Loading judgment…
Facts
The assessee, an individual with income from business loss, capital gains, and other sources, claimed a deduction of Rs. 1,93,000/- under Chapter VI-A. The CPC disallowed this deduction under Section 143(1)(a), and the CIT(A) upheld the disallowance, stating that business losses cannot be set off against long-term capital gains as per Section 71. The assessee contended that Section 71(2) provides an option to set off business loss against any head of income, including capital gains, to maximize Chapter VI-A benefits.
Held
The Tribunal allowed the assessee's appeal, finding no error in the assessee's tax planning. It held that Section 71(2) does not prescribe a specific sequence for setting off losses and grants the assessee the option to set off business losses against any head of income, including capital gains, to optimize deductions under Chapter VI-A. The Tribunal directed the Assessing Officer to grant the Chapter VI-A deduction as computed by the assessee.
Key Issues
Whether an assessee has the option under Section 71(2) of the Income Tax Act, 1961, to set off business losses against income from other sources and capital gains to optimize deductions under Chapter VI-A, and the validity of a disallowance made by the CPC under Section 143(1)(a).
Sections Cited
143(1), 143(1)(a), 154, 70, 71, 71(1), 71(2), 71(2A), 71(3), 71(3A), 71(4), 71A, 80A(1), 80C, 80D, 80G, 80TTA, 80U, Chapter VI-A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SMT. RENU JAUHRI
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of order dated 27/01/2025 passed by ADDL/JCIT(A)-6, Delhi for assessment year 2019-20 on following grounds of appeal : “Gr. I
1. The learned Addl./JCIT (Appeal)-6 Delhi, erred in confirming the disallowance of deduction of Rs. 1,93,000/- under chapter VI-A inspite of Bank Interest of Rs. 9,38,459/- taxed under the head 'Other Sources'.
2 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal 2. The learned AddI./JCIT (Appeal)-6 Delhi, further erred in denying the right of the appellant to first set-off of Business LOSS of Rs. 11,60,579/- with the Long Term/Short Term Capital Gains of Rs. 1,02,52,055/- of the same year in the absence of any specific sequence of set-off provided under section 71(2) of the Act.
3. The Income Tax filing system cannot hinder Taxpayer's rebate / setoff claim of the Business Loss with the Short Term / Long Term Capital Gains of the same year permitted under the substantive sec.71(2) of the Income Tax Act. 1961.
4. The appellant prays that the right of appellant to first set-off Business Loss with Long Term / Short Term Capital Gains of the same year be upheld and further be directed to allow deduction of Rs. 1,93,000/- under chapter VI-A from Bank Interest of Rs.9,38,549/- taxed under "Other Sources" Gr.II 1. The learned Addl./JCIT (Appeal)-6 Delhi, dealt upon an issue neither disputed by CPC nor by the Appellant and not appealed before her of set-off of Business Loss with Long Term/Short Term Capital Gain of the same year.
The CPC had always deducted Business Loss with Long Term/Short Term Capital Gains in the intimation passed under section 143(1) or rectification orders passed under section 154 of the Income Tax Act 1961.
The learned Addl./JCIT (Appeal)-6 Delhi, ought not to have dealt with an issue neither disputed nor appealed before her.
4. The appellant prays that appropriate Order be passed, deleting all those portions of the order of the Addl./JCIT (Appeal)-6 Delhi, denying set-off of Business Loss with Long Term/Short Term Capital Gain of the same year under sec.71(2) of the Income Tax Act 1961. Gr. III The appellant craves leave to add, modify, or delete any grounds of appeal.” Brief facts of the case are as under:
2. The assessee is an individual deriving Income/loss from Business, Capital gain and income from other sources. The Return of income was filed on 25/10/2019 declaring total taxable 3 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal income at Rs.98,36,940. The total Income includes loss from business of Rs. 11,60,579/- by way of derivatives, Long Term Capital gain of Rs. 1,02,45,891/-, Short Term Capital Gain of Rs. 6,164 and Income from other sources of Rs. 9,38,459/- 2.1 The CPC on e-filing portal proposed adjustment under section 143(1)(a) dated 03/01/2020 stating that the return filed by assessee contains incorrect claims under Schedule VIA and Schedule Sl. The assessee in response filed objection dated 11/01/2020 against the proposed adjustment and stated that the net taxable income of Rs. 98,36,940/- includes Income from other sources of Rs. 9,38,459/- which is entitled for deduction of Rs. 1,93,000/- claimed under chapter VIA. 2.2 The CPC ignored the objections raised by the assessee, and didn't allow the deduction of Rs. 1,93,000/- claimed under chapter VIA while passing the intimation under section 143(1) for the year under consideration. Aggrieved by the CPC intimation the assessee preferred appeal before the Ld.CIT(A).
