Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Brought Forward Losses Be Set Off Against Profit U/s. 50?

QUERY: A Ltd. has a brought forward losses of Rs. 1/- crore. During the F.Y. 2012-13, it has sold the depreciable asset being office premises which was purchased 5 years ago. The sale value is Rs. 5/- crore and the W.D.V. of said premise is Rs. 1/- crore.

A Ltd. wishes to adjust the brought forward business loss of Rs. 1/- crore against the deemed Capital Gain u/s. 50 relying on the Mumbai Tribunal decision in case of Digital electronics reported in 49 DTR 484.

The tax advisor of A Ltd. do not agree with the action of A Ltd. as regard the set off of business losses against the short term capital gain computed u/s. 50 in view of special bench decision in case of Nandi Steel reported in 134 ITD 73 (Bom.)
ANSWER: Yes, the income tax is one tax. Section 14 of the Act, classifies the taxable income under different heads for the purpose of computation of net income of the assessee. Though, for the purpose of computation of the income, profit on sale of depreciable asset is separately classified, the said profit on the sale of the asset does not ceased to be a part of income from business if the assets are part of the business assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provision of section 14 but on commercial principal. [see CIT v. Cocanada Radhaswami Bank Ltd., [57 ITR 306 (SC)].

The Mumbai Tribunal in Digital Electronics Ltd., v. ACIT [135 TTJ 419] has held that, section 72 of the IT Act, inter alia, provides that "where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this chapter, be carried forward to the following assessment year and,– (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ..........". It is thus clear that s. 72 of the Act provides that where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off is to be carried forward to the following assessment year and is allowable for being set off "against the profits, if any, of that business or profession carried on by him and assessable for that assessment year". It is thus for setting off the income that while the loss to be carried forward has to be under the head "Profits and gains of business or profession", the gains against which such loss can be set off, has to be profits of "any business or profession carried on by him and assessable in that assessment year". In other words, there is no requirement of the gains being taxable under the head "Profits and gains of business or profession" and thus, as long as gains are "of any business or profession carried on by the assessee and assessable to tax for that assessment year", the same can be set off against loss under the head profits and gains of business or profession carried forward from earlier years. In the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC), their Lordships of the Hon'ble Supreme Court took note of this distinction and the implications of these provisions regarding carry forward and set off of business loss. It was noted by the Hon'ble Supreme Court that while one set of provisions, i.e., the nature of loss incurred by the assessee, classifies the same on the basis of income being taxable under a particular head for the purpose of computation of the net income, the other set of provisions is concerned, only with the nature of gains being from business and not with the head of tax. Their Lordships held that as long as the profits and gains are in the nature of business profits and gains, and even if these profits are liable to be taxed under a head other than income from business and profession, the loss carried forward can be set off against such profits of the assessee. In this view of the matter, that the income earned in the year before us, although not taxable as "profits and gains from business or profession" was an income in the nature of income of business nevertheless. The assessee was, therefore, indeed justified in claiming the set off of business losses against the income of capital gains.

However, as per judicial precedent, a Special Bench decision would prevail over Division Bench. The special decision till date has not been overruled by any High Court or there is no contrary decision of any High Court. Therefore, Nandi Steel would apply.

In Nandi Steel Ltd., v. ACIT [supra] the Special Bench has observed as under:

“Much stress has been laid by both the parties on the term ‘profits and gains if any of any business or profession mentioned in sub-clause (i) of sub-section (1) of section 72. What are the profits and gains of business or profession? Whether it should be the income earned out of the business carried on by the assessee or it may be the income in any way connected to the business or profession carried on by the assessee? The answer to this question entirely depends on the interpretation to be given to the term “of any business or profession carried on by the assessee and assessable for the assessment year’ for determination of the issue. It is not in dispute that the land, building and bore well sold by the assessee were used by the assessee for its business purposes. It is also not disputed that these assets were fixed assets of the assessee. The only argument of the assessee has been that they have direct nexus with the business carried on by the assessee and therefore, are business assets and any gains from the sale of such assets would also have the character of business income. The contention of the assessee that the assets sold by the assessee were business assets cannot be accepted. Undisputedly, they were capital assets and the capital receipts are not taxable nor are the capital payments deductible from the income of the assessee. The capital is to be used for the purpose of carrying on the business of the assessee and it shall remain in the business of the assessee till it is either converted into stock-in-trade or is disposed of. The income earned by the assessee by carrying on the business by use of stock-in-trade only is the business income of the assessee. Likewise, any expenditure incurred by the assessee for carrying on of business and for earning the income from such business or profession only allowable as deduction. After taking into account the receipt and payments for carrying on the business of the assessee only the profit or gain or loss from the business is computed. If the profit or loss relate to the same assessment year from one source then it can be set-off from another source under the same head of income under section 70, and it can be set-off against the income from any other head of income under section 71. Section 72, however, permit the carry forward business loss to subsequent assessment years and allows it to be set-off against profit and gains, if any, of any business or profession carried on by the assessee and assessable for the relevant assessment year. Thus, it is clear that it is only the business loss that can be carry forward under section 72 and it can also be set-off only against the business income of the assessee, be it from the same business or from any other business. Capital gains on sale of capital assets is not to be set off against the brought forward loss of earlier years. In view of the same, it is to be held that the assessee would not be entitled to set-off carry forward business loss against the long term capital gain arising on sale of land used for the purpose of business.”

Therefore, brought forward business loss cannot be set off against the short term capital gain under section 50 of the Act.
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