2016 (6) TMI 530 - AT - Income Tax

Priority of Adjustment of business loss against the Long Term Capital Gains and interest income - contention of the assessee company for adjustment of business loss first against the interest Income and then against the Long Term Capital, thereby leaving only LTGC to be taxed at 20% as applicable on it - Held that - Section 71(2) makes it clear that in respect of any assessment year, when the net result of the computation under any head of income, other than Capital gains , is a loss and the assessee s income is assessable under the head Capital gains , the assessee would be entitled to the set off such loss against his income, assessable for that assessment year under any other head including income assessable under the head Capital gains . The Section does not states that the business loss has to be adjusted first with particular head of income. In respect of any assessment year, when the net result of the computation under any head of income, other than Capital gains , is a loss and the assessee s income is assessable under the head Capital gains , the assessee would be entitled to set off such loss against his income which is assessable for that assessment year under any other head including income assessable under the head Capital gains . The ITAT, Pune Bench decision in case of Coated Fabrics (P.) Ltd. Vs. JCIT 2006 (1) TMI 228 - ITAT PUNE-A is applicable in the present case as facts are similar in both the matter as relates to whether option is available to an assessee for set off of any head of loss against any head of income including capital gain assessable for that assessment year. The said question was answered in favour of the assessee therein. The CIT(A) while dismissing the appeal of the assessee, mis- interpreted the said order of the Appellate Tribunal which is binding on the CIT(A) and has to be followed by the CIT(A) being superior appellate authority. - Decided in favour of assessee

Summary

Issues:
1. Adjustment of business loss against Long Term Capital Gains.
2. Interpretation of Section 71 of the Income Tax Act.

Issue 1: Adjustment of business loss against Long Term Capital Gains
The appeal was filed by the assessee against the order passed by CIT(A)-XVI, New Delhi, regarding the adjustment of business loss against Long Term Capital Gains. The Assessing Officer set off the business loss against Long Term Capital Gains first and then against interest income. The assessee contended that the business loss should have been adjusted first against interest income. The CIT(A) upheld the AO's decision. The ITAT analyzed Section 71(2) of the Income Tax Act, which allows for the set off of loss from one head of income against income from another head. The ITAT referred to the decision in the case of Coated Fabrics (P.) Ltd. Vs. JCIT and held that the assessee is entitled to set off business loss against any head of income, including Capital Gains.

Issue 2: Interpretation of Section 71 of the Income Tax Act
The ITAT further elaborated on the interpretation of Section 71(2) by comparing it with Section 70. It emphasized that Section 71 provides for set off of loss against income for the same assessment year under any other head, including Capital Gains. The ITAT referred to Circular No. 26(LXXVI-3) and a decision of ITAT Bombay Bench to support the view that the option for set off should be in a manner that gives maximum benefit to the assessee. The ITAT directed the Assessing Officer to first set off the business loss against income under the head "Other sources" and then against income under the head "Capital gains." This decision was based on the principle that the interpretation of a taxing statute should be construed as beneficial to the assessee.

In conclusion, the ITAT allowed the appeal, emphasizing that the decision of the Appellate Tribunal is binding on the CIT(A) and must be followed. The ITAT's decision clarified the sequence for adjusting business loss against different heads of income, providing relief to the assessee in this case.