Case Law Details
Valuable Technologies Pvt. Ltd. Vs CIT (ITAT Mumbai)
In a recent case before the Income Tax Appellate Tribunal (ITAT) Mumbai, Valuable Technologies Pvt. Ltd. challenged the order of the Commissioner of Income Tax (Appeals) – Pune-11 [CIT(A)]. The appeal focused on the issue of set-off of brought forward capital loss against long-term capital gain for the assessment year (AY) 2020-21. The assessee contended that the CIT(A) incorrectly treated the capital loss as a business loss, leading to the disallowance of the set-off. The case was heard and decided on 30th August 2024.
Case Background:
The assessee, Valuable Technologies Pvt. Ltd., filed its income tax return for AY 2020-21 on 12th January 2021, reporting long-term capital gains of ₹2,67,73,895 and claiming a set-off of ₹15,72,530 as a long-term capital loss. This set-off was rejected during the processing of the return by the Central Processing Centre (CPC), Bangalore, which classified the capital loss as a business loss. This resulted in an adjustment under Section 43B of the Income Tax Act, 1961, and changes to the set-off of losses.
The assessee filed a rectification request under Section 154 of the Income Tax Act, which was partially accepted by the CPC in its rectification order dated 6th July 2022. However, the CPC rejected the set-off of the brought forward loss, leading the assessee to appeal before the CIT(A). The CIT(A) ruled that the ₹15,72,530 loss was a business loss, not a capital loss, and thus could not be adjusted against the current year’s capital gain. Dissatisfied with this ruling, the assessee appealed to the ITAT.
Arguments by the Assessee:
The assessee argued that the CIT(A) had erroneously treated the loss as a business loss instead of a capital loss. The counsel for the assessee emphasized that the ₹15,72,530 in question was a long-term capital loss brought forward from previous years. According to the assessee, this capital loss should have been allowed as a set-off against the current year’s long-term capital gain in accordance with Section 74 of the Income Tax Act, 1961, which governs the carry-forward and set-off of capital losses.
Relevant Provisions of Section 74 of the Income Tax Act:
Section 74 deals with losses under the head “Capital Gains.” It permits the carry-forward of losses under certain conditions:
- Short-term capital losses can be set off against any other capital gain.
- Long-term capital losses can only be set off against long-term capital gains.
- Unabsorbed capital losses can be carried forward to subsequent assessment years but must be used within a maximum of eight assessment years.
The assessee argued that under these provisions, it was entitled to set off the ₹15,72,530 capital loss against its long-term capital gain of ₹2,67,73,895.
CIT(A)’s Decision:
In its order, the CIT(A) accepted the assessee’s right to choose how to set off its income. However, it determined that the brought forward loss was a business loss and therefore could only be set off against business income under Section 72(1) of the Income Tax Act. As the assessee had reported capital gains, the CIT(A) disallowed the set-off.
ITAT’s Findings:
The ITAT reviewed the case and the provisions of the Income Tax Act relevant to the set-off of losses. It identified that the core issue was the nature of the loss—whether it was a business loss or a capital loss. The tribunal noted that the assessee claimed the loss was a long-term capital loss, which, if correct, would entitle it to set off the loss under Section 74.
After examining the facts and hearing the arguments, the ITAT found that the characterization of the loss required further verification by the Assessing Officer. The tribunal emphasized that if the loss was indeed a capital loss, the assessee should be allowed to set it off against its capital gain, as per the law.
Conclusion:
The ITAT remanded the case to the Assessing Officer for further verification. It instructed the officer to determine whether the ₹15,72,530 was a capital loss or a business loss. If it was a capital loss, the assessee’s claim for set-off should be allowed in accordance with Section 74 of the Income Tax Act. The appeal was allowed for statistical purposes, meaning the tribunal did not give a final ruling but sent the case back for further investigation.
Implications:
This case underscores the importance of proper classification of losses under the Income Tax Act. For taxpayers, it highlights the need for clear documentation and understanding of the nature of losses—whether they are capital or business losses—before filing returns or appealing decisions. Misclassification can lead to disputes with tax authorities and potentially significant tax liabilities.
