2008 (12) TMI 631 - AT - Income Tax

Business loss or Capital Loss loss on sale of investment - Depreciation Profit u/s 115JA adjustment of depreciation with book profit

Summary

Issues Involved:
1. Re-opening of assessment.
2. Addition of Rs. 6,03,843 being loss on sale of investment.
3. Computation of profit under section 115JA.

Issue-wise Detailed Analysis:

1. Re-opening of Assessment
- Summary: Ground No. 1 pertaining to re-opening of assessment was not pressed by the assessee and hence, taken as withdrawn.

2. Addition of Rs. 6,03,843 being Loss on Sale of Investment
- Facts: The assessee claimed a loss of Rs. 6,03,843 on the sale of shares in Indus Bank Ltd., which were held by Met Securities P. Ltd. (amalgamated with the assessee-company). The Assessing Officer disallowed the loss, stating it was a capital loss. The assessee contended that the shares were held as stock-in-trade and thus, the loss should be treated as a revenue loss.
- CIT(A) Findings: The CIT(A) examined the Balance Sheet of the amalgamating company and noted that the shares were classified as long-term investments as of 31-3-1998. Consequently, the CIT(A) agreed with the Assessing Officer that the loss was a short-term capital loss, not a business loss.
- Assessee's Argument: The assessee argued that the classification in the Balance Sheet should not determine the nature of the loss. They cited the Supreme Court ruling in Investment Ltd. v. CIT [1970] 77 ITR 533, which held that the description in the Balance Sheet does not necessarily reflect the true nature of the stock.
- Tribunal's Decision: The Tribunal acknowledged that the Balance Sheet might not be a true indicator of the conduct of the assessee. It emphasized the need to examine the past records and returns of the amalgamating company to determine whether the loss was a business loss or a capital loss. The matter was remanded to the Assessing Officer for re-examination based on the assessment records of the amalgamating company. The ground was considered partly allowed.

3. Computation of Profit under Section 115JA
- Facts: The assessee declared income at nil under section 115JA, adjusting the net profit of Rs. 1,78,10,976 against brought forward losses. The Assessing Officer invoked section 115JA, stating that the brought forward loss or unabsorbed depreciation was nil, and thus, the book profit should be Rs. 1,78,10,976.
- CIT(A) Findings: The CIT(A) concurred with the Assessing Officer's interpretation of section 115JA.
- Assessee's Argument: The assessee argued that there were no fixed assets before 1-4-1999, and thus, no unabsorbed depreciation. They cited the ITAT Mumbai SMC Bench decision in Hercules Holding (P.) Ltd. v. ITO [1996] 57 ITD 215, which supported their view that in the absence of unabsorbed depreciation, only the business losses should be reduced.
- Tribunal's Decision: The Tribunal examined the provisions of section 115JA and concluded that the clause (iii) of the Explanation to section 115JA(2) requires a comparison between the amount of loss brought forward and unabsorbed depreciation. If either is nil, the provision does not apply. The Tribunal found that the assessee's situation did not meet the criteria for reducing the brought forward loss from the net profit. The reliance on the Hercules Holding case was deemed inapplicable as it pertained to section 115J, which has different provisions. Consequently, the Tribunal upheld the Assessing Officer's order, rejecting the ground.

Conclusion:
The appeal was partly allowed, with the issue of loss on sale of investment remanded for re-examination and the computation of profit under section 115JA upheld as per the Assessing Officer's determination.