`Prejudice' should be something real and substantive in relation to very assessment under consideration and not merely conjectural or prospective which did not give jurisdiction to commissioner for revision.
The apprehension that any loss computed by the Income Tax Officer might be availed of by the assessee in a later year when it had profit was not correct since it was made clear by section 80 that such an allowance could be given only if the loss had been determined in pursuance of return filed under section 139. `Prejudice' which confers jurisdiction on the Commissioner should be something real and substantive in relation to the very assessment year under consideration and not any anticipated prejudice in later year. The mere action of the Income Tax Officer in repeating the unabsorbed relief under section 80-J pertaining to the assessment year 1976-77 in the order for 1977-78 would not entitle the assessee to set off the loss in the later year unless other conditions were satisfied. There was no `prejudice' to the revenue even in this year. The Commissioner was not, therefore, justified in setting aside the assessments.
1. These two appeals have been filed by Lakshmi Narasimha Export Industries, Proddatur, against the orders of the Commissioner, under Section 263 of the Income-tax Act, 1961 ('the Act'), for the assessment years 1976-77 and 1977-78.
2. The assessee is a firm which had filed application for registration which was not, however, pursued for the assessment year 1976-77. The assessee did not file any return voluntarily, but filed a return in response to a notice under Section 148 of the Act on 24-11-1979 declaring a loss of Rs. 6,26,881 for the assessment year 1976-77. For the assessment year 1977-78, it is the assessee's case that the return was filed in response to the notice under Section 139(2) of the Act, which was served on the assessee within the time though it appeared that a notice under Section 148 also came to be issued after the end of the assessment year. The ITO computed the loss for both the years besides computing the relief under Section 80J of the Act, to be carried forward and unabsorbed depreciation in the following manner: Assessment year Assessment year Business loss 12,797 1,13,172 Unabsorbed depreciation 4,27,833 2,33,322 Unabsorbed allowance under Section 80J 66,000 66,000 5,06,630 4,12,494 After completion of the assessment for 1976-77, it was modified by another order under Section 154 of the Act, wherein, the ITO reduced the loss by an amount of Rs. 21,394. The above figures for the assessment year 1976-77 are after the effect of the order under Section 154. The Commissioner felt that the assessments were prejudicial to the interests of the revenue on the ground that the loss was computed on returns filed beyond the time-limit entitling the assessee to set off the same against future income under Section 80. He, therefore, issued notices under Section 263. He cancelled the assessment for 1976-77 while for the assessment year 1977-78 he found it possible to hold that the return was filed within the time allowed under Section 139(4) in pursuance of notice issued under Section 139(2). All the same, he set aside the assessment in the view that the ITO was wrong in mentioning the loss in the assessment year 1976-77, for this year and holding that it will be carried forward. In other words, the alleged mistake made by the ITO for the assessment year 1976-77 was sought to be made for the assessment year 1977-78 consequently, (sic), and prejudice was presumed to this extent. The assessee is in second appeal for both the years.
3. The learned counsel for the assessee claimed that there is no law against the computation of the loss as such. He was candid enough to admit that the loss determined in pursuance of return filed belatedly could not be available for set off under Section 80. But that does not mean that the determination of the loss itself both in law and in facts are prejudicial to the revenue. At the same time, he claimed that there could be no dispute as to the computation of unabsorbed depreciation and relief under Section 80J which could be claimed by the assessee for set off in a later year whether this had been computed or not in view of the decision of the Allahabad High Cout in Addl. CIT v. Sheetalaya  117 ITR 658, the Calcutta High Court in the case of Indian Aluminium Co. Ltd. v. CIT  122 ITR 660 and the Madras High Court in CIT v. Bluemount Ceramics Ltd.  123 ITR 385. As for the assessment year 1977-78, the learned counsel claimed that the position of the assessee was even stronger inasmuch as the return was filed in response to notice under Section 139(2) within the time allowed under Section 139(4) and that the issue of another notice under Section 148 was apparently by oversight of the earlier issue and even otherwise ineffective, 4. The learned departmental representative relied on the order of the Commissioner for both the years. He claimed that Section 148 does not authorise the continuation of the proceedings where there is no benefit to the revenue. He pointed out to the decision of the Bombay High Court in the case of Kevaldas Ranchhodas v. CIT  68 ITR 842, wherein it was pointed out that the proceedings under Section 148 cannot be converted by an assessee into an assessment in his favour and that it is open to the authorities to drop the proceedings. The learned counsel for the assessee, in reply, sought to distinguish this decision by pointing out that the Bombay case related to a reassessment and not the original assessment.
