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Income Tax Appellate Tribunal, “H”, BENCH MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAM LAL NEGI&
IN THE INCOME TAX APPELLATE TRIBUNAL “H”, BENCH MUMBAI BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA No.3596/Mum/2018 (Assessment Year: 2014-15) Harbans Singh Bawa Vs. ACIT-17(1) Room No.117, 1st Floor, 410, Jolly Bhavan No.1 10, New Marine Lines Aaykar Bhawan, M.K.Road Mumbai-400 020 Mumbai-400 020 PAN/GIR No.AAAPB6894K Appellant) .. Respondent) & ITA No.4423/Mum/2018 (Assessment Year: 2016-17) Harbans Singh Bawa Vs. DCIT, CPC, Bangalore 112, Free Press House ACIT-17(1) Room No.117, 1st Floor, Nariman Point Mumbai-400 021 Aaykar Bhawan, M.K.Road Mumbai-400 020 PAN/GIR No.AAAPB6894K Appellant) .. Respondent)
Assessee by Shri S.Sriram, AR Revenue by Shri Sachchidanand Dube, DR
Date of Hearing 06/01/2020 Date of Pronouncement 10/01/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M): These two appeals filed by the assesee are directed against separate, but identical orders of the Commissioner of Income tax (Appeals)-56, Mumbai, dated 14/03/2018 and 21/05/2018 for the AY’s 2014-15 and 2016-17. Since, the facts are identical issues are
2 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa common, for the sake of convenience these appeals were heard together and disposed-off by this consolidated order.
The assessee has more or less raised common grounds of appeal for both Asst. years. Therefore, for the sake of brevity grounds of appeal filed for AY 2014-15 are reproduced as under:-
The Commissioner (Appeals) erred in partly confirming the order of the Assessing Officer regarding disallowance of set off of the unabsorbed depreciation allowance of Rs. 54;18,631/- Rs. 62,49,880 minus set off Rs, 8,31.249 against Income from House Property allowed by the CIT(A)] for the year under consideration against the income chargeable under the head 'Salary income', 2. The Commissioner (Appeals) erred in not following the decisions of the Hon’ble Tribunal in the case of Shri V. Lakshmanan vs. The IT.O. in 1TA No, 198/Mad/2010 for A.Y. 2005-06 dated 10th December, 2010, 3. The Commissioner (Appeals) failed to appreciate that the Hon'ble Tribunal relied upon the judgment of the Supreme Court in the case of CI T vs. Viramani Industries Pvt.Ltd, [(1995) 216 JTR 607 (SC), 4. The Commissioner (Appeals) failed to appreciate (hat the Hon’ble Supreme Court had drawn a distinction between business loss and unabsorbed depreciation and therefore, the limitations arc applicable to the carrying forward of business losses and do not apply to the carrying forward of unabsorbed depreciation.. 5. The order of the Commissioner (Appeals) is bad in law and without jurisdiction.
The brief facts of the case are that the assessee is an individual derives income from salaries, income from house property, income from business, income from capital gains and income from other sources. The assessee has filed his return of income for AY 2014-15 on 08/10/2014,declaring total income at Rs.93,55,670/-. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that the assessee has set off losses from the head business and profession against the income from the head salaries. Therefore, called upon the assessee to explain as to why losses from the head income from business or
3 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa profession cannot be set off against salary income, in view of specific provisions provided in section 71(2A) of the I.T.Act, 1961. In response, the assessee submitted that depreciation of business asset as specified u/s 32 of the I.T.Act, 1961 is allowable business expenditure that part of depreciation allowances that cannot be obsorbed by the profits and gains of business in the current year can be carry forward to the next year and be given a treatment at par with depreciation of the that year. However, the depreciation that year must be set off first. In this regard, he relied upon certain judicial precedents, including the decision of Hon’ble Supreme Court in the case of Virmani Industries Limited vs CIT (995) 216 ITR 607. The Ld. AO after considering relevant submissions of the assessee and also taken note of specific provisions of section 71(2A) of the I.T.Act, 1961, came to the conclusion that losses of business and profession, including depreciation cannot be set off against income from salaries and accordingly, disallowed unabsorbed depreciation of Rs.62,49,880/- and added back to the total income of the assessee. The relevant findings of the Ld. AO are as under:-
5.1 It was observed from the Assessee’s Return of Income that the assessee was setting off loss from the head “Business and profession “ against the income from the head salaries. In this regard it is pertinent to note that section 71(2A) of the Income Tax ac reads as follows: 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
4 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa
