Loading judgment…
Facts
The assessee declared capital gains under Section 50 from the sale of depreciated assets and sought to set off unabsorbed depreciation and brought forward business losses against it, resulting in 'Nil' taxable income. The Central Processing Centre (CPC) initially determined a higher income and, after rectification, allowed only unabsorbed depreciation set-off, disallowing the set-off of brought forward business loss. The CIT(A) upheld this disallowance, leading to the present appeal.
Held
The Tribunal, following `Everest Kanto Cylinders Ltd.`, held that brought forward business loss cannot be set off against short-term capital gains computed under Section 50 of the Act. It clarified that Section 41(2) was inapplicable to the case, and such short-term capital loss/gain must be treated solely under the head "Capital Gains" as per Sections 70(2) and 71(3).
Key Issues
Whether brought forward business loss can be set off against short-term capital gains arising from the sale of depreciated assets under Section 50 of the Income-tax Act, and the applicability of Section 41(2) in such a scenario.
Sections Cited
250, 154, 50, 143(1), 41(2), 32(1)(i), 43(6)(c)(i), 70, 70(2), 71, 71(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI NARNDRA KUMAR BILLAIYA & SHRI ANIKESH BANERJEE
O R D E R Per Anikesh Banerjee (JM):
The instant appeal of the assesse was filed against the order of the National Faceless appeal Centre (NFAC), Delhi [in short, ‘the Ld. CIT(A)] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment Year 2021-22, date of order 25/01/2025. The impugned order emanated from the order of the CPC, Bengaluru passed under section 154, date of order 28/02/2023.
2 ITA 1508/Mum /2025 Sabeena Silk Mills 2. The assessee has taken the following grounds:- “The grounds mentioned hereunder are without prejudice to one another.
1. On the facts and in the circumstances of the case, the learned Commissioner of Income tax, National Faceless Appeal Centre (NFAC) Delhi, erred, in confirming the order of Deputy Director of Income tax, CPC, Bengaluru, under section 154 of the Act, in respect of not setting off brought forward losses for assessment years 2018/19 to 2020/21, amounting to Rs. 1,77,49,496/- particularly when, return of income for the said assessment years were filed in time.
2. On the facts and in the circumstances of the case, the said learned Commissioner of Income tax has also erred in confirming the order of the Assessing Officer in respect of not setting off the brought forward losses of Rs. 1,77,49,496/- against the short term capital gains under section 50 of the Act.
The appellant craves a leave to add, to delete or to modify any of the main grounds of appeal”
3. The brief facts of the case are that the assessee filed its return of income on 15/02/2022, declaring Rs.1,78,62,050/- as “Income from Capital Gains” on the sale of depreciated assets under section 50 of the Act. After setting off unabsorbed depreciation of Rs.1,12,554/- and brought forward business loss of Rs.1,77,49,496/- against the said capital gains, the assessee computed the total income at ‘Nil’. The CPC initially processed the return under section 143(1) and erroneously determined the total income at Rs.3,41,36,520/-. On rectification application under section 154, the intimation was modified; however, CPC allowed set-off only of unabsorbed depreciation of Rs.1,12,554/- against current year capital gains and disallowed the set-off of the brought forward business loss of Rs.1,77,49,496/-, recomputing total income at Rs.1,62,71,529/-. Against the said rectification order, the Assessing Officer maintained the disallowance of set-off of 3 ITA 1508/Mum /2025 Sabeena Silk Mills brought forward business loss without any other modification. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who upheld the rectification order. The assessee has, therefore, filed the present appeal before us.
