M/s Ashok Leyland Ltd. Versus ACIT – judgment of Madras High Court – deserve a review and appeal – plus many vital points missed or not emphasised by assessee.

[CA DEV KUMAR KOTHARI]

Section 71 (2), 72(1), 154  of Income-tax Act 1961.

Important words, phrases and expressions like:

Words ‘shall’ , ‘shall be’ ‘shall not be’  and  ‘such loss may,  ‘may’  and 

 “such loss cannot be or is not wholly set off” 

Provisions relating to concessional treatment of long-term capital gains in various provisions from time to time like S.45, 47, 48, 49, 54 to 55 and 80T,111,111A,112 etc.

M/s Ashok Ley land Ltd. Versus The Assistant Commissioner of Income Tax 2016 (2) TMI 800 - MADRAS HIGH COURT

Facts in case of Ashok Lely land Ltd:

 The assessment year is 1999-2000.

Assessment was completed on 26.3.2002.

AO determined total income  of more than ₹ 17 crores for the year being long term capital gains (LTCG) of ₹ 17,67,37,705/- under the head  ‘capital gains’.

In computing the total income, business loss of more than ₹ 85 crores had not been adjusted that means LTCG is treated as forming part of  Gross Total Income and Total Income on which tax was paid by assessee and assessed by the AO.

Considering the above as a mistake apparent from the record, a notice for rectification was issued under Section 154 on 6.9.2004 for revision of assessment.

In response to notice u/s 154 the assessee contended that Section 71(2) uses the expression 'may' indicating that they have an option either to adjust or not to adjust the business loss against capital gains.

The objection was overruled and an order was passed under Section 154 on 4.2.2005.

The appeals of assessee before CIT(A) and ITAT both failed. Thus the AO, the CIT(A) and the Tribunal concurrently held that business loss was to be set off against capital gains, as the word ‘may’ is to be read as ‘shall’.

Therefore, the assessee preferred appeal before the High Court.

It seems that there was not much emphasis laid before lower authorities and the High Court that there was no mistake apparent from records. Although a question was formulated on this aspects but there seems no discussion in the judgment on the issue of not a mistake apparent from records.

The findings  being concurrent by  the three authorities found correct and impressive by honourable High Court, and High Court also confirmed the same view.

Observations of author on facts as available from the judgment:

From facts as available in judgment, in return assessee did not set off business loss against capital gains and paid tax.

This was accepted by AO and income of more than ₹ 17 crore was determined and therefore, income tax was imposed u/s 112 on LTCG.

Thereafter AO issued notice u/s 154 for the reason that  business loss of more than ₹ 85 crores had not been adjusted against the long term capital gains of ₹ 17,67,37,705/-.

This means that the AO wanted to set off business loss and reduce total income of more than ₹ 17 crore to nil and as a consequence, to reduce loss to be carried forwarded, and to make refund of tax paid.

Full facts are not available. The loss of ₹ 85 crore is not bifurcated, however, considering size and nature of business of Assessee Company it must mostly be in nature of depreciation. It is also possible that entire depreciation allowable may be in addition to this loss.

This means that there was current loss and / or depreciation for the year. However, questions before the High Court, observations of the High Court and judgment of the High Court are silent on this aspect. Therefore, it can be presumed that business loss was not depreciation or depreciation was also considered as equivalent to business loss.  

Why business loss was not set off ?:

The assessee company had current loss and / or depreciation. Still company did not set off such loss/ depreciation against capital gains and preferred to pay tax. Logically this was only because Assessee Company had expectation of higher business profits in near future against which assessee company expected to set off business loss and depreciation. And the net present value of taxes to be saved in near future was more than net present value of tax paid on LTCG.

The rate of tax on business profit is higher and that on LTCG is low u/s 112. Therefore, assessee company must have acted to save tax taking into account 2-3 years expected income.

Tax payment offered by assessee and accepted in original assessment:

From above facts it is clear that Assessee Company offered capital gains for taxation and paid tax. This payment was accepted by tax authorities in original assessment.

Whether there was mistake apparent from records in not setting of loss?:

Assessee Company is one of largest automobile company in India. It has team of tax experts, its accounts are audited, in which tax provision is also considered while preparing accounts and audit thereof.  Company also engage tax experts for computation of taxable income. Company chose to offer capital gains for taxation without adjusting allowable business loss and depreciation. Thus company choose to pay tax on capital gains and the same was accepted in original assessment. The option exercised by assessee company was definitely based on opinion of experts (may be tax executives and /  or tax consultants)

Therefore, it can be said that the management of company (including tax experts engaged by company) as well as the Assessing Officer had same view that it is not necessary for assessee to set off business loss against capital gains. And revenue had accepted tax payment made by the assessee. It is not clear whether assessment was made u/s 143.1 or 143.3, but it is most likely a case of assessment u/s 143.3. Even if the case was u/s 143.1, if it is a mistake apparent from record, it could have been rectified even through computer generated report/ intimation etc. Therefore, when stand of assessee was accepted and no adjustment was made in intimation, it is very difficult to believe that there was a mistake apparent from records.

However, on reading of the judgment, it does not appear that this contention was pressed forcefully before lower authorities, Tribunal and the High Court.

Any judgment on this aspect and also on other aspects have also not been referred by the High Court, therefore, it can be presumed that either any judgment was not cited or the Court did not give value of precedence to the same. Even if counsels of assessee did not cite a case, the lower authorities, Tribunal and the High Court could have considered them.

