Brought forward business losses can be set off against the gains arising from any business or profession, though chargeable to tax under any other head of income
• During the assessment year 2005-06, the taxpayer had sold the factory building, plant and machinery, furniture and fixtures on which it had earned capital gains.
• The taxpayer had set off unabsorbed depreciation and brought forward business losses against the short term capital gains on sale of factory building, plant and machinery, furniture and fixtures.
• The Assessing Officer disallowed the claim of the set off of brought forward business losses on the ground that the same cannot be set off against any other head of income other than profits and gains of business or profession as per the provisions of the Income Tax Act (“ITA”).
Issue before the Tribunal
• Whether brought forward business losses can be set off against the profits on sale of business assets which are assessed to tax as capital gains?
Observations and Ruling of the Tribunal
• As per the provisions of the ITA, for setting off the income, while the loss carried forward has to be under the head “Profits and gains of business or profession”, the gains against which such loss can be set off, has to be profits of “any business or profession carried on by the taxpayer and assessable to tax in that assessment year”.
• The Tribunal observed that while one set of provisions, i.e., the nature of loss incurred by the taxpayer, classifies the same on the basis of income being taxable under a particular head for the purpose of computation of the net income, the other set of provisions is concerned only with the nature of gains being from business and not with the head of income.
• The Tribunal further observed that as long as the profits and gains are in the nature of business profits and gains, even if these profits are liable to be taxed under a head other than income from business and profession, the loss carried forward can be set off against such profits..
• The Tribunal held that income earned by the taxpayer on sale of factory building, plant and machinery although not taxable as “Profit and gains of business or profession” was in the nature of income of business though assessed as capital gains and hence the taxpayer is entitled to set off of brought forward business losses against the said capital gains which were from a business carried on by the taxpayer.
• The above ruling affirms the position that brought forward business losses can be set off against the gains arising from any business or profession, though chargeable to tax under any other head of income.
Source: Digital Electronics Ltd. Vs. ACIT135 TTJ 419 (Mum ITAT)