The Ld. AR contended that the Ld. CIT(A) erred in denying the set-off of brought forward business loss of Rs.1,77,49,496/- against the current year’s capital gains arising from the sale of depreciated assets under section 50. It was submitted that the return was filed within the due date and the business loss was duly carried forward from A.Y. 2018-19 to A.Y. 2020-21. The Ld. AR placed reliance on the decision of the co-ordinate bench, ITAT Mumbai Bench “G”, in ITO v. Smart Sensors & Transducers Ltd. [104 taxmann.com 129], wherein it was held, in A.Y. 2011-12, that brought forward business loss and long-term capital loss could be set off against short-term capital gains computed under section 50 on the sale of depreciable assets. Reliance was also placed on the judgment of the Hon’ble Bombay High Court in CIT v. Manali Investments [(2013) 39 taxmann.com 4 (Bom)], wherein it was held that short-term capital gains computed on long-term depreciable assets could be set off against long-term capital losses.
The matter was listed for clarification on 01/08/2025 to ascertain the applicability of the order of the co-ordinate bench in Everest Kanto Cylinders Ltd., pronounced on 20/01/2025. The Ld. AR submitted that the said decision was factually distinguishable from the present case and further relied on the judgment of the Hon’ble Bombay High Court in PCIT v. Alcon Developers [(2021) 120 taxmann.com 371 (Bom)], wherein it was held that the 4 ITA 1508/Mum /2025 Sabeena Silk Mills assessee was entitled to claim set-off of brought forward business loss against capital gains arising on the sale of a business undertaking for AY 2011-12.
The Ld. DR, on the other hand, relied on the orders of the revenue authorities and referred to paragraphs 9 to 12 of the appellate order, which, inter alia, held that: “9.0 The decision even in above case was essentially rendered in the context of set-off of unabsorbed depreciation against STCG and not applicable to the facts of the case where the issue is relating to set-off of brought forward business loss against STCG. Therefore, there is no merit in the contention of the assessee that CPC erred in denying the set-off of brought forward business loss against STCG. 10. Yet another contention of the assessee is that the gains from sale of depreciated asset is treated as STCG only due to the deeming fiction in section 50. Otherwise, the gains from the sale of business asset were business income in terms of section 41(2) of the Act and therefore the brought forward loss was eligible to be set-off against the business income. The assessee relied on the decision of Madras HC in the case of M/s. Share Aids Private Ltd. 11. Section 41(2) of the Act provides that gain, to the extent not exceeding the difference between actual cost and WDV arising from sale of asset on which depreciation is claimed u/s 32(1)(i) of the Act, shall be treated as business income. This provision has only a restricted application in cases where depreciation is specifically allowed u/s 32(1)(i) ie assets used for generation or generation and distribution of power. On the other hand, section 50 is applicable on gains arising from transfer of an asset on which depreciation is allowed under any provisions of the Act. 12. In the present case, there was no claim of depreciation u/s 32(1)(i) on the asssets sold and hence the provisions of section 41(2) are inapplicable. In any case, the assessee did not make such claim in the return of income. For the sake of argument, even if it is assumed that provisions of section 41(2) are applicable, the excess receipt over the WDV
5 ITA 1508/Mum /2025 Sabeena Silk Mills still cannot be treated as business profits as per the ruling of the Apex court in the case of CIT vs Urmila Ramesh (AIR 1997 SC 1841). Therefore, reliance on the decision of M/s. Share Aids Private Ltd is wholly misplaced and without any merits. The grounds of appeal are therefore dismissed. In result, the appeal is dismissed.”
