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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of CIT(A)-2, Thane, dated 28.01.2016 relating to assessment year 2011-12 against order passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:-
ITA No.662/PUN/2016 2 M/s. Vardhan Nutritions & Chemicals Pvt. Ltd.
The Ld. CIT (A) has completed the assessment without considering the facts & circumstances of the case, which is contrary to law and is against the principles of natural justice. 2. The Ld. CIT (A) has erred in facts and in law while denying the appellant's claim of set off of current year's business loss of Rs.15,265/- against Short Term Capital Gains as per the provisions of Sec. 72(1) of the IT Act. 3. The Ld. CIT (A) has erred in facts and in law while rejecting the appellant's claim of set off of accumulated depreciation of Rs.17,37,830/- and brought forward business loss of Rs.8,65,154/- against the current year's Short Term Capital Gains of Rs.1,00,85,754/- 4. The Ld. CIT (A) ought to have appreciated that short term capital gains arising on sale of business assets, even though offered to tax as short term capital gains, is in essence business income only and therefore eligible for set - off. 5. The Ld. CIT (A) has erred in relying upon certain judicial pronouncements which are inapplicable, not relevant or clearly distinguishable. 6. The Ld. CIT (A) has erred in raising fresh issue of quantification of business loss for the earlier years, which is not disputed by the Ld. AO during the course of current year's assessment u/s. 143(3). 7. The appellant craves leave to add, alter, modify, amend or substitute all or any of the above grounds of appeal. RELIEF CLAIMED 1. The appellant be allowed to set off Current Year Business Loss aggregating to Rs.15,265/-. 2. The appellant be allowed to set off Accumulated Depreciation aggregating to Rs.17,37,830/-. 3. The appellant be allowed to set off Carried Forward Business Loss aggregating to Rs.8,65,154/-.
The issue which is raised in the present appeal filed by assessee is against claim of set off of current year’s business loss of ₹ 15,265/- and brought forward depreciation loss of ₹ 17,37,830/- and brought forward business loss of ₹ 8,65,154/- against current year’s short term capital gain arising on sale of business asset i.e. party hall.
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The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in present appeal is squarely covered in favour of assessee.
The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below.
We have heard the rival contentions and perused the record. The assessee during the year under consideration had filed return of income declaring total income of 83,32,660/-. The case of assessee was picked up for scrutiny. The Assessing Officer noted that assessee had shown short term capital gain of ₹ 1,00,85,753/-, against which it has set off brought forward depreciation loss of ₹ 17,53,095/-. The Assessing Officer noted that business losses of earlier year could not be set off against capital gain as per section 72 of the Act and hence, the same was added. The assessee went in appeal before the CIT(A) and raised the issue of claim of depreciation of ₹ 17,37,830/- and brought forward business loss of ₹ 8,65,154/- and set off of current year’s business loss of ₹ 15,265/-. The assessee claimed that in addition to depreciation loss, it had also available carried forward business loss of ₹ 8,65,154/-. However, this set off of said carried forward business loss was not claimed against short term capital gain arising from sale of business asset in the return of income. He thus, raised this issue for the first time before the CIT(A). The case of assessee before us is that the issue of set off of brought forward losses against deemed short term capital gains arising on sale of depreciable asset, where the assets have been held for a period to which long
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term capital gain would apply. The learned Authorized Representative for the assessee in this regard has placed reliance on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Ace Builders Pvt. Ltd. (2006) 281 ITR 210 (Bom) and CIT Vs. Parrys (Eastern) Pvt. Ltd. reported in 238 taxmann 14 (Bom). He further placed reliance on the ratio laid down by the Pune Bench of Tribunal in DCIT Vs. M/s. Demech Heavy Equipments Pvt. Ltd. in ITA No.1377/PN/2014, along with CO No.16/PN/2016, relating to assessment year 2006-07, vide order dated 13.05.2016.
