2018 (10) TMI 1397 - AT - Income Tax

Computation of short term capital gains and its adjustment against brought forward depreciation loss and / or business loss - Set off of current year s business loss and brought forward depreciation loss and brought forward business loss against current year s short term capital gain arising on sale of business asset i.e. party hall - Held that - The said short term capital gain arises on sale of business assets on which the assessee was claiming depreciation and in view of section 50 the gain was held to be deemed short term capital gain, though the assessee was holding the asset for long time and had fulfilled the conditions of long term capital gain. The learned Authorized Representative for the assessee also placed reliance on the decision of Tribunal in Digital Electronics Ltd. Vs. Addl.CIT (2010 (10) TMI 722 - ITAT, MUMBAI) and pointed out that the issue was decided in favour of assessee, which was followed in M/s. Hickson & Dadajee Pvt. Ltd. Vs. ACIT 2014 (2) TMI 1293 - ITAT MUMBAI also approved by the Hon ble Bombay High Court in CIT Vs. M/s. Hickson & Dadajee Pvt. Ltd. 2017 (3) TMI 274 - BOMBAY HIGH COURT . Since the issue has been settled by the Hon ble Bombay High Court, we find no merit in the order of CIT(A) in relying on another decision of Mumbai Bench of Tribunal and holding the issue to be against the assessee. Unabsorbed depreciation which has been carried forward from preceding year is to be set off against the income shown by assessee under the head short term capital gain under section 50 of the Act. Set off of adjustment on account of brought forward business loss which was not claimed in the return of income - Held that - Referring to ratio laid down in CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT wherein it has been held that any claim can be made before appellate authorities, which need to be adjudicated while determining income of assessee. We find merit in the plea of assessee in this regard and hold that business loss carried forward from earlier year of ₹ 8,65,154/- needs to be adjusted against income assessed under the head short term capital gain under section 50 of the Act. Similarly, current year business loss is to be set off against the said income. Accordingly, we allow the claim of assessee.

Issues Involved:
1. Denial of set off of current year's business loss against short term capital gains.
2. Rejection of set off of accumulated depreciation and brought forward business loss against current year's short term capital gains.
3. Classification of short term capital gains arising from the sale of business assets.
4. Applicability of judicial pronouncements relied upon by CIT(A).
5. Raising of fresh issues by CIT(A) regarding the quantification of business loss for earlier years.

Detailed Analysis:

1. Denial of Set Off of Current Year's Business Loss Against Short Term Capital Gains:
The assessee argued that the CIT(A) erred in denying the set off of the current year's business loss of ?15,265 against short term capital gains. The Tribunal noted that the assessee had declared a total income of ?83,32,660 and had shown short term capital gains of ?1,00,85,753, against which it set off brought forward depreciation loss of ?17,53,095. The Tribunal upheld the assessee's claim, referencing the precedent set by the Hon'ble Bombay High Court in CIT Vs. Ace Builders Pvt. Ltd., which clarified that the deeming fiction of section 50 is restricted to the mode of computation of capital gains and does not convert a long-term capital asset into a short-term capital asset.

2. Rejection of Set Off of Accumulated Depreciation and Brought Forward Business Loss Against Current Year's Short Term Capital Gains:
The assessee also claimed set off of accumulated depreciation of ?17,37,830 and brought forward business loss of ?8,65,154 against the short term capital gains. The Tribunal referred to the decision in DCIT Vs. M/s. Demech Heavy Equipments Pvt. Ltd., which supported the assessee’s position that the brought forward business loss and unabsorbed depreciation could be set off against deemed short term capital gains arising from the sale of depreciable assets. The Tribunal held that the CIT(A) erred in not allowing this set off, aligning with the Hon'ble Bombay High Court's judgment that the legal fiction created by section 50 is confined to the computation of capital gains and not to the exemption provisions.

3. Classification of Short Term Capital Gains Arising from the Sale of Business Assets:
The Tribunal addressed the issue of whether short term capital gains from the sale of business assets, which were held for a long term, should be treated as business income. The Tribunal concluded that the short term capital gains, though arising from the sale of depreciable assets, should be treated as business income eligible for set off against brought forward business losses and unabsorbed depreciation. This was based on the interpretation that section 50 does not convert a long-term capital asset into a short-term capital asset but only affects the mode of computation of capital gains.

4. Applicability of Judicial Pronouncements Relied Upon by CIT(A):
The Tribunal found that the CIT(A) incorrectly relied on judicial pronouncements that were not relevant to the facts of the case. Instead, the Tribunal emphasized the applicability of the Hon'ble Bombay High Court's decisions in CIT Vs. Ace Builders Pvt. Ltd. and CIT Vs. Parrys (Eastern) Pvt. Ltd., which supported the assessee's claims.

5. Raising of Fresh Issues by CIT(A) Regarding the Quantification of Business Loss for Earlier Years:
The Tribunal noted that the CIT(A) raised fresh issues about the quantification of business loss for earlier years, which were not disputed by the Assessing Officer during the current year's assessment. The Tribunal held that the assessee's claim for set off of brought forward business loss of ?8,65,154, which was not claimed in the return of income, should be allowed based on the precedent set by the Hon'ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. This judgment allows claims to be made before appellate authorities, which must be adjudicated while determining the income of the assessee.

Conclusion:
The Tribunal allowed the appeal, directing the Assessing Officer to allow the claims of set off of current year's business loss, accumulated depreciation, and brought forward business loss against the short term capital gains after verification from the record. The Tribunal emphasized that the legal fiction created by section 50 is confined to the computation of capital gains and does not affect the classification of assets or the applicability of exemptions. The grounds of appeal raised by the assessee were thus allowed.

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