SCARLETT DESIGNS PVT. LTD.,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-8(1),, AHMEDABAD

PER Ms. MADHUMITA ROY - JM:

Both the appeals filed by the assessee are against the common order dated 19.08.2015 passed by the Commissioner of Income Tax (Appeals)-8, Ahmedabad under section 250(6) of the Income Tax Act, 1961 (in short ‘the Act’) arising out of the order dated 12.09.2014 passed by the ITO, Ward – 8(1), Ahmedabad under section 154 of the Act for the Assessment Years 2010-11 & 2011-12.

Since both the appeals relate to the same assessee, these are heard analogously and are being disposed of by a common order.

- 2 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12 ITA No.2839/Ahd/2015 for A.Y. 2010-11:

The said return was processed u/s 143(1) of the Act by CPC, Banglore on 15.03.2011 with the following modified computation of income: Profit & Gains from Business or Profession (-) 21,93,102/- Short Term Capital Gain 15,55,609/- Long Term Capital Loss (-) 30,586/- Gross Total Income (-) 6,68,079/- Less : Losses allowed to be carried forward 6,68,079/- Total Income Nil____

The CPC, Banglore, allowed to carry-forward following losses: 1. Unabsorbed depreciation for A.Y. 2009-10 1,79,378/- 2. Short Term Capital Loss for A.Y. 2009-10 16,17,834/- 3. Business loss for A.Y. 2010-11 6,37,493/- 4. Long Term Capital Loss for A.Y. 2010-11 30,586/- Total 24,65,291/-

- 3 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12 On 01.11.2011, a rectification application u/s 154 of the Act was filed by the assessee, since not disposed off, the assessee filed a grievance before the Hon’ble CCIT (Public Grievance Cell), Ahmedabad on 17.10.2013. The grievance of the assessee is this that the CPC, Banglore has committed a gross error in modifying the returned income of the appellant by not giving set off of brought forward Short Term Capital Loss of A.Y. 2009-10 of Rs.16,17,834/- against the current year’s short term gain of Rs.15,55,609/- in terms of Provision of Section 74 of the Act, operative w.e.f. A.Y. 2003-04. It was the case of the assessee that the Short Term Capital Loss of Rs.16,17,834/- was already determined in A.Y. 2009-10 and such loss was required to be set off against Capital Gain of Rs.15,55,609/- to arrive at assessable capital gain in terms of Section 71(2) of the Act. The explanation of the assessee was not accepted by the Learned AO. According to him in terms of the provisions of section 72(1), the business loss is required to be first set off against income under other head at the first possible opportunity and only the balance business loss is required to be carry forward. He further observed that the assessee company has to set off the current year’s business loss is against the current year’s Short Term Capital Gain and then the balance business loss can be allowed to be carry forward. According to the Learned AO, the assessee company completely overlooked the condition laid down in the provisions of section 72(1) of the Act and claimed the benefit directly u/s 74 of the Act, which belongs to “Loss under the head Capital Gain”. In that view of the mater, the claim for set off of brought forward Short Term Capital Loss against the current year Short Term Capital Gain is not correct and thus the rectification application preferred by the assessee company has been dismissed keeping the computation of income made by the CPC, Bangalore by and under the order dated 15.03.2011 unchanged. In appeal, the Learned CIT(A) in turn confirmed the order passed by the Learned AO.

- 4 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12 Capital Loss against such Short Term Capital Gain which is permissible in the eye of law. For the purpose of working out income assessable under the Head Capital Gain provision of section 74 of the Act as mandated w.e.f. 01.04.2003 need to be referred wherein it has stipulated that loss relating to the Short Term Capital assets shall be set off against income “under the Head Capital Gain” in respect of any other capital asset.

The Learned Counsel appearing for the appellant also relied upon the judgment passed by the Hon’ble Chandigarh Bench, ITAT in the case of Ajay Kumar Singhania- vs-DCIT, reported in 99 Taxmann.com 335. According to the Learned Advocate the methodology of set off adopted by the assessee is absolutely justified and the same need not to be disturbed. It was further argued that the CBDT Circular No.587 dated 11.12.1990 relied by the Learned CIT(A) has no manner of application since the provision of section 74 has been amended w.e.f. 01.04.2003. Finally, reliance has been placed on the judgment passed in the matter of CIT-vs-Mahendra Co. Ltd., reported in 269 ITR 12 (Raj). On the contrary, the Learned DR relied upon the order passed by the authorities below.

