SPAN MOTELS PVT LTD,KULLU vs. ITO-KULLU, KULLU

That based on facts and circumstances of the case and in law, the AddI/JCIT (A), Raipur [CIT(A)], erred in confirming the profit on sale of fixed assets of Rs.6,47,072/-credited to P&L A/C adjusted by the CPC, Bangalore in the Intimation issued u/s.143(1) for decreasing the declared loss in the return of income, by applying the provisions of section 50 of the I.T. Act, 1961 and failed to consider the fact that the provisions of section 50 are not applicable to the profit on sale of assets computed under the Company's Act and credited to P&L A/C, thus the assess-appellant prays that the profit on sale of assets of Rs.6,47,072/-credited to P&L A/C, may kindly be held as being capital in nature can not be a part of loss declared in the return of income computed under the I.T. Act, 1961. 2. That without prejudice the grounds of appeal no.1 raised above, it is requested to allow the benefit of profit on sale of fixed assets of Rs.6,47,072/- credited to P&L A/C not being revenue in nature adjusted by CPC, Bangalore and confirmed by CIT[A] for decreasing the declared loss in the return of income.

That the assessee-appellant craves leave to amend, add, delete, replace, all or any of the grounds of appeal either during the course of hearing or at any time before hearing of this appeal.

Briefly the facts of the case are that the assessee, Span Motels Pvt. Ltd., filed its return of income for A.Y. 2019–20 declaring a business loss of Rs. 2,13,69,481/-. The return was processed under section 143(1), wherein an adjustment of Rs. 6,47,072/- was made by the CPC, Bengaluru by treating the profit on sale of fixed assets as capital gains instead of business loss, thereby reducing the loss eligible for carry forward.

1 The assessee had credited profit on sale of fixed assets amounting to Rs. 6,47,072/- to its Profit & Loss Account and, considering the same as capital in nature, reduced it while computing business loss. However, CPC treated the said amount as taxable under the head “Capital Gains” and not allowable for adjustment against business loss.

The CPC, while processing the return under section 143(1), observed that the profit arising from sale of fixed assets forms part of capital gains as per the provisions of section 50 of the Act. Accordingly, the said profit cannot be treated as part of business loss nor can it be reduced from the loss declared in the Profit & Loss Account.

1 Thus, the AO/CPC disallowed the adjustment of Rs. 6,47,072/- from the business loss and recomputed the loss at a reduced figure for carry forward purposes.

Being aggrieved, the assessee preferred an appeal before the CIT(A).

1 The CIT(A), after considering the submissions of the assessee, held that the issue is governed by section 50 of the Income Tax Act, which specifically provides that profit arising on sale of depreciable assets forming part of a block shall be treated as short- term capital gains.

2 It was observed that such capital gains cannot be merged with business income or loss and cannot be adjusted against business loss for the purpose of carry forward. The CIT(A) further held that the contention of the assessee that such income should be treated as exempt or reduced from business loss is not tenable in law.

3 Accordingly, the CIT(A) upheld the action of the CPC in disallowing the adjustment of Rs. 6,47,072/- and dismissed the appeal of the assessee.

Against the order of the Ld. CIT(A) the assessee preferred in appeal before the Tribunal.

During the course of hearing the Ld. AR submitted that the profit on sale of fixed assets amounting to Rs. 6,47,072/- is capital in nature and was rightly reduced from the business loss while computing income. It was contended that the said amount was credited to the Profit & Loss Account and, being capital in nature, does not form part of taxable income under the head business.

1 The Ld. AR further argued that the omission to disclose the same under the schedule of exempt income was merely a clerical error and should not disentitle the assessee from claiming the correct computation of loss. It was also contended that the provisions of section 50 were wrongly applied and that such profit, being capital in nature, should not be considered for reducing the business loss.

2 Before the Tribunal, the assessee additionally contended that the provisions of section 50 are not applicable in the manner applied by the lower authorities and that the profit credited to the P&L account should not be used to reduce the loss declared in the return.

Per contra, the Ld. DR relied upon the orders of the lower authorities and submitted that section 50 clearly provides a special mechanism for taxation of profit arising from sale of depreciable assets, deeming such profit as short-term capital gains.

1 It was argued that once the statute mandates taxation under the head “Capital Gains”, the same cannot be treated as part of business income or loss. The DR further submitted that capital gains and business income are distinct heads of income and cannot be intermingled unless specifically permitted under the Act.

2 Accordingly, the adjustment made by the CPC and confirmed by the CIT(A) was in accordance with law and requires no interference.

We have heard the rival submissions and perused the material on record. The sole issue for consideration is whether the profit on sale of fixed assets amounting to Rs. 6,47,072/- can be reduced from the business loss declared by the assessee or is liable to be taxed separately under the head “Capital Gains” in terms of section 50 of the Act.

1 It is not in dispute that the assets sold formed part of a block of depreciable assets. As per section 50, any gain arising from transfer of such assets is deemed to be short-term capital gains. Thus, the nature of such income is statutorily fixed and cannot be altered by the accounting treatment adopted by the assessee.

2 The contention of the assessee that the said amount, being capital in nature, should be reduced from business loss is untenable. Once taxed under the head “Capital Gains”, it cannot be adjusted against business loss for computing carry forward losses, as the heads of income are distinct.

3

In the result, the appeal of the assessee is dismissed.

""थ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"ीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File