mehta [2001 247 ITR 805] as relied upon by Ld. AR concluded that the losses of the dissolved firm could not be set-off by the ITA NOs.1379 &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 assessee partner upon succession. We also find that the case of Hon’ble Apex Court rendered in CIT v. Madhukant M. Mehta [2001 247 ITR 805] was factually different since in that case, the erstwhile proprietorship concern of the father was carried on by the legal heirs by forming partnership firm and the Hon’ble court held that firm could claim carry forward of loss of sole proprietor as it was found by Tribunal that there was succession to business of deceased. Therefore, the same being factually different, could not be applied to the facts of the case. Resultantly, this ground of assessee’s appeal stands dismissed. 3.7 The assessee’s appeal stands partly allowed for statistical purposes. Now, we take up ITA 1379/Mum/2017 4. By way of this appeal, the assessee contest the order of order of Ld. Commissioner of Income-Tax (Appeals)-42 [CIT(A)], Mumbai, Appeal No.CIT(A)-42/IT-221/13-14 dated 06/10/2016 qua confirmation of certain additions. The assessment for impugned AY was framed by Ld. Income Tax Officer -24(3)(4), Mumbai [AO] u/s 143(3) read with Section 148 of the Income Tax Act,1961 on 15/01/2014 wherein the assessee has been saddled with further additions of Rs.14,12,500/-. The same, upon confirmation by first appellate authority, is being contested before us.
5. The Ld. AR pointed out that the assessee could not avail professional representation to effectively represent his case before Ld. CIT(A) and therefore, deserves another opportunity of being heard in view of the ITA NOs.1379 &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 principle of natural justice. The Ld. DR opposed the same that the onus was on assessee to pursue his appeal before the lower authorities.
6. Upon due consideration and upon perusal of impugned order, we find that there was repeated non-compliance to hearing notices before Ld. first appellate authority and the assessee sought frequent adjournments which reveals that the assessee was negligent in attending the appellate proceedings. However, keeping in view the fact that the assessee-in-person was attending the proceedings and could not avail professional representation & keeping in view the principle of natural justice, we see no harm or prejudice in providing another opportunity to the assessee to make effective representation before first appellate authority. Therefore, without delving much deeper into the issue, the matter stand remitted back to the file of Ld. CIT(A) for re-adjudication with a direction to the assessee to substantiate his case forthwith failing which Ld. CIT(A) shall be at liberty to dispose-off the same as per law on the basis of material available on record. The assessee’s appeal stands allowed for statistical purposes.
Conclusion 7. Resultantly, both the appeals stands partly allowed in terms of our above order. &1380/Mum/2017 Ramesh Kocha Assessment Year: 2009-10 Order pronounced in the open court on 23rd March, 2018.
Sd/- Sd/- (C. N. Prasad) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांक Dated : 23.03.2018 Sr.PS:- Thirumalesh आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent 2. आयकर आयु�(अपील) / The CIT(A) 3. आयकर आयु� / CIT – concerned 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard File 6.