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Facts
The assessee company, engaged in software services, filed a return for AY 2020-21 claiming a refund. The CPC made adjustments, including disallowance under Section 43B and adjustments to set off brought forward losses against capital gains. The Assessing Officer rejected the assessee's rectification application regarding the set off of brought forward loss.
Held
The CIT(A) erred in not allowing the set off of a brought forward capital loss against the current year's capital gains, erroneously treating it as a business loss. The Tribunal observed that the core dispute is the characterization of the loss. If the assessee's claim of it being a capital loss is correct, it should be allowed as per Section 74 of the Act.
Key Issues
Whether the brought forward loss of Rs.15,72,530/- is a capital loss or a business loss, and if it is a capital loss, can it be set off against capital gains.
Sections Cited
43B, 72(1), 74, 154
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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SUNIL KUMAR SINGH
This appeal by the assessee is directed against order dated 13.12.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – Pune-11 [in short ‘the Ld. CIT(A)’] for assessment year 2020-21, raising following grounds:
Valuable Technologies Pvt. Ltd Valuable Technologies Pvt. Ltd 2 ITA No. 645/MUM/2024
On the basis of facts and circumstances of the case, the Learned 1. On the basis of facts and circumstances of the case, the Learned 1. On the basis of facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals), Pune ["CIT(Appeals)"] has oner of Income Tax (Appeals), Pune ["CIT(Appeals)"] has oner of Income Tax (Appeals), Pune ["CIT(Appeals)"] has erred in not allowing the legitimate set off of long erred in not allowing the legitimate set off of long-term capital loss of term capital loss of Rs.15,72,530/- - against Long Term capital gain of Rs 2,67,73,895/ against Long Term capital gain of Rs 2,67,73,895/- presuming that the said capital loss is a Business Loss. presuming that the said capital loss is a Business Loss.
The Learned CIT(Appeals) has treated the long he Learned CIT(Appeals) has treated the long - term Capital Gain term Capital Gain of AY 20-21 which the assesse has set off against the brought forward 21 which the assesse has set off against the brought forward 21 which the assesse has set off against the brought forward Long -term capital loss of the previous years, as Business income and term capital loss of the previous years, as Business income and term capital loss of the previous years, as Business income and levied tax on such income. The CIT(Appeals) has err levied tax on such income. The CIT(Appeals) has erred on facts and in ed on facts and in law by not allowing the legitimate set off of unabsorbed capital loss of law by not allowing the legitimate set off of unabsorbed capital loss of law by not allowing the legitimate set off of unabsorbed capital loss of earlier years against the income from capital gains u/s 74 of the earlier years against the income from capital gains u/s 74 of the earlier years against the income from capital gains u/s 74 of the Income Tax Act and disallowing the same under section 72(1) of the Income Tax Act and disallowing the same under section 72(1) of the Income Tax Act and disallowing the same under section 72(1) of the Income Tax Act. Income Tax Act. 2. Briefly stated, facts of the case are that the assessee company ed, facts of the case are that the assessee company ed, facts of the case are that the assessee company was engaged in providing software services etc. For the year under was engaged in providing software services etc. For the year under was engaged in providing software services etc. For the year under consideration, the assessee filed return of income on 12.01.2021 consideration, the assessee filed return of income on 12.01.2021 consideration, the assessee filed return of income on 12.01.2021 claiming tax refund of Rs.1,08,17,078/ claiming tax refund of Rs.1,08,17,078/-. The return of income filed . The return of income filed by the assessee was processed by the Central Processing Centre, he assessee was processed by the Central Processing Centre, he assessee was processed by the Central Processing Centre, Bangalore Bangalore Bangalore (in (in (in short short short ‘CPC’) ‘CPC’) ‘CPC’) wherein wherein wherein certain certain certain adjustment adjustment adjustment to to to disallowance u/s 43B of the Income disallowance u/s 43B of the Income-tax Act, 1961 (in short ‘the tax Act, 1961 (in short ‘the Act’) as well as adjustment to set off of current year and brought Act’) as well as adjustment to set off of current year and brought Act’) as well as adjustment to set off of current year and brought forward losses to the income reported under capital gain and losses to the income reported under capital gain and losses to the income reported under capital gain and income from other sources were made. Thereafter, the Assessing income from other sources were