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  32 ITR 688 (SC)
Chugandas & Co.’s  55 ITR 17 (SC)
Cocanada Radhaswami Bank Ltd.  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?
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:
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.
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:
a) Hickson and Dadajee (P) Ltd. (122 taxmann.com 94) (SC) (2020)
b) Digital Electronics v. ACIT (16 taxmann.com 316) (Mum-ITAT) (2011)
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