We find that the Tribunal in DCIT Vs. M/s. Demech Heavy Equipments Pvt. Ltd. (supra) relying on the decision of Hon’ble Bombay High Court in CIT Vs. Ace Builders Pvt. Ltd. (supra) and also referring to the decision in CIT Vs. Parrys (Eastern) Pvt. Ltd. (supra), had held as under:- “17. Even on merit we find the issue has to be decided in favour of the assessee. We find the Hon’ble Bombay High Court in the case of Ace Builders Pvt. Ltd. reported in 281 ITR 210 has held that there was nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary this section makes it explicitly clear that the deeming fiction created in sub-section (1) and (2) is restricted only to the mode of computation of capital gains contained in section 48 and 49. The legal fiction is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset. Section 50 does not convert a long-term capital asset into a short-term capital asset. Though section 50 was enacted with the object of denying multiple benefits to owners of depreciable assets, yet that restriction was limited to the computation of capital gains and not the exemption provisions. Thus, the Hon’ble High Court held that exemption under section 54E cannot be denied to the assessee on account of the fiction created in section 50. The relevant observation of the Hon’ble High Court from para 22 to 26 read as under : “22. Under the machinery sections the capital gains are computed by deducting from the consideration received on transfer of a capital asset, the cost of acquisition, the cost of improvement and the expenditure incurred in connection with the transfer. The meaning of the expressions “cost of improvement” and “cost of acquisition” used in sections 48 and 49 are given in section 55. As the depreciable capital assets have also availed of depreciation allowance under section 32, section 50 provides for a special procedure for computation of capital gains in the case of depreciable assets. Section 50(1) deals with the cases where any block of depreciable assets does not cease to exist on account of transfer and section 50(2) deals with cases where the block
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of depreciable assets ceases to exist in that block on account of transfer during the previous year. In the present case, on transfer of a depreciable capital asset the entire block of assets has ceased to exist and, therefore, section 50(2) is attracted. The effect of section 50(2) is that where the consideration received on transfer of all the depreciable assets in the block exceeds the written down value of the block, then the excess is taxable as a deemed short-term capital gains. In other words, even though the entire block of assets transferred are long-term capital assets and the consideration received on such transfer exceeds the written down value, the said excess is liable to be treated as capital gain arising out of a short-term capital asset and taxed accordingly. 23. The question required to be considered in the present case is, whether the deeming fiction created under section 50 is restricted to section 50 only or is it applicable to section 54E of the Income-tax Act as well ? In other words, the question is, where the long-term capital gain arises on transfer of a depreciable long-term capital asset, whether the assessee can be denied exemption under section 54E merely because, section 50 provides that the computation of such capital gains should be done as if arising from the transfer of short-term capital asset? 24. Section 54E of the Income-tax Act grants exemption from payment of capital gains tax, where the whole or part of the net consideration received from the transfer of a long-term capital asset is invested or deposited in a specified asset within a period of six months after the date of such transfer. In the present case it is not in dispute that the assessee fulfils all the conditions set out in section 54E to avail of the exemption, but the exemption is sought to be denied in view of fiction created under section 50. 25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the apex court in the case of State Bank of India v. D. Hanumantha Rao reported in [1998] 6 SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to July 19, 1969. The respondent therein who had joined the bank on July 1, 1972, claimed extension of service because he was deemed to be appointed in the bank with effect from October 26, 1965, for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the apex court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion, that the fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section
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54E specifically provides that where capital gain arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under section 54E of the Income-tax Act cannot be denied to the assessee on account of the fiction created in section 50. 26. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long-term capital asset has availed of depreciation, then the capital gain has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50. The contention of the Revenue that by amendment to section 50 the longterm capital asset has been converted into a short-term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as shortterm capital asset. Therefore, it cannot be said that section 50 converts a long-term capital asset into a short-term capital asset.” 18. We find following the above decision, the Hon’ble Bombay High Court in the case of Parrys (Eastern) Pvt. Ltd. has held that where deemed short term capital gain arose on account of sale of depreciable assets that was held for a period to which the long term capital gain would apply, said gain would be set off against brought forward long term capital losses and unabsorbed depreciation. Since the Hon’ble High Court has already held that provisions of section 50 makes it explicitly clear that the deemed fiction created in sub- section (1) and (2) is restricted only to the mode of computation of capital gains contained in section 48 and 49 and that the legal fiction is to deem the capital gain as short term capital gain and not to deem the asset as short term capital asset and accordingly has held that the exemption u/s.54E could not be denied to the assessee on account of the deeming fiction created in section 50, therefore, in view of the above ratio laid down by the Hon’ble High Court the decision of the Bangalore Special Bench of the Tribunal is not applicable to the facts of the present case. The assessee in our opinion is entitled to set off the brought forward business loss from the deemed short term capital gain. Therefore, the order of the CIT(A) is upheld and the ground rasied by the revenue is dismissed.”