5. We have carefully considered the records as well as the arguments.
We will take up the appeal for the assessment year 1976-77 first. The assessee had not filed a voluntary return for this year within the assessment year and it was filed only in response to the notice under Section 148. This fact is not disputed. Section 148 would apply only where a taxable income has escaped assessment or where the assessee having a taxable income had failed to make a return. At the time when the ITO had issued the notice, he had reason to believe that the assessee had made profits as it was in business during the year.
Initiation of the proceedings is valid. However, it was open to the ITO to have dropped the proceedings once he found that there was no taxable income. However, the ITO has to go through the exercise of computing the income in order to find whether there was taxable income or not.
Hence, the mere computation of the income on his part cannot be said to be wrong or unjustified in law. It is not also revenue's case that the loss that he has computed is excessive or that he had made any other mistake in such computation. The grievance of the revenue is based upon the apprehension that this loss so computed by the ITO will be availed of by the assessee in a later year of profit merely because it has been so determined. This apprehension itself may not be correct because Section 80 on which reliance has been placed by the revenue itself makes it clear that such loss should not only have been determined but it should have also been determined 'in pursuance of a return filed under Section 139'. There are also other conditions for the right to set off under Chapter VI. It, therefore, stands to reason that the assessee may not be entitled to the set off merely because the loss had been computed. Hence, there cannot be a presumption of prejudice merely on the basis of the assessment order for this year. Again, it stands to reason that the 'prejudice' so as to confer jurisdiction for the Commissioner should be something real and substantive in relation to the very assessment under consideration and not merely conjectural or only prospective. Obviously, prejudice in another year cannot justify the jurisdiction for this year. Hence, we find that the basic requirement for jurisdiction that the assessment should be prejudicial to the revenue is not satisfied because it has not been shown that there has been any prejudice in this year. There is only an anticipated prejudice and that also on the wrong presumption that mere computation of the income would automatically entitle an assessee to set off in a later year whatever might be the law regarding such set off in such later year. The Bombay High Court in the case of Kevaldas Ranchhodas (supra), where the assessee wanted a recomputation in its favour and insisted on a fresh assessment, held that Section 34 of the 1922 Act, which is in pan materia with Section 147 of the Act, does not authorise such recomputation in a reassessment inasmuch as Section 34 is meant for the benefit of revenue and not for the taxpayer. In assessee's case, no such recomputation was involved. In this case, the assessment was an original one and it is not the case of the revenue that the computation made by the ITO is faulty so as to require the assessment being modified or cancelled under Section 263. We, therefore, find that there is neither prejudice to the revenue nor is there justification for cancelling the assessment inasmuch as the reason for which the assessment was sought to be cancelled is not a wrong computation of loss but the mere apprehension of possible prejudice. Such apprehension has to be treated as academic for the assessment year under consideration. It was also pointed out by the learned counsel for the assessee that at least in respect of unabsorbed depreciation and relief under Section 80J which is to be carried forward, there could be no objection to the determination of both during the year. We find that the Allahabad High Court in the case of Sheetalaya (supra) held that the relief under Section 80J can be claimed in the year of profit and that there is no requirement to have it computed in the year in which the deficiency had arisen. The Calcutta High Court in the case of Indian Aluminium Co. (supra) had also held that there was no requirement to have the deficiency determined for Section 80J in the year when it was not sought to be absorbed. The Madras High Court had taken the same view in the case of Bluemount Ceramics Ltd. (supra).
Hence, it is clear that the determination of Section 80J deficiency in this year also is a matter of academic interest inasmuch as the assessee is entitled to the set off of Section 80J deficiency, if it is otherwise entitled to, whether it has been determined in this year or not. The position regarding unabsorbed depreciation cannot also probably be different as there is no requirement for determination of the same in the year of the use prior to set off unlike business loss which is required to be determined in pursuance of a return under Section 139 in view of Section 80. At any rate, the question of set off of these amounts of unabsorbed depreciation, deficiency under Section 80J and business loss will arise, in our view, only in the year in which set off is claimed by the assessee and not in the year in which it is merely computed. We would have certainly understood the anxiety of the revenue to have the orders set aside or modified if the computation is found to be wrong on merits. There is no such finding.
