1989 (7) TMI 136 - AT - Income Tax

Summary

Issues Involved:
1. Set off of carried forward loss from the assessment year 1983-84 against the income of assessment years 1984-85 and 1985-86.
2. Classification of interest income from Fixed Deposits as business income.
3. Treatment of Fixed Deposits as business assets.
4. Alleged concession by the assessee's counsel during the assessment proceedings.

Detailed Analysis:

1. Set off of Carried Forward Loss:
The primary issue revolves around whether the loss carried forward from the assessment year 1983-84 can be set off against the income of the assessment years 1984-85 and 1985-86. The Income Tax Officer (ITO) disallowed the set off on the grounds that the business of purchase and sale of brass scrap was not continued during these two assessment years, citing the proviso to Section 72(1)(i) of the Income Tax Act. The Appellate Assistant Commissioner (AAC) directed the ITO to allow the set off, reasoning that the interest income from Fixed Deposits, which were treated as business assets, should be considered as business income. The Tribunal, however, disagreed with the AAC, stating that the business of brass scrap had indeed been discontinued and thus, the loss could not be set off against the income of subsequent years.

2. Classification of Interest Income:
The AAC had treated the interest income from Fixed Deposits as business income, allowing the set off of the carried forward loss. The Tribunal noted that while the ITO had treated the Fixed Deposits as business assets, this did not automatically classify the interest income as business income. The Tribunal emphasized that the interest income could not be linked to the discontinued business of brass scrap merely because the Fixed Deposits were used as a guarantee for a business transaction in the assessment year 1983-84.

3. Treatment of Fixed Deposits as Business Assets:
The Tribunal acknowledged the ITO's classification of Fixed Deposits as business assets but clarified that this classification did not integrate them into the discontinued business of brass scrap. The Tribunal pointed out that an individual could withdraw funds from a sole proprietorship and invest them in personal assets, which would not necessarily become business assets. The Tribunal stressed that the Fixed Deposits, although treated as business assets, did not form part of the business activities that generated the loss in the assessment year 1983-84.

4. Alleged Concession by Assessee's Counsel:
The ITO noted that the assessee's counsel had agreed that the set off would not be claimed, which was contested by the assessee before the AAC. The Tribunal chose not to delve into the arguments regarding the alleged concession, focusing instead on the merits of the case. The Tribunal concluded that the purported concession did not affect the legal entitlement to claim the set off.

Conclusion:
The Tribunal ultimately held that the assessee was not entitled to the benefit of the carried forward loss from the assessment year 1983-84, setting aside the consolidated order of the AAC and restoring the orders of the ITO. The appeals were allowed, reinforcing the principle that the continuation of business activities is crucial for the set off of carried forward losses under Section 72(1)(i) of the Income Tax Act.