2016 (2) TMI 800 - HC - Income Tax

Rectification of mistake - adjustment of the business loss against long term capital gains - 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 - Held that - 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. Therefore, the questions of law are answered against the assessee and in favour of the Revenue.

Summary

Issues:
1. Rectification of assessment order under Section 154 - Adjusting business loss against long term capital gains
2. Taxation of long term capital gains of a domestic company independently under Section 112(1)(b)
3. Interpretation of the term 'may' in Section 71(2) regarding setting off long term capital gains against loss under any other head of income

Analysis:
1. The case involved the question of whether the Tribunal was correct in confirming the action of the Assessing Officer in rectifying the assessment order under Section 154 by adjusting the business loss against long term capital gains. The appellant argued that Section 71(2) provides an option to adjust or not adjust the business loss against capital gains. However, the objection was overruled, and the order was passed under Section 154. The Commissioner and the Income Tax Appellate Tribunal upheld this decision. The High Court agreed with the lower authorities, stating that Section 71(2) does not operate on a standalone basis and must be read together with Section 72(1).

2. Another issue raised was whether long term capital gains of a domestic company should be taxed independently under Section 112(1)(b) of the Income Tax Act, and other income/loss should be assessed separately as its total income. The Court did not find fault with the view taken by the authorities in this regard. The Tribunal's observation that Section 72(1) needs to be considered along with Section 71(2) was deemed appropriate.

3. The final issue pertained to the interpretation of the term 'may' in Section 71(2) of the Act. The appellant argued that they have the option to set off long term capital gains against loss under any other head of income. However, the Court sided with the Revenue, stating that Section 71(2) does not operate independently and should be read in conjunction with other relevant provisions. Consequently, the questions of law were answered against the appellant, and the tax case appeal was dismissed without costs.