Brought Forward business Loss can not be set off against Capital Loss on sale of Depreciable Business Assets

Nandi Steels Limited Vs The ACIT (ITAT Bangalore)- It is not in dispute that the land, building and bore well sold by the assessee were used by the assessee for its business purposes. It is also not disputed that these assets were fixed assets of the assessee. The only argument of the assessee has been that they have direct nexus with the business carried on by the assessee and therefore, are business assets and any gains from the sale of such assets would also have the character of business income.

We are unable to agree with this contention of the assessee that the assets sold by the assessee were business assets. Undisputedly, they were capital assets and the capital receipts are not taxable nor are the capital payments deductible from the income of the assessee. The capital is to be used for the purpose of carrying on the business of the assessee and it shall remain in the business of the assesee till it is either converted into stock-in-trade or is disposed off. The income earned by the assessee by carrying on the business by use of the stock in trade only is the business income of the assessee. Likewise, any expenditure incurred by the assessee for carrying on of business and for earning the income from such business or profession is only allowable as deduction. After taking into account the receipts and payments for carrying on the business of the assessee only the profit or gain or loss from the business is computed. If the profit or loss relate to the same assessment year from one source then it can be set off from another source under the same head of income u/s 70 Act, and it can be set off against the income from any other head of income u/s 71 of the Act. Sec.72 of the Act however, permits the carry forward business loss to subsequent assessment years and allows it to be set off against profit & gains, if any, of any business or profession carried on by the assessee and asses-sable for the relevant assessment year. Thus, it is clear that it is only the business loss that can be carried forward u/s 72 of the Act and it can also be set off only against the business income of the assessee, be it from the same business or from any other business. In the cases relied upon by the learned counsel for the assessee, the Hon’ble Supreme Court was dealing with the cases of the assessee’s whose business was dealing in securities also and it was thus held that these securities were trading assets and therefore, the income therefrom though to be computed under the head “income from securities” does not lose the character of “business income”. But in the case of M/s Express Newspapers Ltd., cited supra, the facts of the case are little different and after taking into consideration the facts of the case therein, the Hon’ble Supreme Court has held that the capital gains on sale of capital assets is not to be set off against the brought forward loss of earlier years. In our opinion, the decision of the Hon’ble Supreme Court in the case of M/s Express Newspapers Ltd., is fairly applicable to the facts of the case before us. The Coordinate Bench of the Tribunal in the case of M/s Steelcon Industries Pvt.Ltd., cited supra, has misplaced its reliance upon the decision of the Apex Court in the cases of M/s United Commercial Bank Ltd., and M/s Cocanada Radhaswami Bank Ltd.,

Also Read- 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

Full Text of the Judgement is as follows:-

INCOME-TAX APPELLATE TRIBUNAL, BANGALORE

I.T.A. No. 546(Bang.)/2008 (Assessment Year: 2003 -2004)

M/s Nandi Steels Limited

Vs

The Assistant Commissioner of Income Tax

Date of pronouncement: 09-12-2011

ORDER

PER SMT. P. MADHAVI DEVI, JM;

The present Special Bench has been constituted u/s 255(3) of the IT Act, 1961. The Special Bench was constituted under the following circumstances.

2. The assessee company which is engaged in the business of manufacture/production of Iron and Steel has filed its return of income for the relevant assessment year on 14-10-2003, declaring an income of Rs.98,27,270/- under the head ‘capital gains’. The return was processed u/s 143(1) on 20-01-2004 and a refund of Rs. 4,77,163/- was issued. Subsequently, the AO noticed that the assessee had set off the long term capital gains of Rs. 43,36,640/- against the brought forward business loss and depreciation contrary to the provisions of Sec.72 of the IT Act. In view of the same, the AO believed that the income chargeable to tax has escaped assessment within the meaning of Sec. 147 and issued notice u/s 148 on 8-07-2005. In response to notice u/s 148, the assessee filed its return of income on 17-04-2006 as returned in the original return of income. The assessee also requested the AO to furnish a copy of the reasons recorded for re-opening of the assessment. The AO furnished the reasons recorded for reopening of the assessment to the assessee. In the proceedings u/s 143(3) read with Sec. 148 of the IT Act, the AO held that the brought forward business loss and unabsorbed depreciation cannot be set off against the income from capital gains. He observed that the assessee has sold the land situated at Tumkur road along with the building and bore well which were all used for the business. Taking note of the decision of the Hon’ble Apex Court in the case of M/s Killick Nixon & Co., Vs CIT reported in 66 ITR 7 14(SC), wherein it was held that only income which is earned by carrying on business is entitled to be set off, he held that the carry forward business loss cannot be set off against the income from capital gains, as it is against the provisions of law. He also observed that the assessee has admitted the profit and sale of land etc. as long term capital gains and offered to tax at the rate of 20%. He accordingly, computed the income of the assessee.