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2021 (9) TMI 708 - HC - Income TaxDeduction of advances written off - Deduction being advances paid to Continental Group of Companies for supply of machinery and written off during the year - whether allowable capital expenditure? - HELD THAT - The assessee has filed appeal for the Assessment Year 2003-04 2021 (9) TMI 736 - KERALA HIGH COURT and question no.4 in the said appeal relates to disallowing the deduction of advances written off by the assessee. The Counsel appearing for the parties state that the same reason could be adopted for answering the instant question as well. For the reasons recorded in question no.4 therein, the instant question is answered in favour of the Revenue and against the Assessee. Setting off long term capital loss on sale of shares and units of mutual funds against the long term capital gain earned on the sale of land - application of Section 10(38) on one hand and on another the extent to which set-off under Section 70(3) read with Sections 48 to 55 of the Act could be claimed by the assessee - Whether assessee is mixing up heterogeneous heads as homogeneous heads and claiming the set-off? - HELD THAT - The literal meaning of Section 70(3) clearly shows that both for including the loss against set-off and setting of loss against income the computation must have been made under Sections 48 to 55 of the Act. The language of Section 70(3) is clear and unambiguous. In the understanding of this Court, the Parliament intended homogeneous entries to adjust the loss or profit against one another and not introduce heterogeneous elements or entries. Hence, the interpretation adopted by the assessee would give benefits not otherwise intended by the Section. The effort of the assessee, in our view, includes an excluded claim, i.e., a heterogeneous claim under Section 70(3) of the Act, by claiming that the homogeneity of long term capital gain is satisfied by the assessee. We are of the view that the application of Section 70(3) by the assessee is incorrect and illegal. AO has very clearly appreciated the objection, applied the law to the circumstances of the case, and recorded the findings. As we have noted supra the CIT (Appeals) and the Tribunal have merely adopted the conclusions recorded by the Assessing Officer. After independently examining the implication of each one of the Sections and the principle laid down by the Supreme Court in Harprasad Co. case 1975 (2) TMI 2 - SUPREME COURT , we are of the view that no exception to the view taken by the Assessing Officer, as confirmed by the CIT (Appeals) and Tribunal could be taken by us as well. - Decided in favour of revenue.
Issues Involved:
1. Disallowance of deduction of ?2,76,00,000/- as capital expenditure. 2. Disallowance of setting off long-term capital loss on the sale of shares and mutual funds against long-term capital gain on the sale of land. Issue-wise Detailed Analysis: Issue 1: Disallowance of deduction of ?2,76,00,000/- as capital expenditure The first issue concerns the disallowance of a deduction of ?2,76,00,000/- which was an advance paid by the assessee to the Continental Group of Companies for the supply of machinery and subsequently written off. The Tribunal held that this amount was of the nature of capital expenditure. The same reasoning applied in ITA No.26/2013 for the Assessment Year 2003-04 was adopted for this case, leading to the conclusion that the deduction was not allowable. Thus, the question was answered in favor of the Revenue and against the Assessee. Issue 2: Disallowance of setting off long-term capital loss on the sale of shares and mutual funds against long-term capital gain on the sale of land The second issue involves the assessee's claim to set off long-term capital loss on the sale of shares and mutual funds against long-term capital gain on the sale of land. The relevant provisions of the Income Tax Act, 1961, including Section 10(38) and Section 70(3) read with Sections 48 to 55, were examined. Analysis: - Assessee's Argument: The assessee contended that the loss from the sale of long-term capital assets (shares and mutual funds) should be set off against the income from the sale of another long-term capital asset (land) under Section 70(3) of the Act. The argument relied on the interpretation that both income and loss from long-term capital assets should be considered for set-off purposes. - Revenue's Argument: The Revenue argued that income exempt under Section 10(38) should be excluded from the computation of total income. Consequently, the loss from such exempt income also cannot be considered for set-off. The Revenue emphasized that the computation of income under Sections 48 to 55 must be made before applying Section 70(3), and since the loss from the sale of shares and mutual funds was exempt, it could not be set off against the income from the sale of land. Court's Reasoning: - Legal Framework: The court examined Section 10(38), which excludes income from the transfer of long-term capital assets (equity shares and mutual funds) from the total income computation. Section 70(3) allows the set-off of loss from one long-term capital asset against the income from another long-term capital asset, provided the computations are made under Sections 48 to 55. - Interpretation: The court held that the language of Section 70(3) is clear and unambiguous, requiring homogeneous entries for set-off. The loss from exempt income (under Section 10(38)) cannot be set off against taxable income from another long-term capital asset. The court emphasized that the assessee's interpretation would lead to unintended benefits, which the legislature did not intend. - Precedents: The court referred to the Supreme Court's judgment in Harprasad & Co., which clarified that both profit and loss should be considered for computation, but excluded income (and loss) under Section 10(38) cannot be included for set-off purposes. The court also agreed with the Gujarat High Court's decision in Kishorebhai Virani, which supported the Revenue's stance. Conclusion: The court concluded that the assessee's claim to set off the loss from the sale of shares and mutual funds against the income from the sale of land was incorrect and illegal. The Assessing Officer's decision, confirmed by the CIT (Appeals) and the Tribunal, was upheld. The substantial question of law was answered in favor of the Revenue and against the Assessee. Consequently, the appeal was dismissed with no order as to costs.
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