2019 (9) TMI 444 - AT - Income Tax

Rectification of mistake u/s 154 - brought forward losses set off against the speculative business income - HELD THAT - Gross total income of the assessee company does not consist mainly of income chargeable as Interest on securities Income from house property , Capital gains and Income from other sources and its principal business is not the business of banking or of granting of loans or advances. The assessee company is a Limited Company engaged in the business of purchase and sales of shares during the year under consideration and has also earned income from Rent and Dividend, etc. The assessee is a non-banking financial company (NBFC) and may be categorized as an Investment Company. The losses of earlier years, i.e., assessment years 2008-09 and 2009-10 were claimed by the assessee to be set off against the profit of the year under consideration for the reason that there was no change in the nature of the business of the assessee company. The set off of loss claimed by the assessee was allowed by the AO vide order passed u/s.143(3) of the Act, in accordance with the Explanation to section 73 as per which, the business of the assessee company is deemed to be a speculative business. To reiterate, in the earlier two years, the business of the assessee was a speculative business. Ergo, the business of the assessee company in the year under consideration remains the same as that in the earlier two assessment years. We hold that there was no mistake apparent from the record in the original assessment order dated 16/3/2016 and the brought forward losses had correctly been set off against the speculative business income for the year under consideration.

Summary

Issues:
- Rectification under section 154 of the Income Tax Act for assessment year 2010-11 regarding set off of brought forward Business Loss against Non-Speculative Business income.
- Interpretation of section 73 of the Income Tax Act regarding set off of speculative losses against future speculative income only.

Analysis:
1. The appeal was made against the order of the ld. CIT(A)-II, Kanpur, for the assessment year 2010-11, challenging the rectification under section 154 of the Income Tax Act. The Assessing Officer (A.O) had noticed that brought forward Business Loss was set off against Non-Speculative Business income, which was previously determined as speculative loss. The A.O issued a notice under section 154 proposing the rectification, as speculative losses can only be set off against future speculative income.

2. The A.O disallowed the brought forward business loss of &8377; 42,50,204/-, which was set off against the business income of &8377; 87,04,503/- for the year under consideration. The ld. CIT(A) confirmed this order, emphasizing that speculative losses cannot be adjusted against normal business income. The appellant did not challenge the AO's findings during the appellate proceeding, leading to the approval of the rectification under section 154.

3. The ITAT analyzed the nature of the assessee's business, which involved purchase and sale of shares, Rent, and Dividend income. The Explanation to section 73 of the Act deems the business of purchase and sale of shares as speculative if certain conditions are met. The ITAT concluded that as the assessee's business remained the same as in the earlier years, the set off of brought forward losses against speculative business income was correct.

4. Therefore, the ITAT held that there was no mistake apparent from the record in the original assessment order, and the brought forward losses were correctly set off against the speculative business income for the year under consideration. The appeal was allowed, and the order under appeal was reversed.

5. In summary, the ITAT's decision focused on the correct interpretation of section 73 of the Income Tax Act regarding the set off of speculative losses against future speculative income, ultimately ruling in favor of the assessee based on the continuity of business activities.