1. This appeal has been filed by the assessee against the order dated 12-11-1982 of the Commissioner relating to the assessment year 1979-80.
2. The assessee is a company which was formerly doing business in coal mining. This business was stopped as it was nationalised with effect from 1-5-1972. During the year under consideration, the assessee was receiving interest on the compensation amount receivable by it. On the other hand, it was paying interest on the overdraft amounts. The resultant figure was being shown as income or loss from 'other sources'. During the year under consideration, the assessee had a net loss of Rs. 17,593 under the head 'Income from other sources'. At the same time, it had an income of Rs. 37,505 under Section 41(1) of the Income-tax Act, 1961 ('the Act'). The ITO set off the income of Rs. 37,505 assessable under Section 41(1) under the head 'Profits and gains of business or profession' against loss of Rs. 17,593 arrived at under the head 'Income from other sources' and, thus, assessed the assessee on a net income of Rs. 19,910. In other words, the ITO set off the loss under the head 'Income from other sources' against the income under the head 'Profits and gains of business or profession' under Section 70(1) of the Act. It may be stated that the loss did not relate to speculation business. Evidently, the said loss was not under the head 'Capital gains'.
3. Subsequently, the Commissioner scrutinised the records and came to hold the view that the profit under Section 41(1) could be set off only against the loss under Section 41(5). As the ITO had not applied his mind to this aspect of the question, he proposed to set aside the assessment under Section 263 of the Act. The assessee contended that there was no mistake prejudicial to the interests of the revenue in the order passed by the ITO and so the action under Section 263 proposed by the Commissioner was not justified. The Commissioner overruled these contentions of the assessee and passed the impugned order setting aside the assessment and directing the ITO to make the assessment afresh after proper enquiries.
4. The assessee was not represented before us at the time of hearing of this appeal even though the notice of hearing was served on the assessee on 22-4-1985 as per acknowledgement on file. Shri P.C.Banerjee, the learned representative for the department, urged before us that the Commissioner was justified in passing his order. He took us through the order of the Commissioner and contended that the arguments therein have been well taken and so the order deserved to be upheld.5. We have considered the contentions of both the parties as well as the facts on record. We find that Section 70(1) entitles the assessee to set off the loss under one head against the income under any other head of the same year so long as the loss did not relate to capital gains or speculation business. In the instant case, the assessee was clearly entitled to such a set off and the ITO was quite justified in making the assessment in the way that he had done. Section 41(5) is an additional advantage available to the assessee. It says that in case there is any business loss which has remained without being set off against the business which has ceased to exist, then such loss can be set off against any future income under Section 41(1). After such a set off, if still income under Section 41(1) remains then Section 70 comes into play and the assessee is further entitled to set off that balance income under Section 41(1) against the loss, if any, under the other heads except capital gains or speculation business. If the ITO has not looked into this aspect of the matter, it is because the assessee did not claim this additional advantage available to it under Section 41(5). Had the assessee any business loss in the year in which it stopped its business then the same would have gone to reduce the income assessed by the ITO still further. Due to the alleged absence of enquiry by the ITO on this point, the mistake, if any, has resulted in a benefit to the revenue and not in any prejudice to the revenue.
Hence, we hold that the Commissioner did not acquire valid jurisdiction to proceed under Section 263 and so the impugned order passed by him is bad in law. We, therefore, cancel the same.