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Facts
The assessee, a partnership firm, declared business loss and income from other sources and long-term capital gains. The assessee opted to set off other income against business loss and carry forward unabsorbed business loss. However, the CPC adjusted business loss against capital gains. The assessee's rectification applications and appeals to CIT(A) were dismissed on procedural grounds.
Held
The Tribunal held that as per Section 71(2) of the Act, the assessee has the option to set off business losses against capital gains. The CPC's adjustment violated principles of natural justice as it was made without affording an opportunity to be heard. The Tribunal set aside the CPC's adjustment and directed to accept the assessee's original computation.
Key Issues
Whether the CPC can adjust business loss against capital gains without the assessee's explicit option to do so, and whether the assessee has discretion under Section 71(2) of the Act to set off business losses against capital gains.
Sections Cited
143(1), 154, 71(2), 71, 72
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the Addl/JCIT (A) – 2, Vadodara dated 12/12/2023 in for the assessment year 2020-21.
The facts are briefly that the assessee, a partnership firm, filed its return of income declaring a business loss of Rs. 49,02,660/-, income from other sources amounting to Rs. 2,97,768/-, and long-term capital gains of Rs. 17,22,654/- only. The assessee opted to set off the income from other sources against the business loss and carry forward the unabsorbed business loss of Rs. 46,04,890/-. The capital gains were separately offered to tax, and the assessee discharged the applicable tax liability of Rs. 3,58,312/-. However, the Centralized Processing Center (CPC), while processing the return under Section 143(1) of the Act, adjusted the business loss against the capital gains. This adjustment reduced the carry-forward business loss to Rs. 28,82,236/- while the tax liability on capital gains remained unchanged at Rs. 3,58,312/-.
Against the intimation order, the assessee filed a rectification application under section 154 of the Act which was dismissed vide order dated 03rd December 2021. The assessee filed the second rectification application under section 154 of the Act dated 22nd December 2021.
4. During the pendency of the second rectification application proceeding, the assessee also filed an appeal before the learned CIT(A) as on 11-02-2022 against the first rectification order dated 3rd December 2021.
The learned CIT(A) vide order dated 24th April 2023 dismissed the 5. appeal of the assessee as infructuous by holding that the second rectification order under section 154 of the Act was passed as on 16th February 2022.
The assessee filed further appeal before this Tribunal in ITA No. 415/Bang/2023. The Tribunal vide order dated 01st August 2023 set aside the issue to the file of the learned CIT(A) for fresh adjudication on merit.
6.1 The assessee in the set aside proceeding before the learned CIT(A) submitted that as per the provision of section 71(2) of the Act, the setting off of the business losses with income under the head capital gain are at the option of the assessee and it has exercised the option not to set-off the business losses against the capital gain. However, CPC blindly proceeded to set-off the business losses against the capital gain without affording the opportunity of being heard to the assessee.
7. However, the learned CIT(A) again dismissed the appeal of the assessee by holding that the assessee has not filed grounds of appeal therefore, the appeal cannot be adjudicated.
Being aggrieved by the order of the earned CIT(A) the assessee is in appeal before us.
The learned AR for the assessee before us argued that under Section 71(2) of the Act, the assessee has the discretion to decide whether to set off business losses against capital gains. The assessee consciously exercised this option by not setting off the business loss against capital gains in its original return of income. The AR further submitted that the CPC’s adjustment violated principles of natural justice as it was made without providing the assessee an opportunity to be heard.
On the other hand, the learned DR supported the CPC’s computation, asserting that the set-off was done in accordance with the Act.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that this is the second round of litigation before us. In the first round, this Tribunal has set aside the issue to the file of the learned CIT(A) for fresh adjudication on merit. We note the learned CIT(A) again dismissed the appeal of the assessee on procedural ground by holding that the assessee has not filed the grounds of appeal. As such the learned CIT(A) failed to adjudicate the matter on merits despite explicit directions from the Tribunal. This failure to address the substantive issues unnecessarily prolongs litigation and defeats the purpose of efficient judicial resolution. In our considered opinion tax proceedings must not only adhere to statutory provisions but also ensure substantive justice. Therefore, considering the fact stated above, the action for setting aside the issue again to the lower authorities will unnecessarily prolongs the litigation, hence we are inclined to decide the issue on merit at Tribunal level only.
