2021 (9) TMI 509 - AT - Income Tax

Computation of Total Income - Mode and manner of set off of loss - loss from one head set off against other head of income - setting off the business loss against house property income, income from other sources and thereafter income from capital gains which is in accordance with the provisions of Section 71 - HELD THAT - Admittedly, income tax provides for computation of income in order of preference starting from income under the head salary, Income under the head income from house property , and income under the head long term capital gain and further income under the head income from other sources' Therefore, in our considered view business loss should be first set off against income from house property and then followed by income from long term capital gain and further still unabsorbed loss remains, it should be set off against income from other sources. Therefore, we set aside appeal to the file of AO and direct him to recompute total income, after allowing set off of loss under the head income from business or profession in terms of our observations herein above - Appeal of assessee is treated as allowed for statistical purposes.

Summary

Issues:
Rectification of assessment order under section 154 of the Income Tax Act, 1961 regarding the set off of business loss against different heads of income.

Detailed Analysis:

Issue 1: Rectification of assessment order under section 154
The appeal was against the order passed by the CIT(A) regarding the rectification of the assessment order under section 154 of the Income Tax Act for the assessment year 2011-12. The Assessing Officer rectified the assessment order on the ground that business loss was wrongly set off against income under the head salary, which was not allowable as per section 71(2A) of the Act. The assessee challenged this rectification, arguing that the Assessing Officer set off the business loss against income under the head long term capital gain without following the procedure laid down under section 71(2) of the Act.

Issue 2: Interpretation of section 71(2) and 71(2A)
The CIT(A) considered the relevant facts and provisions of section 71(2) and 71(2A) of the Act. The CIT(A) rejected the assessee's arguments and affirmed the Assessing Officer's decision to disallow the claim of business loss against salary income. The CIT(A) held that there is no hierarchy prescribed for setting off income amongst different heads of income under section 71(2) of the Act. The CIT(A) also rejected the claim that the assessee had agreed to the rectification of the assessment order before the Assessing Officer, stating that once an agreement was reached, the assessee could not challenge it on appeal.

Issue 3: Mode and manner of set off of loss
The AR for the assessee contended that the Assessing Officer adjusted the business loss against capital gains instead of income from house property and income from other sources, which was more beneficial to the appellant. The AR referred to circular No.26 issued by CBDT and argued for the adoption of the most beneficial mode of set off. The DR supported the CIT(A)'s decision, stating that in the absence of a specific mode of set off under section 71(2), the Assessing Officer can adjust the loss against gross total income.

Judgment:
The ITAT Chennai, after hearing both sides and examining the records, found that the Assessing Officer should have set off the business loss against income from house property first, followed by income from long term capital gain and income from other sources. The ITAT directed the Assessing Officer to recompute the total income in accordance with this order. As a result, the appeal filed by the assessee was treated as allowed for statistical purposes.