The ITAT’s decision also reinforces the right of taxpayers to appeal against such misclassifications and seek rectification when errors are made in the assessment process.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against order dated 13.12.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – Pune-11 [in short ‘the Ld. CIT(A)’] for assessment year 2020-21, raising following grounds:
1. On the basis of facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals), Pune [“CIT(Appeals)”] has erred in not allowing the legitimate set off of long-term capital loss of 15,72,530/– against Long Term capital gain of Rs 2,67,73,895/-presuming that the said capital loss is a Business Loss.
2. The Learned CIT(Appeals) has treated the long – term Capital Gain of AY 20-21 which the assesse has set off against the brought forward Long -term capital loss of the previous years, as Business income and levied tax on such income. The CIT(Appeals) has erred on facts and in law by not allowing the legitimate set off of unabsorbed capital loss of earlier years against the income from capital gains u/s 74 of the Income Tax Act and disallowing the same under section 72(1) of the Income Tax Act.
2. Briefly stated, facts of the case are that the assessee company was engaged in providing software services etc. For the year under consideration, the assessee filed return of income on 12.01.2021 claiming tax refund of Rs.1,08,17,078/ -. The return of income filed by the assessee was processed by the Central Processing Centre, Bangalore (in short ‘CPC’) wherein certain adjustment to disallowance u/s 43B of the Income-tax Act, 1961 (in short ‘the Act’) as well as adjustment to set off of current year and brought forward losses to the income reported under capital gain and income from other sources were made. Thereafter, the Assessing Officer CPC passed a rectification order u/s 154 of the Act dated 06.07.2022 reversing the adjustment made u/s 43B of the Act, however the assessee filed rectification application on 15.12.2022 seeking rectification on the adjustment of the set off of brought forward loss. However, same was rejected by the AO CPC and against which the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) though accepted the contention of the assessee that it is at liberty to choose which set off of income it wishes. However, as far as brought forward loss of Rs.15,72,530/ -, is concerned, The Ld. CIT(A) noted that it was a brought forward business loss and therefore, declined for adjustment of the same against the current years capital gain income. Aggrieved, the assessee is in appeal before the Tribunal by way of raising grounds as reproduced above.
3. We have heard rival submission of the parties and perused the relevant material on record. The finding of the Ld. CIT(A) rejecting the set off of brought forward loss of Rs.15,72,530/ – is reproduced as under:
“7.2 It is however seen that the appellant has claimed a set-off of brought forward business loss amounting to Rs. 15,72,530/ – against the balance amount of current year’s capital gains income of Rs. 1,82,90,006/ -. In this connection, it is seen that as per the provisions of section 72(1) of the Act, the unabsorbed business loss can be carry-forward to subsequent assessment years and can be set-of against the business income only. Thus, the appellant cannot be allowed to set-off the brought forward business loss of Rs. 15,72,530/ – against the capital gains income or income from other sources, of the assessment year under consideration. The assessing officer is directed accordingly.”
3.1 Before us, the Ld. counsel for the assessee submitted that the brought forward loss of Rs.15,72,530/ – is actually brought forward capital loss and not brought forward business loss as noted by the Ld. CIT(A) and therefore, the finding of the Ld. CIT(A) is erroneous.
3.2 In our opinion, the sole dispute is for the characterization of the loss of Rs.15,72,530/ -. The Ld. CIT(A) has considered the said amount as brought forward business loss whereas, the assessee is claiming the same to be brought forward capital loss. If the claim of the assessee is correct, then assessee is eligible for set off of the brought forward loss of Rs.15,72,530/ – against the current years capital gain as per the provisions of section 74 of the Act. For ready reference said provision is reproduced as under:
“Section 74 in The Income Tax Act, 1961
74. [ Losses under the head “Capital gains”.
(1) Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and-
(a)in so far as such loss relates to a short-term capital asset, it shall be set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other capital asset;
(b)in so far as such loss relates to a long-term capital asset, it shall be set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other capital asset not being a short-term capital asset;
(c)if the loss cannot be wholly so set off, the amount of loss not so set off
shall be carried forward to the following assessment year and so on.]
(2)[ No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.]
(3) omitted by Act 20 of 2002, Section 29 (w.e.f. 1.4.2003).]
3.3 In view of the above facts and circumstances, we restore this issue back to the file of the Assessing Officer for verification whether the brought forward loss of Rs.15,72,530/ – is in the nature of brought forward capital loss and if so then claim of the assessee shall be allowed in accordance with law. The ground of the appeal of the assessee is allowed for statistical purposes.
4. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 30/08/2024.
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