Capital gains (whether relating to short-term capital assets or any other capital assets.) (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 assesse shall not be entitled to have such loss set off against such income. 5.2 As is evident from a plain reading of the section, any loss under the head Business and Profession cannot be set off against Salary Income. When the assessee was asked to show cause as to why the set off of Business Loss against Income from Salary should not be disallowed, the Assessee submitted that he was actually setting off “unabsorbed depreciation of AY 2011-12, 2012-13, 2013-14 and 2014-15 against salary income and the same should be treated differently from Business loss. The assessee submitted a revised calculation of his income (with total income remaining the same) explaining his position. The assessee in his submission on 06/12/2016 also stated the following case laws: Veeramani industries Limited (SC): this case law does not carry merit in the assessee’s case on the following grounds-The question of law in the present case was whether the Assesee company could set off unabsorbed deprecation from one business against profits and gains from another business. The Hon’ble HC in the present case opined as follows: in computing the net income from the business, deduction is to be allowed on account of depreciation of buildings, plants and machinery, etc. used in the business at the prescribed rate. If such depreciation allowance cannot be completely absorbed by the profits and gains chargeable to tax-which expression includes profits and gains arising not only under he head business but also under other heads. Thus, it is clear that the Hon’ble court meant profits and gains. To include the income from Salaries (there is no profit and gain from salary) under this ambit and not taking into account the fags and circumstances of the case on which the judgment was pronounced is unacceptable. Also, the amendment to Section 71 to insert71(2A) (applicable from FY 2005-06) was made after this judgment and the amendment laid to rest any doubts regarding the set off of Business loss (including unabsorbed depreciaton) against salary income. 5.3 Depreciation of Business assets as specified u/s 32 of the I.T.Act, is an allowable business expenditure. That part of depreciation allowances that cannot be absorbed by the profits and gains of business in the current year can be carried forward to the next year and be given a treatment at par with depreciation of that year, however, the depreciation of the next year must be set off first, (SC Mother India Refrigeration Industries Pvt.Ltd.) section 32(2) of the Income tax Act reads as follows. Where in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub section (2) of section 72 and sub-section (3) of section 73, the allowance or the
5 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for deprecation for the following previous year and deemed to the part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.] 5.4 Hence it is clear that the section 32(2) provisions of section 72. When deprecation of business assets is an allowable deduction against profits and gains of business, leading to the calculation of taxable business income/business loss and if business loss is not allowed to be set off against the head salaries, the contention that depreciation/unabsorbed depreciation can be set off against income from salaries lacks any merit whatsoever. To make it abundantly clear the following is an extract from the FAQ is issued by the Income tax Department on its official website: In view of the above, the sum of Rs. 62,49,880/- of unabsorbed depreciation set off by the assesee against income from salaries is disallowed and the same is added back to the total income of the assessee. Penalty proceedings u/s 271(1)(c) of the I.T.Act, 1961 are initiated for concealment of income and/or for furnishing inaccurate particulars of income.
Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee reiterated its submissions made before the Ld. AO and argued that unabsorbed depreciation, if any under the head income from business can be set off against income from salaries. Therefore, it is incorrect to refer the provisions of section 71(2A) of the I.T.Act, 1961, when, the main provisions itself has provided for set off unobsrorbed depreciation against any other head of income. In this regard, he relied upon the decision of ITAT, Chennai bench, in the case of V.Lakshmanan Vs ITO in ITA.No.198/Mad/2010.
The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of provision of section 71(2A) of the I.T.Act, 1961 held that as per law, a loss under the head profits and gains of business and profession cannot be set off against income
6 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa form salaries. He, further, observed that the claim that unabsorbed depreciation is separate from profits and gains of the business and profession is wrong interpretation of law. Unabsorbed depreciation does not have separate existent in final computation of profits and gains of business and profession. Therefore, he opined that the case laws relied upon by the assessee is not applicable to the facts of the present case. He also distinguished the decision of ITAT, Chennai bench, in the case of V.Lakshmanan Vs ITO (supra). The Ld.CIT(A) has also taken support from explanatory memorandum to Finance Act, 2004, which explains the position of law as amended with effect from 01/04/2005 to section 71(2A), as per which losses under the head profits and gains of the business cannot be set off against income under the head salaries. Accordingly, he has rejected arguments of the assessee and confirmed additions made by the AO towards disallowance of losses being unobsrobed depreciation. Aggrieved by the ld.CIT(A) order, the assessee is in appeal before us.
