2013 (8) TMI 552 - AT - Income Tax

Set off of business losses - setoff of business losses with speculation gains - Held that - The restriction set out in section 73 relates only to losses of speculation business being set off against profits of non speculation business, but not vice-versa. Therefore, in the absence of specific restriction on set off of normal business losses against profits of speculation business, the same cannot be inferred or assumed. Similar is the position with regard to set off of speculation losses against non speculation profits. Section 72(1) provides that non speculation business loss can be set off against profits and gains, if any, of any (emphasis supplied by us) business or profession carried on by assessee and assessable in that assessment year, and when it cannot be so set off, it shall be carried forward to the following assessment year. The expression any business clearly includes all businesses, without making any distinction between speculation and non-speculation business, and, therefore, going by the plain language of the statutory provision losses in a business, other than in speculation business, can be set off against profits of speculation business as also non speculation business - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the CIT (A) was justified in declining the set-off of business losses (both current and carried forward) against the profit in speculation business during the current year.

Issue-wise Detailed Analysis:

1. Justification of CIT (A) in Declining Set-off of Business Losses Against Speculation Profits:

The primary issue in this appeal is the correctness of the CIT (A)'s decision to disallow the set-off of non-speculative business losses against speculative business profits. The appellant argued that the CIT (A) erred in law and on facts by enhancing the assessed income to Rs. 3,84,09,932 by disallowing the set-off of current year non-speculative business loss of Rs. 1,67,08,443 and carried forward non-speculative business loss of Rs. 2,17,01,489 against the current year's speculative business profit. The appellant contended that such set-off is allowable under section 70(1) read with sections 71(1) and 72(1) of the Income Tax Act, 1961, and there is no prohibition under the law against setting off non-speculative business loss against speculative profit.

2. Interpretation of Relevant Sections (70, 71, 72, and 73) of the Income Tax Act:

The CIT (A) interpreted the provisions of section 72(1) to mean that non-speculative business losses cannot be set off against speculative profits. The CIT (A) observed that the provisions of sections 70, 71, and 72 do not provide for setting off business losses against speculation income. Section 73, which deals specifically with speculation business, was cited to support this interpretation. The CIT (A) concluded that speculation income is treated separately from business income as per Explanation-2 of section 28, and thus, non-speculative business losses cannot be set off against speculative profits.

3. Appellant's Argument and Computation of Income:

The appellant provided a detailed computation of income, showing the set-off of current year's non-speculative business loss and carried forward non-speculative business loss against the speculative business profit, resulting in a returned income of NIL. The appellant argued that this computation was in accordance with the law and that the denial of set-off by the authorities was erroneous.

4. Tribunal's Analysis and Decision:

The Tribunal examined the rival contentions, the material on record, and the applicable legal position. It found that the scheme of the Income Tax Act envisages that losses in speculation business cannot be set off against other business profits, but this restriction does not operate the other way round. Section 73(1) specifically restricts the set-off of speculation losses against non-speculation profits, but there is no statutory restriction on setting off non-speculation business losses against speculation profits. The Tribunal noted that section 72(1) allows non-speculation business losses to be set off against "profits and gains, if any, of any business or profession" carried on by the assessee, which includes speculation business.

5. Historical Context and Judicial Precedents:

The Tribunal referred to the historical context of the introduction of the distinction between speculation and non-speculation business in the Income Tax Act, which was intended to restrict the set-off of speculation losses against non-speculation profits. The Tribunal cited the Supreme Court's decision in CIT v. Jagannath Mahadeo Prasad and the Bombay High Court's decision in A R Mahadevia v. CIT, which clarified that the restriction applies only to speculation losses and not to speculation profits.

6. Conclusion and Directions:

The Tribunal concluded that the authorities below had gone beyond the statutory provisions in declining the set-off of normal business losses against speculation profits. It upheld the plea of the assessee and directed the Assessing Officer to allow the set-off of normal business losses against speculation business profits.

Final Judgment:

The appeal was allowed, and the Tribunal directed the Assessing Officer to allow the set-off of normal business losses against speculation business profits. The judgment was pronounced in the open court on 6/06/2013.