We have heard the respective parties, perused the relevant materials available on record. The Learned CIT(A) relied upon the Circular Being No.587 dated 11.12.1990 where the board has advised that effect is first to be given to the provision of Section 71 i.e. where in respect of assessment year, there is income under the head, the loss, if any, under any other head for that assessment year should first be set off against it before the carry forward losses under the formal head can be set off against such income. But as argued by the Learned AR that the said Circular has lost its force since section 74 has been amended w.e.f 01.04.2003 with the provision as relied by the appellant. However the Learned CIT(A) finally observed as follows while rejecting the claim of the assessee:

“6.3 The AR has quoted the decision of Gujarat High Court In the case of CIT V. Gautam Sarabhai 129 ITR133 (Guj.). Here, it is decided that the section SOT deductions have to be worked out on the balance of capital gains after set off of

- 5 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12 carry forward losses of previous year u/s.74(1)(a)(ii). The facts of this case are totally different from the case of the appellant. Hon'ble ITAT Mumbai Bench 'E' in the case of Sumarla Appliances P, Ltd. Vs. ACIT Ward-7(2), Mumbai [2014] 48 Taxman , com 241 (Mumbai-Trib) in its order dated 11th June, 2014 decided the question "whether section 71(2) gives option to assessee to carry forward business loss separately without setting off income arising out of short term capital gain." Hon'ble ITAT decided in negative. In view of the above discussion, applicability of sections related to set off of brought forward and current year losses, CBDT circular Mo.587 dated 11/12/1999 and the decision of the Mumbai Tribunal in case of Sumaria Appliances P. Ltd. Vs. ACIT Ward-7(2), Mumbai, it is very clear that the AO (CPC Bangalore) has rightly computed the income of the appellant after rightly setting off of current year's business loss against the current year's capital gain. The following modification of carry forward of losses by CPC Bangalore are confirmed:

The Application u/s 154 has been rightly rejected by the ITO Ward 8(1) Ahmedabad, Accordingly, the AO’s order u/s 154 is confirmed. In the result, appeal is dismissed.”

By virtue of the amendment to S.74 w.e.f. 01.04.03, "ring-fencing" has been done by the Legislature qua "set-off of loss under the head "capital gains". Accordingly, loss under the head "capital gains" can be set-off against income under the head "capital gains" only. Hence, in order to determine "income assessable under the head 'capital gains'" for the purposes of S.71(2), provisions of S.74 of the Act need to be adhered to. Even S.71(2) itself uses the phrase "subject to the provision of this chapter". S.71 forms part of Chapter VI which covers S.66 to S.80 (which includes S.74). Hence, while working out "income assessable under the head 'capital gains'" for S.71(2), provisions of S.74 needs to be first complied with. Thus, whenever an assessee has "BL". "STCG" and "B/f STCL", then as per S.74. " income

- 6 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12 assessee under the head capital gains" would be worked out by setting-off "brought forward capital loss" against "Short Term Capital Gain". The resultant gain, if any, would be allowed for set-off of "BL".

But it is a fact S.74 is the only section which deals with “set-off" of loss under the head "capital gain”. There are no separate section for "set-off" and "carry forward and “set off” for losses under the head "capital gains". Thus. S.74 dealing with “set off” of losses under the head "capital gain" is a complete code in itself. Hence, loss under the said head must be first set-off against income under the said head and thereafter, the resultant gain, if any. would be available for set-off of any other losses. Thus, it cannot be said that provisions of S.71 would override the provisions of S 74.

We have also carefully considered the judgment passed by the Hon’ble Chandigarh Bench in the case of Ajay Kumar Singhania (supra). The matter therein relates to loss – set off from one head against income from another for A.Y. 2016-17. The question before the said Bench as to whether under provision of section 71 was there an option to the assessee to set off the business losses against the capital gains or was it mandatory to do so. Therefore it was held in favour of the assessee with the following observation: “6. A perusal of the above Legislative history reveals that the assessee has always been given an option to set off his losses against the income from capital gains. However, as per the provisions of sub-section (3) of section, the assessee is not allowed to set off capital loss against income under any other head. The above view is fortified by the decision of the Pune Bench of the Tribunal in “Coated Fabrics (P) ltd. v. Jt CIT [2006] 101 1TD297. 7. In view of this, we do not find any justification On the part of the lower authorities in making the impugned adjustments and, therefore, the same are set aside. The Assessing officer is directed to accept the returned income /computation of the assessee, as such. In the result, the appeal of the assessee stands allowed.”

- 7 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12 Furthermore, the judgment passed in the matter of CIT-vs-Mahendra Co. Ltd. (supra) decided the issue in favour of the assessee wherein it has been decided that set off of Short Term Capital Loss first to be worked out against Short Term Capital Gain or Long Term Capital Gain and balance against income under the other heads. In that view of the matter, we are of the opinion to allow the set off of the Short Term Capital Loss against Short Term Capital Gain as done by the assessee instead of setting off business loss against Short Term Capital Gain. The Learned Assessing Officer is further directed to accept the returned income / computation of the assessee. Hence, assessee’s appeal is allowed.

ITA No.2840/Ahd/2015 for A.Y. 2011-12:

This Order pronounced in Open Court on 01/04/2019

Sd/- Sd/- ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 01/04/2019 Priti Yadav, Sr.PS

- 8 - ITA Nos.2839 & 2840/Ahd/2015 Scarlett Designs Pvt. Ltd. vs. ITO Asst.Year –2010-11 & 2011-12

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-8 Ahmedabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad