2021 (2) TMI 284 - HC - Income Tax

Revision u/s 263 - AO Allowed set off the brought forward losses against the income from capital gains derived by the respondent-assessee by selling its undertaking relating to GGBS business - ITAT set aside revision proceedings - Whether the Hon'ble ITAT is right in ignoring the provisions of Section 263 wherein the Hon'ble Pr. CIT, Panaji rightly invoked the proceedings under Section 263 in respect of the Assessment Order which was erroneous and prejudicial to the interest of revenue? - HELD THAT - This Court has accepted the position that it is not the requirement of Section 72 of the said Act that such gain or profit must be taxable only under the head of profits and gains of business or profession . The carry forward business losses would therefore be set off against theshort-term capital gains on the sale of building, plant, and machinery. This is yet another reason not to accept the submissions of Ms. Linhares and to answer the substantial questions of law against the Revenue and in favour of the assessee. Although, we may not be entirely in agreement with the ITAT on the aspect of invocation of the revisional jurisdiction under Section 263 of the said Act by the PCIT, we feel that the impugned order made by the ITAT warrants no interference because there is nothing fundamentally wrong in the view taken by the ITAT having regard to the decisions of the Hon'ble Supreme Court in the case of Chugandas Co. 1964 (7) TMI 8 - SUPREME COURT , Cocanada Radhaswami Bank Ltd 1965 (4) TMI 11 - SUPREME COURT and the decision of this Court in Hickson and Dadajee (P.) Ltd. 2020 (1) TMI 1399 - SUPREME COURT . Therefore, there is no point in dilating on the first substantial question of law when the second substantial question of law which relates to the merits will have to be answered against the Revenue and in favour of the assessee. Assessee based on instructions from the assessee has fairly stated that the assessee will pay proportionate tax on the basis that the AO allowed excess set off to the extent of ₹ 22,34,366/-. In fact, even the ITAT, in paragraph 10 of its order had held that the AO, if at all, had allowed excess set-off of ₹ 22,34,366/- and therefore the appeal of the assessee is partly allowed . This would mean that the assessee was still to pay proportionate tax since the AO had allowed excess set-off of ₹ 22,34,366/-. This appeal is disposed of by making the following order (a) The substantial questions of law as framed are decided against the Revenue and in favour of the assessee ; (b) However, the respondent-assessee, consistent with the statement made on its behalf is directed to pay proportionate tax based on the premise that the AO had allowed excess set off to the extent of ₹ 22,34,366/-. This payment to be made within three months from today.

Summary

Issues Involved:
1. Invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT).
2. Set-off of brought forward business losses against capital gains.
3. Consistency with decisions of higher courts and ITAT precedents.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 by the Principal Commissioner of Income Tax (PCIT):

The PCIT invoked his revisional jurisdiction under Section 263 of the Income Tax Act, 1961, setting aside the assessment order dated 31.03.2014 on the grounds that it was erroneous and prejudicial to the interest of the Revenue. The PCIT argued that the brought forward loss of ?4,45,36,935 was incorrectly set off against the income from capital gains, which was not permissible under Section 72 of the Act. The ITAT, however, set aside the PCIT's order and restored the AO's order, leading to the present appeal.

2. Set-off of Brought Forward Business Losses Against Capital Gains:

The core issue was whether the brought forward business losses could be set off against the income from capital gains. The AO allowed the respondent-assessee to set off the brought forward losses against the income from the sale of its GGBS business undertaking. The ITAT upheld this set-off, relying on the Supreme Court's decision in Express Newspapers Ltd., which explained that the difference between the sale price and the written down value of an asset represents recouped depreciation and is akin to business income. The ITAT found that at least ?2,84,31,062 of the income from the sale was recouped depreciation and thus business income, which could be set off against brought forward business losses.

3. Consistency with Decisions of Higher Courts and ITAT Precedents:

The ITAT's decision was challenged on the grounds that it was contrary to the Special Bench of the ITAT in Nandi Steels Ltd. and the Supreme Court in Express Newspapers Ltd. The respondent-assessee argued that the decision in Express Newspapers Ltd. was in the context of Section 26(2) of the Income Tax Act, 1922, and was clarified in subsequent Supreme Court decisions (Chugandas & Co. and Cocanada Radhaswami Bank Ltd.) to limit its scope. The ITAT's decision was also consistent with the ITAT's decision in Digital Electronics Ltd., which allowed the set-off of business losses against capital gains. The Bombay High Court in Hickson and Dadajee (P.) Ltd. had accepted this position, noting that the Revenue had accepted the ITAT's decision in Digital Electronics Ltd.

Conclusion:

The High Court found that the ITAT's view was plausible and consistent with the Supreme Court's decisions in Chugandas & Co. and Cocanada Radhaswami Bank Ltd., as well as the ITAT's decision in Digital Electronics Ltd. Therefore, there was no substantial question of law warranting interference. The substantial questions of law were decided against the Revenue and in favor of the assessee. However, the respondent-assessee was directed to pay proportionate tax on the premise that the AO had allowed an excess set-off of ?22,34,366, to be paid within three months. No order as to costs was made.