2010 (8) TMI 430 - AT - Income Tax

Revision setoff of business losses of earlier years income from sale of depreciable assets block of assets ceases to exist after sale of assets Held that - provision contained in section 50(2) comes into operation when the block of assets ceases to exist. AO had not applied this section, which is in force, but applied the provision of section 41(2), which no longer exists on the statute. We are also of the view that distinction between attributable to and derived from does not advance the case of the assessee. since the income from sale of business asset can not be setoff u/s 72(1), CIT is correct in revising the order u/s 263. Change is classification of income business income to speculative income trading in shares in earlier years the losses were classified as business losses and not speculative losses. This position cannot be changed unless earlier orders are upset. What can be seen in this year is whether the losses can be set-off as per statutory provision and nothing further revision of order u/s 263 on this ground rejected. Depreciation on land land is a non depreciable asset - non-exclusion of the value of land for the purpose of grant of depreciation is against the statutory provision and the case decided thereunder. - No force in the argument that the value of land could not be ascertained because of composite purchase deed as the same could have been ascertained by obtaining valuation of either the land or the building revision of order on this ground upheld Rental income as business income - the submission of the assessee is that it had been running its business from the premises since 1998-99. - There are not enough facts before us to come to the conclusion as to whether the income is taxable as business income or under the head income from house property revision of order on this ground upheld

Issues Involved:
1. Exercise of powers under Section 263 by the Commissioner of Income-tax.
2. Treatment of the order of the ITO as erroneous.
3. Application of Section 41(2) and taxation of short-term capital gain.
4. Rejection of assessee's submissions by the Commissioner.
5. Treatment of set-off brought forward business losses as speculative loss.
6. Deduction on depreciation of land.
7. Legality of the reassessment order.

Detailed Analysis:

1. Exercise of Powers under Section 263 by the Commissioner of Income-tax:
The Commissioner of Income-tax, Delhi-VI, exercised powers under Section 263 to cancel the earlier assessment for the year 2005-06, directing a de novo assessment. The Commissioner found the original order erroneous and prejudicial to the interests of the revenue, citing issues such as computation of profit on sale of depreciable assets, rental income, applicability of Section 73(1) regarding speculation losses, and deduction of depreciation on land.

2. Treatment of the Order of the ITO as Erroneous:
The Commissioner deemed the order of the ITO, dated 30-11-2007, erroneous for not taxing short-term capital gain of Rs. 42,60,394. The ITO had accepted the computation under Section 41(2) for granting set-off against brought forward losses, which the Commissioner found unsustainable.

3. Application of Section 41(2) and Taxation of Short-Term Capital Gain:
The assessee argued that income from the sale of depreciable assets, although taxable under 'capital gains,' should be treated as business income for the purpose of set-off against brought forward business losses. The Commissioner, however, found that since the block of assets ceased to exist, the ITO should have computed short-term capital gain under Section 50. The Tribunal upheld the Commissioner's view, noting the ITO had not applied the correct legal provisions.

4. Rejection of Assessee's Submissions by the Commissioner:
The Commissioner rejected the assessee's submissions, holding that the original order was prejudicial to the revenue. The Tribunal found that the ITO had not properly examined the nature of the income and had incorrectly accepted the assessee's submissions, leading to a loss of revenue.

5. Treatment of Set-Off Brought Forward Business Losses as Speculative Loss:
The Commissioner noted that the assessee's main activity was trading in shares, which was considered speculative under Section 73(1). However, the Tribunal found that since trading in shares was the assessee's main business, the loss could not be treated as speculative. The losses were business losses in earlier years and could not be reclassified in the year of set-off.

6. Deduction on Depreciation of Land:
The Commissioner found that the assessee had claimed depreciation on the entire value of Rs. 21.10 lakh for land and building, without excluding the value of land. The Tribunal upheld this view, stating that land is not a depreciable asset as per statutory provisions and judicial precedents. The order was erroneous and prejudicial to the revenue for allowing higher depreciation.

7. Legality of the Reassessment Order:
The Tribunal considered whether the reassessment order was bad in law. The Commissioner had restored the matter to the ITO for a fresh assessment, which the Tribunal found justified. The ITO had not properly examined the issues, making the original order erroneous and prejudicial to the revenue.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the Commissioner's order on the grounds of erroneous treatment of short-term capital gains and depreciation on land. However, it disagreed with the Commissioner on treating set-off of brought forward business losses as speculative and the head of taxation of rental income, finding the original assessment on these points to be a possible view and not erroneous.

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