The Ld. AR for the assessee submitted that the ld.CIT(A) was erred in confirmed the action of the Ld. AO in disallowances of set off of unabsorbed depreciation allowances against income under the head salary without appreciating the fact that the provision of section 32(2) of the I.T.Act, 1961 has not made any distinction between current year deprecation and unabsorbed depreciation. He, further, submitted that in any financial year the result of computation under the head income from business is resulted unto loss, and then the same can be set off against income from any other head of income. In this regard, he referred to provision of section 71(2A) of the I.T.Act, 1961 and argued that till 1997, there was no restriction
7 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa for carry forward and set off of unabsorbed depreciation and only in the year 1998, the provision has been amended to restrict carry forwarded of unabsorbed depreciation to eight years. Further, the said amendment has been further amended to bring back old provisions of the Act and accordingly, there is no restriction in the Act for carry forward and set off of unabsorbed depreciation. This being the case, it is incorrect on the part of the Ld. AO, as well as the Ld.CIT(A) to interpret the law by relying upon the provision of section 71(2A) of the I.T.Act, 1961, where it clearly says that losses under the head income from business and profession cannot be set off against income under the head salaries without appreciating the fact that the ITAT, Chennai bench, in the case of V.Lakshmanan vs ITO had considered the identical issue, even after amendment to section 71(2A) of the I.T.Act, 1961. He further, submitted that if at all unabsorbed depreciation is not allowed to set off against salary income, then a direction may be given to the Ld. AO to allow carry forward of such depreciation to subsequent years.
The Ld. DR, on the other hand, strongly supporting order of the Ld.CIT(A) submitted that as per the provision of the Act, the income has been classified under five heads of income as stated in section 14 of the Act. Further, section 14D defines the income under the head profits and gains of the business and profession. If you go through, provision of section 29, it clearly explain, how income from profits and gains of business and profession shall be computed as per which, the income referred to in section 28 shall be computed, in accordance with the provisions contained in section 30 to 43D of the Act. Since, depreciation allowance comes under provision of section 32, any loss arises under the head income from business and
8 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa profession cannot be set off against income under the head salaries, because the law has been amended by way of section 71(2A) of the I.T.Act,1961 to exclude loss under the head profits and gains of business or profession to be set off against income assessable under the head salaries. In this regard, he relied upon the decision of Chennai, ITAT in the case of Chandrkumar vs ACIT (2010) 5 ITR 540 and also, the decision of ITAT, Mumbai bench in case of DCIT vs Times Guaranty Limited (4 ITR 210). He has also relied upon the decision of ITAT, Mumbai bench, in the case of Nitin Chandrakant. Desai vs ACIT in ITA .No. 2877/Mum/2012.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The provisions of set off of loss from one head against income from another head have been provided in section 71 of the I.T.Act, 1961. As per section 71(2A) of the I.T.Act, 1961, 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 assesee has income assessable under the head salaries, the assessee shall not be entitled to have such loss set off against such income. From the above, it is very clear that from AY 2005-06 onwards, it is not allowed to set off loss under the head profits and gains of business or profession to income assessable under the head salaries. Further, the explanatory memorandum given to Finance Act, 2004, while amending the provision of section 71(2A) of the I.T.Act, 1961 w.e.f 01/04/2005, has categorically explained that in order to prevent abuse of the provision of set off losses, an amendment has been proposed to section 71 to provide that an
9 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa assesee shall not be entitled to set off any loss under the head profits and gains of business or profession against income under the head salaries. From the language used in provisions of section 71(2A) and the explanatory memorandum to Finance Act, 2004, it is very clear that any losses under the head income from business or profession cannot be allowed to set off against income assessable under the head salaries. Therefore, we are of the considered view that the Ld. AO, as well as the Ld.CIT(A) were right in disallowed set off of unabsorbed depreciation allowances against income under the head salaries. This legal position has been strengthened by the decision of ITAT, Mumbai in the case of DCIT vs Time Guaranty Limited (4 ITR 210), where the law has been explained, in light of provision of section 32(2) and held that losses under the head income from business or profession cannot be set off against income under the head income from other sources. Insofar as, case laws relied upon by the assesee, in the case of V. Laxmanan vs ITO in ITA No.198/Mad/2010, we find that the facts of the above case is not applicable to facts of the present case, more particularly, in light of specific provision provided under section 71(2A) of the I.T.Act, 1961 and hence, the same is hereby rejected.
