Brought Forward Business Loss Can Be Setoff Against Capital Gains On Sale Of Business Assets

The Hon'ble Karnataka High Court in matter of Nandi Steels Limited Vs. ACIT approved setoff of brought forward losses against capital gains on sale/transfer of business assets of the assessee under provisions of Section 72 of the Income Tax Act,1961.

FACTS

The  Nandi Steels Limited is a company engaged in the business of manufacture of iron and steel. During assessment year 2003-04, the assessee reported long-term capital gains on sale of land and building used for the purpose of business, out of which depreciation was claimed on building and assessee do not have any income from business or profession during the previous year under consideration.

The assessee while filing his return of income setoff its brought forward losses against Capital Gains due to sale/transfer of business assets and also claimed depreciation of the current year from the Capital Gains.

Though the aforesaid claim stood allowed under section 143(1), subsequently, in reassessment proceedings, the aforesaid claim of set off of carried forward business loss against capital gains was held to be inadmissible by the assessing officer under section 72 of the Act. The action of assessing officer was upheld by first appellate authority [CIT(A)].

On further appeal at the instance of the assessee, the aforesaid issue was referred by the Division Bench of the Income Tax Appellate Tribunal (Tribunal) to the Special Bench considering that the co-ordinate Bench in the case of Steelcon Industries vs ITO: ITA No.571/Bang./1989 upheld the claim following decisions of the Supreme Court in case of CIT vs Cocanada Radhaswami Bank: 57 ITR 306 (SC) and CIT vs Chugandas & Co: 55 ITR 17 (SC), despite contrary decision of the Supreme Court in case of CIT vs Express Newspapers Ltd: 53 ITR 250 (SC).

DECISION OF SPECIAL BENCH OF TRIBUNAL

The Special Bench of the Tribunal reported in 143 TTJ 521 (Bang.) succinctly held that gain or loss on transfer of capital asset, though depreciable, cannot be referred as business income and thus, brought forward business loss from earlier years cannot be set off against the income from capital gains in terms of section 72 of the Act. The Tribunal, placing reliance on the decision of Express Newspapers, decided the issue of ‘set off of brought forward business loss against income from capital gains under section 72 of the Act' in favour of the Revenue and against the assessee.

THE TRIBUNAL HELD THAT

(a) the primary contention of assessee that assets transferred had direct nexus with business carried out by the assessee and hence gains from its sale would also assume character of business income, is not acceptable;

(b) 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 assessee till it is either converted into stock-in-trade;

(c) income earned from carrying on the business by use of stock in trade only is the business income of the assessee; and

(d) section 72 of the Act provides that only business loss can be carried forward and allowed as set off against the business income of the assessee, be it from same business or any other business.

Aggrieved, the assessee preferred an appeal before the Karnataka High Court which was registered as ITA No.103/2012.

DECISION OF HIGH COURT

The Hon'ble High Court, vide order dated 23.02.2021, followed the fundamental exposition of law by the Supreme Court in case of Cocanada Radhaswami (cited supra) where it was held that business income is segregated under different heads only for the purpose of computation of total income and by such break-up the income does not cease to be income of business.

The Court, disagreeing with the Special Bench of the Tribunal, held that the assessee is entitled to set off brought forward loss against income, which has attributes of business income, even though the same is assessable to tax under a head other than ‘profits and gains from business or profession'.

The Court taking guidance from the legal maxim expression ‘unius est exclusion alterius' meaning express mention of one thing implies the exclusion of another; dealt by the Apex Court in case of GVK Industries vs ITO: 332 ITR 130 (SC) held that ‘Section 72(1) employs the expression “under the head Profits and gains of business or profession” whereas Section 72(1)(i) does not use the expression “under the head”. Thus, the “legislature has consciously left it open that any income from business though classified under any other head can still be entitled to the benefit of set off”.

In view of the aforesaid, the High Court allowed the benefit of set off of brought forward business loss against long-term capital gains on transfer of capital assets of business even though such gain was assessable under the head ‘capital gain'.

KEY TAKEAWAYS FROM ABOVE DECISION

The principle laid down by the Karnataka High Court is a welcome decision and it works as a boon for various vanishing companies ,who has assets and they cannot be setoff their brought forward losses against sale of business assets used in the business. In various court decisions it was cleared that the brought forward business loss can be setoff against Capital Gains on sale/transfer of business assets under provisions of Section 72 of the Income tax Act,1961. The Hon'ble High Court has reiterated the fundamental principle that inherent character of income is not lost simply because the same may be assessable under a different head. The decision, thus, fortifies the view taken by the Courts in CIT vs S&S Power Switchgear Ltd: 415 ITR 376 (Mad.) and Digital Electronics Ltd vs ACIT: 49 SOT 65 (Mum) upholding similar principle relying on the decision of Cocanada Radhaswami Bank (cited supra).

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