11.1 Coming to the facts of the case, we note that the question before us whether the assessee has option under section 71(2) of the Act to setoff business losses against the income under the head capital gain or not, in this regard we find that the question has been answered by the coordinate bench of Chandigarh Tribunal in detailed manner in the favour of the assessee in the case of Ajay Kumar Singhania vs. DCIT reported in 99 taxmann.com 335. The detailed findings of the Chandigarh Tribunal in said case are extracted as under: 3. The brief facts of the case are that during the year under consideration, the assessee had business loss of Rs. 3,04,56,921/-, whereas, the assessee had earned short-term capital gains of Rs. 8,80,902/-. The assessee in the return of income did not set off the business loss against the short-term capital gain. However, after adjusting the capital gains of the year against the brought .
Page 5 of 8 forward short-term capital loss of Rs. 4,86,524/- and claiming deduction u/s 80 at Rs. 3,94,378/- returned the taxable income at 'nil' with carry forward business loss of Rs. 2,91,52,776/-. However, the lower authorities have adjusted the current year capital gains against the current year business loss and accordingly computed the income of the assessee.
Before us, ld. Counsel for the assessee has relied upon the provisions of section 71 of the Act as amended from time to time. He has further submitted that to arrive at the correct conclusion, provisions of section as introduced vide 1961 Act and further substituted by Finance Act 1961 w.e.f. 1.4.1962 and further substituted by Finance Act 1967 w.e.f. 1.4.1968 (as above) and further substituted by Finance Act 1987 are also relevant. 1961 - As originally enacted this section read as under:— Set off of loss from one head against income from another – 71. 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 assessable for the assessment year under any other head. Provided that where the total income includes any income assessable under the head 'capital gain', the loss computed under any other head of income, if the assessee so desires, shall not be set off against the income under the head 'Capital gains' but shall set off against his income assessable under any other head of income. 1962 - By the Finance (No.2) Act,1962 (20 of 1962) the following section was substituted for the earlier section with effect from 1 April, 1962. "71. Set off of loss from one head against income from another - (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 the 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, of the assessee assessable for that assessment year under any other head including income from Capital gains relating to the short-term capital assets as well as other capital assets or if the assessee so desires, shall be setoff only against his income, if any, assessable under any head of income other than capital gains. The effect of this was to number the earlier section as sub-section (1), with verbal changes, delete the original proviso and insert sub-section (2) 1967 - Sub-section (2) was substituted by the following sub-sections (2) and (3) by the Finance (No. 2) Act 1967 with effect from 1st April, 1968 : (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 - (i) against his income, if any, of the assessee assessable for that assessment year under any other head including income assessable under the head 'Capital gains' (whether relating to the short-term capital assets or any other capital assets); or .
Page 6 of 8 (ii) if the assessee so desires, only against his income, if any, under the head "Capital gains" insofar as such income relates to short-term capital assets, and income under any other head. Substituted by Finance Act, 1987 w.e.f. 1.4.1988 Set off of loss from one head against income from another – Where in respect of any assessment year, the net result of the computation under any head of income, is a loss, the assessee 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 the assessment year under any other head. Carry forward and set off business losses. 72. (1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, …." The relevant provisions of Section 71 of the Act as substituted by Finance Act 1991 w.e.f. 1.4.1992 are reproduced as under:- Substituted by the Finance Act (No.2), 1991 w.e.f.1.4.1992; 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); (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.
The provisions of section 72 are also relevant, which for the sake of convenience are also reproduced below:— Carry forward and set off of business losses; 72. (1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and— .
Page 7 of 8 (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ; (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on : ** ** ** 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 71, 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 ITD 297.
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.
11.2 In view of the foregoing and respectfully following the decision of Chandigarh Tribunal in identical facts and circumstances, we hold that the adjustment made by the CPC under Section 143(1) is required to be reversed, and the original computation filed by the assessee, where the business losses were carried forward as per its discretion under Section 71(2), is to be accepted. Hence, the ground of appeal filed by the assessee is hereby allowed.
In the result, the appeal of the assessee is allowed.