We, therefore, set aside the order of the Commissioner cancelling the assessment and restore the assessment done by the ITO after clearly finding that this computation does not ipso facto, entitle the assessee to have the amount so decided set off in a later year unless the set off is warranted by law. Such a finding on our part is, no doubt, academic and not necessary and cannot be construed as a direction for another year by any authority under the income-tax law because this Tribunal cannot bind either the assessee or the revenue for an assessment which is not before it. We must also point out that the ITO himself had not directed in his order for the assessment year 1976-77 that the loss or unabsorbed depreciation or the deficiency under Section 80J computed by him will be carried forward and/or set-off in a later year. Even if he had done so, as we have repeatedly pointed out in this order, it cannot bind the successor officer unless such set off is warranted by law. In the assessment year under consideration, he has merely declared that there is no demand against the assessee. Tt was precisely the purpose of his order. Hence, it is in the context of these facts that we are cancelling the order of the Commissioner.
6. As for the assessment year 1977-78, the issue raised is even more academic than the assessment in dispute for the immediately preceding year. The Commissioner has noticed that this was a return filed in response to notice under Section 139(2). A further notice under Section 148 for the same year apparently is redundant and, therefore, did not have any legal effect. Hence, the ITO, according to the assessee, was justified in computing the loss as well as the deficiency under Section 80J and the unabsorbed depreciation as part of such computation. This has been practically conceded by the first appellate authority inasmuch as he had finally found only one objection to the order for the assessment year 1977-78 and, that is, that the ITO had categorised the business loss, the unabsorbed depreciation and the unabsorbed relief under Section 80J in the foot-note to this order for both the assessment years 1976-77 and 1977-78 under the heading 'Losses to be carried forward'. As we had repeatedly pointed out in the preceding paragraph, such a direction which was, however, absent for the assessment year 1976-77 can have no legal effect. At any rate, it was not at all necessary for the ITO to repeat the figures for the assessment year 1976-77. As for the assessment year 1977-78, his observation is also presumably not wrong as the loss has been determined in pursuance of a return under Section 139, and, therefore, not hit by Section 80, Even otherwise, as observed by us in connection with the assessment for the preceding year, the mere computation of income cannot give rise to prejudice if there is nothing therein prejudicial to the revenue. There is no allegation of any larger loss or any other mistake in the computation. The action of the ITO in repeating the business loss, unabsorbed depreciation and unabsorbed relief under Section 80J of the assessment year 1976-77 in the order for 1977-78 is, no doubt, an unnecessary and superfluous exercise in the mistaken belief that the assessee would be automatically entitled to the loss determined for the assessment year 1976-77 overlooking the fact that the return was not filed in response to notice under Section 139 in that year. But that does not mean that there has been any prejudice because his finding does not automatically entitle the assessee to have the loss set off in the later year whether the conditions such as continuity of business, determination of the loss in pursuance of a return under Section 139, etc., under Chapter VI are satisfied or not. It is not a part of the order which has something to do with the computation of income or demand for this year. To repeat again, it is not the revenue's case that the loss or the deficiency under Section 80J or the unabsorbed depreciation for the year have been wrongly determined. In this sense, there is no prejudice for this year also. There was, therefore, no justification to set aside the assessment. The formal listing of the various types of losses and allowances under 'losses to be carried forward' was a formality which was not a necessary part of the assessment order for the year. There was no justification for setting aside the assessment as there was no prejudice even initially in respect of this assessment. Hence, even this order setting aside the assessment cannot stand. We will, however, like to observe that the foot-note even if treated as 'direction' by the ITO to his successor as regards future unabsorbed allowances and the losses to be 'carried forward' cennot bind the authorities in a later year. Such an observation on our part is, however, unnecessary, but made with a view to point out that the apprehension of the authorities as to the possible effect of these orders in later years is not justified. Under the circumstances, we cancel the order of the Commissioner for this year also.
7. In the result, both the appeals are allowed. The orders of the Commissioner are set aside in the light of what we have stated in the preceding two paragraphs.