2022 (12) TMI 571 - AT - Income Tax

Set off of brought forward business loss of earlier years with the current year income received on account of Franchise Fees - HELD THAT - We find that Section 72(1), as it stood at the relevant point of time, inter alia provided that, Where for any assessment year, the net result of the computation under the head Profits and gains of business or profession is a loss to the assessee be carried forward to the following assessment year, and- (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year . Clearly, therefore, all that is necessary for the income to be set off must consist of the profits and gains of any business or profession carried by the assessee and assessable for that assessment year. On the facts of the present case, there is not even a dispute that the franchise fee is earned by the assessee in the course of its business and is, therefore, assessable as such. The only issue, as raised by the Assessing Officer, is with respect to the rate at which this franchise fee is taxable, but then the rate of taxation is, in our considered view, not a relevant factor so far as eligibility of income for set-off is concerned. We also see no conflict in an income being taxable under the head profits and gains from business or profession, and an income being in the nature of a franchise fee earned in the course of business - even if it is taxed at a rate different than the rate at which the normal business income is taxed. All that really matters is the income being in the nature of profits and gains from business or profession being carried on by the assessee, and that aspect is not even in dispute on the facts of the present case. The grievances raised by the Assessing Officer are thus devoid of legally sustainable merits.

Summary

Issues:
1. Eligibility of set off of brought forward business loss against current year income received as franchise fees.
2. Taxability of franchise fees as royalty income and its set off against business loss.

Issue 1: Eligibility of set off of brought forward business loss against current year income received as franchise fees:
The appellant, a foreign company, received franchise fees during the relevant year and sought to set off this income against brought forward business loss from a previous assessment year. The Assessing Officer denied the set off, arguing that franchise fees, being in the nature of royalty income, cannot be set off against business loss. The CIT(A) allowed the set off, noting that the loss claim from the previous year was sufficient to set off the current year's franchise fee income. The ITAT observed that the franchise fee was earned in the course of the appellant's business and was assessable as such. The rate of taxation was deemed irrelevant for eligibility of set off, as long as the income was from the business or profession carried on by the assessee. The ITAT upheld the CIT(A)'s decision, dismissing the Assessing Officer's grievances as lacking legal merit.

Issue 2: Taxability of franchise fees as royalty income and its set off against business loss:
The Assessing Officer contended that franchise fees should be taxed as royalty income and not considered for set off against business loss. However, the ITAT clarified that the nature of the income, whether franchise fee or business income, did not affect its eligibility for set off against business loss. The key consideration was whether the income was derived from the business or profession carried on by the assessee. The ITAT emphasized that the franchise fee, earned in the course of business, was assessable as business income, irrespective of the tax rate applied. Therefore, the ITAT affirmed the CIT(A)'s decision to allow the set off of franchise fees against the brought forward business loss.

In conclusion, the ITAT upheld the CIT(A)'s decision, emphasizing that the franchise fee income was eligible for set off against the brought forward business loss, as it was earned in the course of the appellant's business activities. The judgment clarified that the nature of income, whether taxed as royalty or business income, did not impact its eligibility for set off.