In the facts of present case, the issue raised is with regard to computation of short term capital gains and its adjustment against brought forward depreciation loss and / or business loss. The said short term capital gain arises on sale of business assets on which the assessee was claiming depreciation and in view of section 50 of the Act, the gain was held to be
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deemed short term capital gain, though the assessee was holding the asset for long time and had fulfilled the conditions of long term capital gain. The learned Authorized Representative for the assessee also placed reliance on the decision of Mumbai Bench of Tribunal in Digital Electronics Ltd. Vs. Addl.CIT (2011) 16 taxmann.com 316 (Mumbai) and pointed out that the issue was decided in favour of assessee, which was followed in M/s. Hickson & Dadajee Pvt. Ltd. Vs. ACIT in ITA No.5882/Mum/2012, relating to assessment year 2009-10, order dated 28.02.2014 and the said decision of Tribunal has been approved by the Hon’ble Bombay High Court in CIT Vs. M/s. Hickson & Dadajee Pvt. Ltd. in Income Tax Appeal No.1493 of 2014, judgment dated 28.02.2017. Since the issue has been settled by the Hon’ble Bombay High Court, we find no merit in the order of CIT(A) in relying on another decision of Mumbai Bench of Tribunal and holding the issue to be against the assessee.
Another aspect which needs to be addressed is against the order of Assessing Officer in holding that since the assessee was not carrying on any business or profession during the year under consideration, he was not entitled to claim the benefit of set off of unabsorbed depreciation during the year under consideration. In this regard, the learned Authorized Representative for the assessee placed reliance on the decision of Hon'ble Supreme Court in CIT Vs. Virmani Industries (P.) Ltd. (1995) 83 Taxman 343 (SC), wherein it was held as under:- “18. Yet another question which has to be answered before we can answer the question concerned in this appeal is whether it is necessary that in the following year the assessee must carry on business, i.e., some or other business, to avail of the benefit of the said sub-section? Two views are possible in this behalf, viz., (1) since the sub-section speaks of unabsorbed depreciation being carried forward to the next year and "added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance" the sub-section necessarily contemplates existence of a business in the following year and (2) inasmuch as the sub-section not only
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speaks of adding the unabsorbed depreciation to the depreciation allowance allowed in the following year but also says that in the absence of such allowance, the carried forward depreciation allowance shall be the allowance for that year, it means that in the following year the assessee need not carry on any business or profession for availing the benefit of sub-section (2) of Section 32. We are inclined to adopt the second of the above two views having regard to the decisions of this Court in Jaipuria China Clay Mines (P) Limited and Rajapalayam Mills Limited. We have extracted the relevant observations from both the judgments hereinabove, which say that the unabsorbed depreciation allowance has not only to be set off against other heads of income in the relevant previous year but where it is carried forward, it "stands on exactly the same footing as the current depreciation".
In other words, we hold that unabsorbed depreciation which has been carried forward from preceding year is to be set off against the income shown by assessee under the head ‘short term capital gain’ under section 50 of the Act.
Now, coming to the second claim of assessee i.e. set off of adjustment on account of brought forward business loss of ₹ 8,65,154/- which was not claimed in the return of income. In this regard, the learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom), wherein it has been held that any claim can be made before appellate authorities, which need to be adjudicated while determining income of assessee. We find merit in the plea of assessee in this regard and hold that business loss carried forward from earlier year of ₹ 8,65,154/- needs to be adjusted against income assessed under the head ‘short term capital gain’ under section 50 of the Act. Similarly, current year business loss is to be set off against the said income. Accordingly, we allow the claim of assessee. The Assessing Officer is directed to allow the claim of brought forward losses after verification from the record after affording
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reasonable opportunity of hearing to the assessee. The grounds of appeal raised by the assessee are thus, allowed.
In the result, the appeal of assessee is allowed.
Order pronounced on this 15th day of October, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 15th October, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; 3. आयकर आयुक्त(अऩीऱ) / The CIT(A)-2, Thane; 4. The Pr.CIT-2, Thane; ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “ए” / DR 5. ‘A’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune