2011 (12) TMI 162 - AT - Income Tax

Whether the brought forward loss from the earlier years can be set off against the income from capital gains u/s 72 land building and bore well used for business purposes being sold assessee claiming it to be business assets - Held that - Only the business loss can be carried forward u/s 72 of the Act and it can also be set off only against the business income of the assessee. In present case assets sold were capital assets and capital gains on sale of capital assets is not to be set off against the brought forward loss of earlier years. Case is posted before the Division Bench to give effect to the order of the special Bench - Decided against the assessee.

Summary

Issues Involved:
1. Validity of assessment under Section 147 of the Income Tax Act.
2. Disallowance of set-off of carry forward business loss and depreciation against long-term capital gains.

Issue-wise Detailed Analysis:

1. Validity of Assessment under Section 147 of the Income Tax Act:
The assessee company, engaged in the manufacture/production of Iron and Steel, filed its return declaring an income of Rs. 98,27,270/- under 'capital gains'. The return was processed, and a refund was issued. The Assessing Officer (AO) later noticed that the assessee set off long-term capital gains against brought forward business loss and depreciation, contrary to Section 72 provisions. Consequently, the AO issued a notice under Section 148, believing that income chargeable to tax had escaped assessment. The assessee responded by filing the return of income as initially filed and requested the reasons for reopening the assessment. The AO maintained that the set-off was against the law, leading to the computation of the assessee's income.

2. Disallowance of Set-off of Carry Forward Business Loss and Depreciation Against Long-Term Capital Gains:
The main contention was whether the assessee could set off the carry forward business loss and unabsorbed depreciation against long-term capital gains from the sale of land and buildings used for business purposes.

The Tribunal noted that the Division Bench had previously referenced decisions favoring the assessee but also observed conflicting Supreme Court judgments. The Special Bench was constituted to resolve this conflict.

Arguments by the Assessee:
The assessee argued that since the land, building, and bore well sold were used for business purposes, the gains from their sale should be considered business income. The assessee cited various Supreme Court decisions (e.g., United Commercial Bank Ltd., Chugandas & Co., Cocanada Radhaswami Bank Ltd.) to support the claim that income from business assets retains the character of business income, even if computed under different heads.

Arguments by the Revenue:
The Revenue contended that the assets sold were capital assets, and the income from their sale was correctly offered under 'capital gains'. They argued that Section 72 allows set-off only against business income, not capital gains. The Revenue relied on the Supreme Court judgment in Express Newspapers Ltd., which held that capital gains from the sale of capital assets could not be set off against business loss.

Tribunal's Findings:
The Tribunal emphasized that Section 72 permits the carry forward of business loss to be set off only against business income. The assets sold by the assessee were capital assets, and the gains from their sale did not qualify as business income. The Tribunal found that the assessee's reliance on certain Supreme Court decisions was misplaced, as those cases involved trading assets, not capital assets. The Tribunal upheld the Revenue's view, rejecting the assessee's grounds of appeal.

Conclusion:
The Special Bench concluded that the brought forward business loss could not be set off against long-term capital gains. The reference was answered in favor of the Revenue. The case was to be posted before the Division Bench to give effect to the Special Bench's order and address the remaining grounds of appeal.

Summary:
The judgment addressed the validity of reopening the assessment under Section 147 and the disallowance of set-off of carry forward business loss against long-term capital gains. The Tribunal upheld the Revenue's stance, emphasizing that Section 72 allows set-off only against business income, not capital gains, thereby rejecting the assessee's appeal.