2022 (1) TMI 1156 - AT - Income Tax

Set-off of net operations loss against income from house property and other sources - set off of loss incurred from the activities coming under the purview of principle of mutuality against the income which is not coming under the purview of mutuality and brought to tax i.e., interest income received from member banks and rental income received from member tenants which was actually assessed under the regular provisions of the Act under the head Other Sources and House Property, respectively - HELD THAT - As decided is own case 2021 (10) TMI 1290 - ITAT HYDERABAD the legislative expression head of income must be taken as any of the five heads of income provided u/s. 14 of the Act i.e. salary, income from house property, profits and gains of business or profession, capital gains and income from other sources; respectively. We thus are of the opinion that once the assessee's impugned deficit arising from mutuality account is neither covered in any of the said heads as well nor u/s. 2(24)(vii) defining income in the very account, section 71 of the Act would not apply in isolation. Order of CIT(A) sustained wherein it was observed that it is well settled legal position that operational loss computed by the assessee coming under the purview of principle of mutuality cannot enter the computation of total income as envisaged u/s.2(45) of the Act. Accordingly, the ground of appeal raised by the assessee on treating such loss arising out of transactions covered under principle of mutuality as income / loss within the meaning of Sec. 28(iii) of the Act is dismissed. As a corollary, such loss cannot be set off against other taxable sources I heads of income of the assessee such as interest income from bank falling under Income from Other Sources, Income from House Property etc. as envisaged u/s.71 of the Act. Similarly, the provisions of Sec.72 of the Act are also not applicable with regard to carry forward and set-off of such losses in the subsequent AYs. Accordingly, all the grounds of appeal raised by the assessee are hereby dismissed Decided against assessee.

Issues Involved:
1. Delay in filing the appeal.
2. Set-off of net operational loss against income from house property and other sources.
3. Applicability of the principle of mutuality to the income and expenditure of the assessee club.
4. Treatment of operational losses as business loss under Section 28(iii) of the Income Tax Act.
5. Applicability of Section 71 and Section 72 of the Income Tax Act for set-off and carry forward of losses.

Issue-wise Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal filed by the assessee for the Assessment Year (AY) 2016-17 suffered from a delay of 320 days. The delay was attributed to reasons beyond the assessee’s control, and there was no rebuttal from the departmental side. Consequently, the delay was condoned.

2. Set-off of Net Operational Loss Against Income from House Property and Other Sources:
The assessee’s primary grievance was the denial of set-off of net operational loss of ?9,11,16,126/- against income from house property and other sources. The CIT(A) had previously held that the deficit from mutual activities cannot be considered a loss for income tax purposes and thus cannot be set off against taxable income. The CIT(A) reiterated this stance, emphasizing that the operational deficit within the circle of mutuality is essentially a consumption expenditure and not allowable as a deduction while computing total income.

3. Applicability of the Principle of Mutuality:
The principle of mutuality was central to the case. The CIT(A) discussed that the assessee, being a social and recreational club, is covered under the principle of mutuality. However, it was noted that the principle of mutuality does not extend to interest income from member banks or rental income from member tenants. The Andhra Pradesh High Court and the Supreme Court had previously ruled that such interest income does not fall under the principle of mutuality and is taxable.

4. Treatment of Operational Losses as Business Loss Under Section 28(iii):
The CIT(A) clarified that the operational loss from mutual activities cannot be treated as a business loss under Section 28(iii) of the Income Tax Act. The principle of mutuality dictates that both profits and losses from mutual transactions are outside the purview of taxation. Thus, the loss from mutual activities cannot be set off against taxable income from other sources or heads.

5. Applicability of Section 71 and Section 72 for Set-off and Carry Forward of Losses:
The CIT(A) and the tribunal held that operational losses from mutual activities cannot be set off against taxable income under Section 71, nor can they be carried forward under Section 72. The tribunal referenced several Supreme Court judgments to support this position, stating that losses from activities not chargeable to tax cannot be set off against taxable income. The tribunal also noted that the legislative expression “head” of income in Section 71 must be one of the five heads of income provided under Section 14 of the Act.

Conclusion:
The tribunal upheld the CIT(A)’s decision, denying the set-off of the assessee’s operational loss against income from other sources and house property. The appeal was dismissed, and the tribunal emphasized that the losses from mutual activities are outside the ambit of taxation and cannot be set off against taxable income. The tribunal also referenced prior judicial precedents to support its decision. The order was pronounced in the open court on 27th January 2022.

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