Madras HC Allows Set-Off of Business Loss Against Section 50 STCG from depreciable business assets

Bojaraj Textile Mills Ltd Vs ACIT (Madras High Court)

Madras High Court has ruled in favor of Bojaraj Textile Mills Ltd., affirming that short-term capital gains (STCG) arising from the sale of depreciable business assets can be set off against brought forward business losses. The court’s decision was made by answering three substantial questions of law, concluding that the Income Tax Appellate Tribunal (ITAT) was incorrect in its previous stance.

The core of the dispute was a reassessment proceeding initiated against the assessee for allegedly setting off business losses incorrectly. The ITAT had initially decided against the assessee, justifying its position on different grounds. The Madras High Court, however, ultimately relied on a detailed judgment from the Bombay High Court in the case of Commissioner of Income Tax-III, Mumbai vs. Galiakot Containers Pvt. Ltd., Mumbai. This judicial precedent was central to the Madras High Court’s conclusion.

In the Galiakot Containers case, the Bombay High Court examined a similar situation where the assessee had sold a block of assets, including buildings, factory buildings, and machinery, resulting in short-term capital gains. The assessee had attempted to set off brought forward business losses against these gains. The Assessing Officer and the Commissioner of Income Tax (Appeals) had initially disallowed this set-off, arguing that capital gains could not be offset against business income under Section 72 of the Income Tax Act.