Set off of Brought Forward Business Loss with Income of Current Year Capital Gains

Nandi Steels Limited Vs ACIT (Karnataka High Court)

A Deviation From a Tradition Understanding Of Section 72(1)-Set off of Brought Forward Business Loss with Income of Current Year Capital Gains

Whether business loss carried forward from earlier years can be set-off against current capital gain arising from sale of business assets?

1. FACTS OF THE CASE

• The assessee is a company which filed its return of income for AY 2003-04 on 14.10.2003 and declared an income of Rs. 98,27,270/- under the head “Capital Gains”.
• The assessee has set off carried forward business loss of earlier years to the extent of Rs. 39,99,652/- against the income declared under the head “Capital Gains” arising out of sale of land along with building and borewell. The land was not held as stock in trade but rather held as capital asset for the purpose of business.
• During that year, the assessee did not have any income from business.
• The assessing officer disallowed the set-off of brought forward business loss against capital gains for the year in dispute. The same was upheld by the first two Appellate authorities and the assessee preferred an appeal before the Hon’ble High Court.

2. ASSESSEE’S & REVENUE’S CONTENTION

• ASSESSEE’S CONTENTION
  • The assessee is entitled to set off of brought forward loss against the income which has the attributes of business income even though the same is assessable to tax under the head other than “Profits and gains of business or profession”.
  • Any income arising from sale of business assets has the character of business income and consequently the income though assessed as capital gain, is entitled to set off against the carry forward business loss.
• REVENUE’S CONTENTION
  • The asset sold by the assessee is a capital asset and the consideration has been offered to tax under the head “Capital Gains”. Therefore, the question of treating the consideration from transfer of a capital asset as business income is not correct.
  • The business loss claimed to be set off by the assessee was carried forward business loss of earlier years and the same can be set off only in terms of section 72 of the Act which permits only set off against current year income declared under the head “Profit and gains of business or profession”.
  • The assessee has not offered any income under the head profits and gains and it is established that the assessee has not carried on any business either in the assessment year under consideration or in immediately preceding year. Therefore, section 72 is not applicable.

3. DECISION OF THE HIGH COURT