made. Thereafter, the Assessing income from other sources were made. Thereafter, the Assessing Officer CPC passed a rectification order u/s 154 of the Act dated Officer CPC passed a rectification order u/s 154 of the Act dated Officer CPC passed a rectification order u/s 154 of the Act dated 06.07.2022 reversing the adj 06.07.2022 reversing the adjustment made u/s 43B of the Act, ustment made u/s 43B of the Act, however the assessee filed rectification application on 15.12.2022 ssessee filed rectification application on 15.12.2022 ssessee filed rectification application on 15.12.2022 seeking rectification on the adjustment of the set off of brought seeking rectification on the adjustment of the set off of brought seeking rectification on the adjustment of the set off of brought forward loss. However, same was rejected by the AO CPC and forward loss. However, same was rejected by the AO CPC and forward loss. However, same was rejected by the AO CPC and against which the assessee preferred appeal before the Ld. CIT(A). against which the assessee preferred appeal before the Ld. CIT(A). against which the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) though accepted the contention of the assessee that T(A) though accepted the contention of the assessee that T(A) though accepted the contention of the assessee that it is at liberty to choose which set off of income it wishes. However, it is at liberty to choose which set off of income it wishes. However, it is at liberty to choose which set off of income it wishes. However,
Valuable Technologies Pvt. Ltd Valuable Technologies Pvt. Ltd 3 as far as brought forward loss of Rs.15,72,530/ forward loss of Rs.15,72,530/-, is concerned, t , is concerned, tThe that it was a brought forward business business loss and Ld. CIT(A) noted that therefore, declined for adjustment of the same against the current for adjustment of the same against the current for adjustment of the same against the current years capital gain income. Aggrieved, the assessee is in appeal income. Aggrieved, the assessee is in appeal income. Aggrieved, the assessee is in appeal before the Tribunal by way of raising grounds as reproduced above. before the Tribunal by way of raising grounds as reproduced above. before the Tribunal by way of raising grounds as reproduced above.
We have heard rival submission of the parties an We have heard rival submission of the parties an We have heard rival submission of the parties and perused the relevant material on record. The fi relevant material on record. The finding of the Ld. CIT(A) rejecting nding of the Ld. CIT(A) rejecting the set off of brought forward loss of Rs.15,72,530/- is reproduced the set off of brought forward loss of Rs.15,72,530/ the set off of brought forward loss of Rs.15,72,530/ as under:
“7.2 It is however seen that the appellant has claimed a set “7.2 It is however seen that the appellant has claimed a set “7.2 It is however seen that the appellant has claimed a set-off of brought forward business brought forward business loss amounting to Rs. 15,72,530/ loss amounting to Rs. 15,72,530/- against the balance amount of current year's capital gains income against the balance amount of current year's capital gains income against the balance amount of current year's capital gains income of Rs. 1,82,90,006/ of Rs. 1,82,90,006/-. In this connection, it is seen that as per the . In this connection, it is seen that as per the provisions of section 72(1) of the Act, the unabsorbed business provisions of section 72(1) of the Act, the unabsorbed business provisions of section 72(1) of the Act, the unabsorbed business loss can be carry loss can be carry-forward to subsequent assessment years and rd to subsequent assessment years and can be set-off against the business income only. Thus, the off against the business income only. Thus, the off against the business income only. Thus, the appellant cannot be allowed to set appellant cannot be allowed to set-off the brought forward off the brought forward business loss of Rs. 15,72,530/ business loss of Rs. 15,72,530/- against the capital gains income against the capital gains income or income from other sources, of t or income from other sources, of the assessment year under he assessment year under consideration. The assessing officer is directed accordingly.” consideration. The assessing officer is directed accordingly.” consideration. The assessing officer is directed accordingly.” 3.1 Before us, the Ld. counsel for the assessee submitted that the Before us, the Ld. counsel for the assessee submitted that the Before us, the Ld. counsel for the assessee submitted that the brought forward loss of Rs.15,72,530/- is actually brought forward brought forward brought forward loss of Rs.15,72,530/ capital loss and not brought forwa and not brought forward business loss as noted by the rd business loss as noted by the Ld. CIT(A) and therefore, the finding of the Ld. CIT(A) is erroneous. Ld. CIT(A) and therefore, the finding of the Ld. CIT(A) is erroneous. Ld. CIT(A) and therefore, the finding of the Ld. CIT(A) is erroneous.