Section 71and 72 :

Section 71 is reproduced below with highlights added in respect of relevant provisions:

[Set off of loss from one head against income from another.

     71. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has no income under the head "Capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

      (2) Where in respect of any assessment year, the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has income assessable under the head "Capital gains", such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head "Capital gains" (whether relating to short-term capital assets or any other capital assets).

      [(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss and the assessee has income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income.]

      (3) Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.]

     [(4) Where the net result of the computation under the head "Income from house property" is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.]

 Relevant recent amendment:  Sub-section 2A was inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Other amendments are very old and have no relevance to the issue.

Relevant portion of section 72 is reproduced below with highlights added:

Carry forward and set off of business losses.

     72. [(1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and-

1. xxx

 Words ‘shall’ , ‘shall be’ ‘shall not be’  and  such loss may, ‘may’ etc:

We find that in section 71 words, shall and may have been used for specific purposes , emphasis and particular intentions. Therefore, it is hard to say that words shall and may have bene used alternately or loosely. The use of phrases ‘ shall be’ and ‘shall not be’ is also important to observe particularly in contrast to ‘assessee may’.

2. Thus when a right is given word ‘shall’ is used, when a right is denied words ‘shall not’ is used, and when an option is given word ‘may’ has been used.

On reading of section 72 we find important words in the following terms:

               such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off….

The sentence such loss cannot be or is not wholly set off postulates following two situations:

1. Loss cannot be wholly set off – this can be due to  there being no income or incomes being lower than loss,
2. Loss is not wholly set off – this means that though there is scope of set off but it has not been fully set off.

The situation b. that the loss is not wholly set off clearly suggest that there are or there can be some options or situations in which the loss is determined, there is income under other heads but still the loss has not been set off. This can be due to option exercised by assessee or due to noncompliance of any condition for such set off or some other reasons.

As noticed on reading of S.71 we find that only in respect of loss under head capital gains, the word may has been used.

This is only for the reason that capital gains have concessional tax treatment.

Therefore, on conjoint reading of S.71 and 72 both and also provisions relating to lower tax rate or tax impact in case of long-term capital gains, and purposes of such lower rate or lower tax impact in case of long-term capital gains,  it is clear that assessee has an option to set off or not to set off losses under business, other sources, house property etc. against capital gains. 

General perception and practice:

On memory recall author had income-tax as one of subject in B.Com. In course of  CA, CWA and CS there was in depth study about income-tax.

The general perception was that except loss under head capital gains and speculation loss, most of losses can be set off under other heads of income. At that time even business loss was allowed to be set off against salary income. The restriction came later on w.e.f. 01.04.2005. In respect of loss under the head capital gains, it was clear understanding that short term capital loss can be set off against any type of  income (now only against capital gains), but long-term capital loss can be set off only against long-term capital gains.

 Long-term capital gains have generally been taxed at lower rate by way of special treatment like indexation of actual cost, allowing deduction from gross gains, option to adopt fair market value as on cut-off date (01.04.1981) and lower rate of tax have been in force from time to time. Therefore, it has generally been prescribed that long-term capital loss will be set off only against long-term capital gains.

It is general practice to pay tax on long-term capital gains and set off losses against other income or carry forward and keep other losses alive, when there is probability of chargeable income in near future.

Unfortunately it appears that above aspects of use of words shall and may and special treatment of loss under head capital gains were not emphasised in case of Ashok Leyland.

 Order of the High Court:

Paragraphs  4 -6   are reproduced below with highlights:

4. Though the assessee contended that Section 71(2) uses the expression 'may' indicating that they have an option either to adjust or not to adjust the business loss against capital gains, the objection was overruled and an order was passed under Section 154 on 4.2.2005. The assessee filed a first appeal. The Commissioner dismissed the first appeal and the same was confirmed by the Income Tax Appellate Tribunal. Therefore, the assessee is on appeal.

5. We do not think that the view taken by all the three Authorities is contrary to law. It is true that under Section 71(2), the assessee may set off, against other income assessable for the assessment year under the head 'capital gains', the loss, if any, arising out of computation of different heads of income. But, Section 71(2) does not operate on a stand alone basis. As rightly observed by the Tribunal, the provisions of Section 72(1) may have to be read together.

6. Therefore, the questions of law are answered against the assessee and in favour of the Revenue. The tax case appeal is dismissed. No costs.

Observations of author:

On reading of the judgment it seems that proper emphasis was not given on the following aspects:

1. That it is a debatable issue and there was not a mistake rectifiable u/s 154.
2. That words and phrases used like ‘shall’ , ‘shall be’ ‘shall not’ and  may  have been used  and it cannot be said that the word ‘may’ means ‘shall;
3. Concessional rates of tax or tax effect, in case of long term capital gains make them an income of separate nature and that assessee has therefore, a right to avail such concessions instead of adjusting other losses.
4. The expression “ such loss cannot be or is not wholly set off” as used in section 72(1) was not pointed out to say that this also indicates an option” to assessee that the loss could be set off but it was not in fact set off for any reason including the option of assessee.
5. Special treatment of loss under head capital gains and particularly in relation to long-term capital loss which can be set off only against long=term capital gains was not emphasised.  

Therefore, this is a fit case for making a review petition before the High Court as well as to prefer an appeal before the Supreme Court. In appeal before the Supreme Court, emphasis should also belaid on aspect of not a mistake rectifiable u/s 154 with help of process followed by assessee in decision making for not set off of business loss against LTCG, withinter office communications, opinions, if any obtained by assessee and case laws relied etc.