3. Before the Ld. CIT(A) the assessee submitted that, the gross total income of Rs.1,00,29,935/- included income from other sources of Rs. 9,38,459/- the assessee claimed deduction of Rs.1,93,000/- under Chapter VIA on account of section 80C-Rs. 1,50,000/-, Section 80D-Rs. 25,000, Section 80G-Rs. 8,000 and Section 80TTA of Rs. 10,000/- totaling to Rs. 1,93,000/-. It was submitted that, as per Section 80A(1) In computing the total Income of an assessee, there shall be allowed from gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80U.
4 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal It is submitted that, the deduction under chapter VIA of Rs.1,93,000./- is thus correctly claimed by the assessee. 3.1 It was also submitted that, as per section 71(2), there is no order prescribed for set off of losses and therefore option is available with assessee to set off the derivative loss against any other head of income including the head “capital gains”. It was submitted that, the assessee thus exercised her option and set off the derivative loss with the Income under the head “Income from other sources” and Net Taxable Long term Capital Gain/Short Term Capital Gain, facilitating her to claim deduction under Chapter VI-A. 3.2 The assessee relied on the decision of Hon’ble Pune Bench of this Tribunal in case of Coated Fabrics Pvt. Ltd. Vs. JCIT reported in (2006) to 285 ITR 148 in support of this submission. The assessee also placed reliance on an old Circular No. 26(LXXVI- 3)[F. No. 4(53)-(IT)/54] dated 07/07/1955. Wherein it was prescribed how loss suffered under one head could be set off against income under any other head. 3.3 The Ld.CIT(A) after considering the submissions of the assessee observed and held as under:
Upon examining the submissions and relevant provisions of the Income Tax Act, the appellant's interpretation of Section 71(2) was found to be incorrect. While Section 71(2) allows the set-off of business losses against income from other heads, case laws and legislative intent establish that such losses cannot be set off against long-term capital gains. Notable judicial precedents, including CIT vs. Hindustan Motors Ltd. (2005) by the Calcutta High Court, CIT vs. Mahalaxmi Glass Works (P) Ltd. (2007) by the Delhi High Court, and CIT vs. Shri Ramalingam (2011) by the Madras High Court, confirm that business losses cannot be set off against long-term capital gains, as Section 71 does not permit such set-offs. The courts have relied on Section 71 of the Income Tax Act, 1961, which permits set-off of business losses against business 5 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal income, income from profession, or short-term capital gains. These judicial pronouncements have noted the rationale that long-term capital gains are taxable under a separate head of income (Capital Gains) and are subject to a different tax treatment. The courts have time and again observed that there is no specific provision in the Act allowing set-off of business losses against long-term capital gains. The hon'ble courts in these decisions have inferred that the legislative intent behind Section 71 is to restrict the set-off of business losses to specific heads of income, excluding long-term capital gains. Hence, the appellant's contention that she had the option to set off business losses against any head of income, including long-term capital gains is misplaced. The appellant's reliance on Circular No. 26(LXXVI-3) is also misplaced, as the circular pertains to scenarios where the law is ambiguous. In this case, as discussed in preceding para, the law explicitly disallows the set-off of business losses against long-term capital gains. Under Chapter VI-A, deductions are permissible only if gross total income includes income under the heads Profits and Gains of Business or Profession" or "Income from Other Sources." Section 80A(1) mandates that such deductions be computed from gross total income, excluding long-term capital gains. In this case, after setting off business losses, the appellant's gross total income comprised taxable long-term capital gains. Judicial precedents, such as CIT vs. Vegetable Products Ltd. (1973), affirm that deductions under Chapter VI-A cannot be allowed when gross total income is composed of long-term capital gains. The appellant's claim regarding CPC's software deficiency also lacks merit. The CPC operates under statutory provision's and processes returns in accordance with Section 143(1). Any adjustments made are based on explicit provisions of the law, leaving no room for discretionary interpretations by the software. In light of the above discussion, the appeal is dismissed. The denial of deductions under Chapter VI-A by CPC is upheld as per the provisions of the Income Tax Act, 1961, and judicial precedents.” Aggrieved by the order of the Ld.CIT(A) the assessee is in appeal before this Tribunal.
The Ld.AR referring to the intimation issue by the CPC submitted that, the assessee had income under the head other 6 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal sources at Rs.9,38,459/- and the business loss of Rs.11,60,579/-. It was submitted that, the assessee also had long term capital gain chargeable to tax at the rate of 20% at Rs.1,02,45,891/-. 4.1 The Ld.AR submitted that, the assessee thus set off the business loss proportionately with the income from other sources to the extent of Rs.2,48,717 and against the balance loss of Rs.9,11,826/- against long term capital gains. It is submitted that, the assessee bifurcated the loss in such manner in order to take the benefit of deduction under Chapter VIA. 4.2 The Ld.AR emphasised that, section 71(2) does not restrict the assessee from exercising the option to set off the business loss in the first instance against the income from other sources to the extent beneficial to the assessee. Referring to the said provision the Ld.AR submitted that, considering heads of income for the year under consideration against which assessee earned taxable income, sub clause 2 of section 71 is clearly applicable. 4.3 He submitted that, the expression used in sub section (2) of section 71 enable assessee to set off business loss under any other head including the head “capital gains”. He submitted that, sub section (2) of section 71 is worded in such manner by legislature that gives a choice to the assessee to set off the loss arising from any other head except capital gains and or to set off against income under the head capital gains whether relating to short term or long term asset. He emphasised that, such choice is not available to the assessee under sub section (3) as it is specifically relates to loss under the head capital gains which has to be set off against the same head.