3.2 In our opinion, the sole dispute is for the characterization of In our opinion, the sole dispute is for the characterization of In our opinion, the sole dispute is for the characterization of the loss of Rs.15,72,530/ the loss of Rs.15,72,530/-. The Ld. CIT(A) has considered the said . The Ld. CIT(A) has considered the said amount as brought forward business loss forward business loss whereas, the assessee is whereas, the assessee is claiming the same to be brought forward capital loss brought forward capital loss. If the claim claiming the same to be Valuable Technologies Pvt. Ltd Valuable Technologies Pvt. Ltd 4 of the assessee is correct of the assessee is correct, then assessee is eligible for set off of the then assessee is eligible for set off of the brought forward loss of Rs.15,72,530/ brought forward loss of Rs.15,72,530/- against the current years against the current years capital gain as per the provisions of section 74 of the Act. For ready ital gain as per the provisions of section 74 of the Act. For ready ital gain as per the provisions of section 74 of the Act. For ready reference said provision is reproduced as under: reference said provision is reproduced as under:
“ “Section 74 in The Income Tax Act, 1961 74. [ Losses under the head "Capital gains". 74. [ Losses under the head "Capital gains". (1) Where in respect of any assessment year, the net result of the (1) Where in respect of any assessment year, the net result of the (1) Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss to the assessee, the computation under the head "Capital gains" is a loss to the assessee, the computation under the head "Capital gains" is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be whole loss shall, subject to the other provisions of this Chapter, be whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment carried forward to the following assessment year, and- (a)in so far as such loss relates to a short (a)in so far as such loss relates to a short-term capital asset, it shall be term capital asset, it shall be set off against income, if any, under the head "Capital gains" assessable set off against income, if any, under the head "Capital gains" assessable set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset; for that assessment year in respect of any other capital asset; for that assessment year in respect of any other capital asset; (b)in so far as such loss rela (b)in so far as such loss relates to a long-term capital asset, it shall be set term capital asset, it shall be set off against income, if any, under the head "Capital gains" assessable for off against income, if any, under the head "Capital gains" assessable for off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset not being a that assessment year in respect of any other capital asset not being a that assessment year in respect of any other capital asset not being a short-term capital asset; term capital asset; (c)if the loss cannot be wholly so (c)if the loss cannot be wholly so set off, the amount of loss not so set off set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.] shall be carried forward to the following assessment year and so on.] shall be carried forward to the following assessment year and so on.] (2)[ No loss shall be carried forward under this section for more than eight [ No loss shall be carried forward under this section for more than eight [ No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for assessment years immediately succeeding the assessment year for assessment years immediately succeeding the assessment year for which the loss was first computed.] which the loss was first computed.] (3) omitted by Act 20 of 2002, Section 29 (w.e.f. 1.4.2003).] (3) omitted by Act 20 of 2002, Section 29 (w.e.f. 1.4.2003).] (3) omitted by Act 20 of 2002, Section 29 (w.e.f. 1.4.2003).] 3.3 In view of the above facts and circumstances, we restore this e above facts and circumstances, we restore this e above facts and circumstances, we restore this issue back to the file of the Assessing Officer for verification issue back to the file of the Assessing Officer for verification issue back to the file of the Assessing Officer for verification whether the brought forward loss of Rs.15,72,530/ whether the brought forward loss of Rs.15,72,530/- is in the nature of brought forward capital loss and if so then claim of the assessee of brought forward capital loss and if so then claim of the assessee of brought forward capital loss and if so then claim of the assessee shall be allowed in accordance with law. The ground of the appeal of be allowed in accordance with law. The ground of the appeal of be allowed in accordance with law. The ground of the appeal of the assessee is allowed for statistical purposes. the assessee is allowed for statistical purposes.
Valuable Technologies Pvt. Ltd Valuable Technologies Pvt. Ltd 5 ITA No. 645/MUM/2024
In the result, the appeal of the assessee is allowed for In the result, the appeal of the assessee is allowed for In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on unced in the open Court on 30/08/2024. /08/2024.