Brought forward business loss allowed to be set-off against capital gains on assets used for business purpose: Karnataka HC

Nandi Steels Limited Vs ACIT (Karnataka High Court)

Facts of the case:

In the present case, the assessee is a limited company carrying on the business of manufacture of iron and steel. During the year under consideration, it had earned income from sale of land, building and bore well used for its business purposes. The assessee had a portion of business losses pertaining to earlier years that were brought forward. The assesse used these losses to set-off against the income earned on sale of capital assets that were charged to tax under the head ‘Capital Gains’. However, while assessing the income under section 147, the Assessing Officer (‘AO’) disallowed this claim of assessee.

Aggrieved with the disallowance made by the AO, the assessee appealed with the higher authorities. The Commissioner of Income tax (Appeals) (‘CIT(A)’) as well as the Income tax Appellate Tribunal (‘ITAT’) disallowed assessee’s claim on the ground that the capital assets sold during the year were not held as stock-in-trade and hence the income arising on its sale shall not be considered as business income. Further the ITAT also relied on the decision of the Apex Court in the case of CIT v. Express Newspapers Ltd. (1964) 53 ITR 250 wherein it was held that the although capital gains are connected with the capital assets used in the business, it cannot make them the profits of the business.

The assessee filed an appeal before the High Court and contended the following:

a) It had claimed depreciation in the earlier years on the building and the bore well. Since these assets were used for the business of the assessee, the gain from sale of these assets has been rightly set off against the carried forward business loss from the earlier years.

b) In support of his contention, he placed reliance upon the following decisions:

United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC)

Chugandas & Co.’s [1965] 55 ITR 17 (SC)

Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC)

The question under consideration is whether capital gains arising from assets used for the purpose of business be construed as business income and consequently can the business loss brought forward be set-off against such gains?

Regulatory provision:

As per section 72 of the Income-tax Act, 1961, if

i) there is a loss under the head ‘Profits and gains of business or profession’ other than from speculation business; and

ii) the said loss is in excess after setting off the income of the current year in other heads;

then the assessee can carry forward the said loss to the subsequent years for a period of 8 years and can set-off such loss against the profits and gains of any business or profession carried on by him.

Decision of the High Court:

The High Court passed it decision based on the following observations:

• Section 72 stated that the loss under the head ‘Profits and gains of business or profession’ can be carried forward and set-off against profits and gains, if any, of any business or profession carried on by the assessee. Here, the specific exclusion of the term ‘under the head’ clearly indicates the intention of the legislation to provide the set-off against any income in relation to business or profession irrespective of the head under which the same has been charged. The court relied on the decision of Supreme court in the case of GVK Industries Ltd. v. ITO [2011] 10 taxmann.com 3 wherein the legal maxim expression unius est exclusion alterius was analyzed and held that express mention of one thing implies the exclusion of another.
• Further, in the case (Express Newspapers) relied by the ITAT while deciding the assessee’s case, the Apex court did not analyze the provisions of section 24(2) of the erstwhile Income-tax Act which is similar to section 72 of the current Income tax Act in connection to the carry forward and set-off of business losses. Accordingly, the same cannot be applied to the case in hand.
• The said provision was, however, analyzed in the case of Cocanada Radhaswami Bank Ltd wherein the Apex Court reaffirmed the decision in the case of Chugandas & Co. which held that the heads of income are mere classification prescribed for the purpose of computation of income. And thus, the head under which the income was chargeable to tax was not relevant for the purpose of determining the source of such income. Accordingly, the High Court opined that the income from sale of assets used for business is in the nature of gains from business although the same was charged to tax under the head ‘Capital gain’.

In view of the above, the High court allowed the set-off of brought forward business losses against Capital gains on assets used for business purpose.

Key Takeaways:

1. The heads of income are prescribed in the Income Tax Act are only for the purpose of computation of income and the same cannot be used to rule out the actual source of any income.

2. The above ratio laid down in the present case may be used to set-off brought forward business losses against rent income chargeable under the head ‘Income from House Property’ where the assesse is able to substantiate that the rent income received is income earned from business asset.

3. Where the legislature wants to include something, it expressly mentions the same.

Points to note:

• It is pertinent to note that, in the decisions relied upon by the Karnataka High Court, the assessee is a banking company and a dealer in securities, who has claimed the brought forward business losses against income from interest on securities which is offered to tax under the head ‘Income from Other Sources’.
• However, reliance may be placed on following judicial precedents where various courts have held that the income from capital gains on assets being land or building used for business purpose can be set-off against brought forward unabsorbed business losses:

a) Hickson and Dadajee (P) Ltd. (122 taxmann.com 94) (SC) (2020)

b) Digital Electronics v. ACIT (16 taxmann.com 316) (Mum-ITAT) (2011)

c) Smart Sensors & Transducers Ltd. (104 taxmann.com 129) (Mum-ITAT) (2019)

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