2018 (11) TMI 1235 - AT - Income Tax

Nature of loss - short term capital loss or revenue loss - loss incurred on capital contribution in joint venture - short term capital loss adjustment against the capital gain - Held that - The assessee had entered into an agreement with other party M/s. R.A. Business Solution Bangalore as per which the assessee was to be paid ₹ 66 lacs immediately and the balance amount of ₹ 6,69,00000/- was claimed as revenue loss by the assessee for the year under consideration. However, the assessing officer has held that above cited loss is not allowable because capital contribution to Joint venture is not revenue expenditure. The above facts demonstrate that the assessing officer himself has treated the claim of revenue loss of the assessee as capital loss. We have noticed from the findings of the ld. CIT(A) that this alternative claim was also made before the assessing officer however the same has not been considered by the assessing officer at the time of finalization of the assessment for the year under consideration. It is clear from the findings of the assessing officer and the CIT(A) that assessing officer has himself treated the revenue loss claim of the assessee as capital loss. No infirmity in the decision of the CIT(A) directing the assessing officer to adjust the short term capital loss against the capital gain as per section 70(2) of the act as the Department has treated the claim of revenue loss of the assessee as capital loss. No merit in the cross objection filed by the assessee as the assessee itself had made alternative claim to set off loss against capital gain as elaborated in the findings of the CIT(A). Accordingly, the appeal of the Revenue and cross objection filed by the assessee are dismissed.

Summary

Issues:
- Treatment of loss on capital contribution in joint venture as short term capital loss
- Applicability of section 2(14) of the Income Tax Act
- Consideration of loan or advance as an asset
- Dispute resolution regarding settlement of advances as business loss
- Adjudication of interconnected grounds of appeal and cross objections

Analysis:
1. Treatment of Loss on Capital Contribution: The Revenue appealed against the CIT(A)'s decision to treat the loss incurred on capital contribution in a joint venture as a short term capital loss. The Revenue argued that the capital contribution made for the joint venture did not fall within the definition of section 2(14) of the Income Tax Act, and therefore, the loss could not be considered a short term capital loss. The Revenue also contended that the loss should be treated as a capital loss rather than a revenue loss.

2. Applicability of Section 2(14): The Revenue further argued that the CIT(A) erred in not applying the decision of the Hon'ble High Court of Karnataka in a specific case, where it was held that a loan or advance cannot constitute an asset. This argument was made to challenge the classification of the loss as a short term capital loss based on the capital contribution made for the joint venture.

3. Dispute Resolution and Business Loss: The assessee raised cross objections, claiming that the loss incurred on the settlement of advances should be considered a business loss under section 28 of the Act. The cross objections also addressed the Revenue's additional issue regarding the definition of section 2(14) of the Act, arguing that it was not subject matter dealt with previously and should be dismissed.

4. Interconnected Grounds Adjudication: The Tribunal adjudicated the interconnected grounds of appeal and cross objections together. The Tribunal found that the assessing officer had treated the claim of revenue loss by the assessee as a capital loss. The Tribunal upheld the CIT(A)'s decision to adjust the short term capital loss against the capital gain as per section 70(2) of the Act, given the Department's treatment of the claim as a capital loss. The Tribunal dismissed both the Revenue's appeal and the assessee's cross objection based on these findings.

In conclusion, the Tribunal upheld the CIT(A)'s decision to treat the loss on capital contribution as a short term capital loss and to adjust it against capital gains. The Tribunal's detailed analysis considered the arguments presented by both parties and clarified the treatment of the loss in the context of the Income Tax Act.