2012 (7) TMI 666 - HC - Income Tax

Entitlement to set off the brought forward business loss against the rental income, car and computer hire charges and the commission income - question on proper interpretation of Section 72(1) - assessee submitted that according to MOA it is in the carrying of business of leasing, selling and renting of real estate properties - Held that - With regard to the hiring of car and computers the CIT(A) has found that they were hired out as they remained idle and assessee thought it prudent to exploit them by letting out temporarily to others. The commission income received by the assessee from Tulika is for obtaining or procuring business for the latter which undoubtedly is a business activity though it may be a single instance only. As decided in CIT v. R. Dalmia (1973 (5) TMI 23 - DELHI HIGH COURT ) that the brought forward business loss was sought to be set off against the dividend income earned by the assessee in the subsequent year as since the dividend income was derived from the shares held as stock-in-trade, the brought forward losses could be set off against the same notwithstanding that the Act required that the dividend income should be assessed under the head income from other sources - in favour of the assessee

Issues Involved:
1. Whether the assessee was entitled to set off the brought forward business loss against rental income, car and computer hire charges, and commission income under Section 72(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Entitlement to Set Off Brought Forward Business Loss:

Background and Assessee's Argument:
The assessee, a private limited company engaged in the business of sale and purchase of properties, also earned rental and other income. For the assessment year 1995-96, the assessee set off the business loss brought forward from the assessment year 1994-95 against its rental income, car and computer hire charges, and commission income, declaring a net loss of Rs.14,20,460/-. The assessee contended that these incomes were part of its business activities and thus eligible for set off under Section 72(1) of the Income Tax Act, 1961.

Assessing Officer's View:
The Assessing Officer disagreed, stating that:
- Rental income should be taxed under "income from house property."
- Hire charges and commission income should be taxed under "income from other sources."
- Section 72(1) only allowed the set off of brought forward business losses against profits assessed under the head "business."

CIT (Appeals) Decision:
The CIT (Appeals) sided with the assessee, noting that:
- The properties let out were shown as stock-in-trade and thus trading assets.
- Rental income from these trading assets could be adjusted against the brought forward business loss.
- The car and computer hire charges and commission income were part of the business activities, even if temporary, and thus could be set off against the business loss.

Tribunal's Decision:
The Tribunal reversed the CIT (Appeals) decision, holding that the business loss could not be set off against the rental income and income from car and computer hire charges and commission income.

High Court's Analysis and Decision:
The High Court found the Tribunal's decision unsustainable, emphasizing:
- Section 72(1) of the Income Tax Act allows the set off of brought forward business loss against the profits and gains of any business carried on by the assessee.
- The section does not require the business income to be computed under the head "profits and gains of business or profession" in the subsequent year.
- The income should be judged by commercial principles to determine if it represents business income.

Commercial Principles and Business Income:
The Court highlighted that:
- The classification of income under different heads for assessment does not change the nature of the income as business income.
- The main objects of the assessee company included leasing, selling, and renting real estate properties.
- The properties were shown as stock-in-trade, indicating they were trading assets.
- The hire charges and commission income were derived from business activities, even if temporary.

Relevant Case Laws:
The Court referred to several Supreme Court judgments, including:
- CIT v. Cocanada Radhaswami Bank Ltd.: Emphasized that business income remains business income even if assessed under different heads.
- United Commercial Bank Ltd. v. CIT: Clarified that the heads of income are for computation purposes and do not change the nature of the income.
- Karanpura Development Co. Ltd. v. CIT: Stated that the object of the activity determines whether it is a business activity.

Conclusion:
The High Court concluded that:
- The rental income, hire charges, and commission income represented the profits and gains of the business carried on by the assessee.
- The brought forward business loss could be set off against these incomes under Section 72(1) of the Act.

Final Judgment:
The substantial question of law was answered in the negative, in favor of the assessee, and against the Revenue. The appeal was allowed with no order as to costs.

← Previous Next →