7. We have considered the rival submissions and examined the material on record. The sole issue for adjudication is whether the assessee is entitled to set-off brought forward business loss against current year’s capital gains on the sale of depreciated assets. The matter is covered by the decision of the co-ordinate bench in Everest Kanto Cylinders Ltd. (supra), wherein it was held that— “11. We have carefully considered the rival submissions and examined the documents available on record. The assessee has relied on the judgment of the Hon’ble Madras High Court in the case of Share Aids (P) Ltd. vs. ITO[124 taxmann.com 256 (Mad)], wherein it was held that when certain assets forming part of block assets, other than immovable property, are sold in the ordinary course of business before being held during the relevant previous year, the resulting loss—if the sale price is less than the written-down value— should be treated as a business loss under Section 41(2) of the Act. The assessee has argued that Section 50 of the Act, being a deeming provision, should yield to the plain language of Section 41(2), as the latter directly addresses the treatment of such losses. Reference was made to the principle that deeming provisions create a legal fiction to assume the existence of facts that do not exist in reality, as laid down in Indira Sawhney (supra). Further, as per Section 41(2) of the Act, any income arising from the sale of assets exceeding the written-down value is taxable. Similarly, if the sale consideration falls short of the written- down value, the resulting loss is also addressed under Section 41(2) of the Act.The Ld. AR also referred to the decision of the Hon’ble Supreme Court in J.H. Gotla (supra), which held that the term “income” includes “loss.” Therefore, if the sale consideration is less than the written-down value, the resultant balance (loss) should be considered under Section 41(2) of the Act. In response, the Ld. DR contended that the process of calculation is clearly outlined in Section 43(6)(c)(i) of the Act, which applies to "any block of assets," including both movable and immovable assets. It was argued that the judgment of the Hon’ble Madras High Court in Share Aids (P) Ltd(supra) is distinguishable. Paragraph 12 of the said judgment specifically noted that the loss was allowed in the context of a business 6 ITA 1508/Mum /2025 Sabeena Silk Mills closure, rendering the carry forward of loss irrelevant. Furthermore, it is emphasized that while Section 41(2) recognizes the loss, the characterization of the loss is determined under Section 50 of the Act, which treats it as a short-term capital loss (STCL).
Before proceeding to examine whether the loss on sale of asset can be considered as business loss under section 41(2), we will first examine whether the said section is applicable to assessee who is engaged in the business of manufacturing and exporting of CNG Cylinders. Section 41(2) provides3(three) conditions for the purpose of applicability of the said section. The conditions are. (a) Building, machinery, plant or furniture is owned by the assessee; (b) Depreciation is claimed under clause (i) of sub-section (1) of section 32; and (c) Building, machinery, plant or furniture was or has been used for the purposes of business Therefore, one of the conditions for applicability of section 41(2) is that the assesseeshould have claimed depreciation under section under clause (i) of subsection (1) of section 32 which reads as under – “32. (1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets. (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, not being goodwill of a business or profession, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed— (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed.” A combined reading of the provisions of section 41(2) and section 32(1)(i) makes it clear that provisions of section 41(2) are applicable only to those entities engaged in the business of generation or generation and distribution of power who claim depreciation on straight line method (SLM). In assessee's case where the depreciation is claimed on WDV method where assets are grouped as "block of assets" there is no question of applicability of section 41(2) of the Act and consequential consideration of the gain or loss on sale under the heard "profits and gains of business or profession". The impugned transaction in assessee's case where the loss has arisen from the sale of asset in the block of asset have to be considered as STCL under section 50 of the Act. The next issue raised pertains to whether the said STCL can be set off against the current year’s business income. As per the amendment to Section 70 of the Act by the Finance Act, 2002, with effect from 01.04.2003, the provisions of Section 70(2) clearly stipulate that a short-term capital loss can only be 7 ITA 1508/Mum /2025 Sabeena Silk Mills adjusted against income from other capital assets. Sub section (3) of section 71 clearly stipulates that "Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head ".
Accordingly, the adjustment of STCL against business income is not permissible. We upheld the decision of the Ld. CIT(A) in this issue. The addition amount to Rs.56,79,598/- is confirmed. In light of the above, Ground No. 2 of the assessee’s appeal fails and is dismissed.”
In view of the foregoing discussion and respectfully following the binding ratio laid down by the co-ordinate bench in Everest Kanto Cylinders Ltd. (supra), we hold that the brought forward business loss cannot be set off against short-term capital gains computed under section 50 of the Act. The provisions of section 41(2) are inapplicable to the facts of the present case, and in terms of sections 70(2) and 71(3) of the Act, such short-term capital loss/gain is to be dealt with only under the head “Capital Gains.” Accordingly, the order of the Ld. CIT(A) is upheld, and Grounds of the assessee’s appeal is dismissed.