1981 (1) TMI 152 - AT - Income Tax

Summary

Issues:
1. Whether the business loss carried forward from earlier years can be set off against the current year's profit under section 41(2) of the Income-tax Act, 1961.

Analysis:
The case involved a dispute regarding the set off of business loss carried forward against the current year's profit under section 41(2) of the Income-tax Act, 1961. The assessee, a company formerly engaged in textile business, had derived income from leasing out its assets in the preceding year. In the relevant accounting year, the assessee sold its assets and realized a profit. The Income Tax Officer (ITO) assessed this profit under section 41(2) without setting off the loss brought forward from earlier years. The Commissioner (Appeals) allowed the set off, referring to a previous order. The Appellate Tribunal considered the revenue's contention that no business was carried on during the relevant year as there was no leasing of properties, and the only income was from the profit under section 41(2) from asset disposal.

The Tribunal examined sections 41(2) and 72(1) of the Act. Section 41(2) deals with the taxation of profits from the sale of assets used for business purposes. The Explanation to this section states that if the business is not in existence in the year of sale, the provisions of section 41(2) shall apply as if the business is in existence. On the other hand, section 72(1) allows for the carry forward and set off of losses from earlier years against profits of any other business in subsequent years, provided the original business continued in the subsequent year. The Tribunal noted that the business had ceased in the previous year, and the profit under section 41(2) was assessed as business income only due to the Explanation to section 41(2.

The Tribunal held that the presumption of the business being in existence for the limited purpose of section 41(2) cannot be extended to section 72(1), which requires the business to have been actually carried on by the assessee. As the business was not operational in the relevant year, the brought forward loss from earlier years could not be set off against the profit under section 41(2) for the assessment year in question. Therefore, the revenue's appeal was upheld, and the Tribunal ruled in favor of the revenue.

In conclusion, the Tribunal clarified the distinction between the application of sections 41(2) and 72(1) concerning the set off of business losses carried forward. The judgment emphasized the requirement of the business being actively carried on by the assessee for the set off to be permissible, which was not the case in the present scenario.