In this view of the matter and respetfully following case laws considered hereinabove, including the decision of ITAT, Mumbai, in the case of DCIT vs Time Guaranty Ltd. (surpa), we are of the considered view that losses under the head income from business or profession, including unabsorbed depreciation, if any cannot be set off against income assessable under the head salaries. The Ld.CIT(A) after considering relevant facts has rightly confirmed disallowances of unabsorbed depreciation losses against income
10 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa under the head salaries and hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the assessee.
Coming back to alternate arguments of the assessee. The Ld. AR of the assesee made an alternate argument that if at all unabsorbed depreciation loss ise not allowed to be set off against salary income, and then said unabsorbed depreciation allowances may be allowed to carry forward to subsequent years. We find that there is no restriction, as per the provisions of section 72 to carry forward unabsorbed deprecation to subsequent years. Therefore, if the assessee has fulfilled conditions prescribed therein for carry forward of unabsorbed depreciation, then the ld. AO is directed to allow carry forwarded of unabsorbed deprecation to subsequent years.
In the result, appeal filed by the assessee is partly allowed.
ITA No.4423/Mum/2018:-
The assessee has raised the following grounds of appeal 1. The Commissioner (Appeals) erred in confirming the order of the Assessing (CPC) regarding disallowance of set offf balance unabsorbed depreciation allowance of Rs.5,08,529/- for the year under consideration against the income die head 'Salary income1 while making adjustment in the intimation u/s143(1). 2. The Commissioner (Appeals) erred in relying on his order for A.Y. 2014-15 against assessment u/s 143(3) in the case of appellant himself for upholding the disallowance as the facts and circumstances being identical on account of same reasons. 3. The Commissioner (Appeals) erred in not following the decisions of the Hon'ble Tribunal in case of Shri V. Lakshmanan vs. The I.T.O.in ITA No. l98/Mad/2010 for A.Y .2005-06 dated 10th December, 2010
11 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa 4. The Commissioner (Appeals) failed to appreciate that the Hon'ble Tribunal relied upon the judgment of the Supreme Court in the case of CIT vs. Virmani Industries Pvt.Ltd [(1995) 216 ITR 607 (SCJ) 5. The Commissioner (Appeals) failed to appreciate that the Hon'ble Supreme Court had drawn a distinction between business loss and unabsorbed depreciation and therefore, the limitations are applicable to the carrying forwards of business losses and do not apply to the carrying forwards of unabsorbed depreciation. 6. The Commissioner (Appeals) erred in holding that the adjustment made u/s 143(1) falls within the scope of section 143(1) 7. The order of the Commissioner (Appeals) is bad in law and without jurisdiction. 13. The facts and issues involved in this appeal is identical to the facts and issues, which we had already considered in ITA No.3596/Mum/2018 for AY 2014-15. The reasons given by us in preceding paragraphs in ITA No.3596/Mum/2018 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we reject ground taken by the assessee to challenge findings of the AO as well as the ld. CIT(A), in rejecting set off of unobsorbed depreciation against salary income. However, direct the Ld. AO to examine the provisions contained in section 72(2) & (3) of the I.T.Act, 1961 to carry forward said unabsorbed depreciation to subsequent years, if the conditions prescribed therein are fulfilled. Accordingly, appeal filed by the assessee is partly allowed.
As a result, both appeals filed by the assessee are partly allowed.
Order pronounced in the open court on this 10 /01/2020
Sd/- Sd/- (RAM LAL NEGI) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER
12 ITA Nos.3596 & 4423/Mum/2018 Harbans Singh Bawa
Mumbai; Dated: 10 /01/2020 Thirumalesh Sr.PS Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, Guard file. 6. स�यािपत �ित //True Copy// (Asstt. Registrar) ITAT, Mumbai