7 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal 4.4 He thus submitted that, as per section 71(2), the assessee has an option to set off the business loss against any head of income including long term capital gains unless it is specifically prohibited. 4.5 The Ld.AR vehemently submitted that, the legislature has made its intention very clear regarding the restriction that is imposed against the set off of income against a particular head of income which further supported by the circular dated 07/07/1955. 4.6 On the contrary, the Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advance by both sides in the light of record placed before us.
In order to consider the argument advance by the Ld.AR, it is necessary to understand the language of section 71. Accordingly the same is reproduced as under :
“Set off of loss from one head against income from another. 71. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has no income under the head "Capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. (2) Where in respect of any assessment year, the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has income assessable under the head "Capital gains", such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head "Capital gains" (whether relating to short-term capital assets or any other capital assets).
8 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal (2A) Notwithstanding anything contained in sub-section (1) or sub- section (2), where in respect of any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss and the assessee has income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income. (3) 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. (3A) Notwithstanding anything contained in sub-section (1) or sub- section (2), where in respect of any assessment year, the net result of the computation under the head "Income from house property" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head. (4) Where the net result of the computation under the head "Income from house property" is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.” 5.1 On a bare reading of the above section, the heading indicates “Set off of loss from one head against the income from another”. The Ld.AR emphasised applicability of sub section 2 to the present facts of the case. On perusal of the same, it is clear that, there is no sequence prescribed therein to set off loss under a particular head of income. Sub section (2) gives option to the assessee to set off any loss, other than the loss under the head “Capital Gains”, against income under any head, including capital gains.
9 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal 5.2 Per contra we also are conscious of the restrictive nature of set off u/s. 70 of the Act. On joint reading of section 70 and section 71 it is clear that, if there is a loss from one source, it has to be set off against income under the same source first. As per the section 70 of the Act and if such loss cannot be set off then section 71 comes into operation that provide for the loss to be set off against income under in other head. Thus u/s.70 the set off is qua the source whereas u/s.71 the set off would be head wise. 5.3 In the present facts of the case as there is no business income for the year under consideration. Therefore, section 70 as no role to play. The applicable provision would be then section 71 of the Act as there is income earned by the assessee under the head, “Income from other sources & capital gains”. Sub section (1) of section 71 will not be applicable as it deals with a situation where assessee has no income under the head “Capital Gains”. In the present facts the assessee has income under the head “Capital Gains”. Coming to subsection (2) there is no rule prescribed to set off loss against income under any other head and income under the head “capital gains”. Sub clause(2) does not provide any particular mode to set off the loss that should be followed. The Ld.AR referred to decision of Hon’ble Supreme Court in case of CIT vs. Vegetable Products Ltd. To support his proposition that interpretation of the taxing statute should be construed as beneficial to the assessee. 5.4 The Ld.AR further submitted that, the section 71(2) also do not emphasis to what extent the loss is to be set off against a particular head. This further gives benefit to the assessee by reducing the profits under the head income from other sources to 10 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal the extent it can fall under a favourable slab rate and the balance to be set off against the Income under the head “Capital Gain”, thereby reducing the tax liability under the head “Capital Gains” also. 5.5 As we analyse the competition of assessee, it is noted that, it is perfect tax planning encompassed within the 4 corners of the Income tax Act. We do not find any error in such computation adopted by the assessee, as it is supported by the provisions of the statute. We also have perused the decision of Hon’ble Pune Tribunal referred by assessee before the Ld.CIT(A), on identical preposition. The Ld.AR also relied on the decision of Hon’ble Delhi Tribunal in case of Opus Reality Development Ltd. vs. ACIt in for assessment year 2009-10 vide order dated 09/06/2016, wherein similar issue was considered by following the decision of Hon’ble Pune Tribunal referred here in above. We accordingly the direct the Ld.AO to grant the deduction under Chapter VI-A as computed by the assessee. Accordingly the grounds raised by the assessee stands allowed. In the result the appeal filed by the assessee stands allowed. Order pronounced in the open court on 30/06/2025 Sd/- Sd/- (RENU JAUHRI) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 30/06/2025 Poonam Mirashi, Stenographer Copy of the order forwarded to:
11 ITA 1838/Mum/2025; A.Y. 2019-20 Priya Kapil Todarwal (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T.