2016 (4) TMI 1394 - AT - Income Tax

Set off of income offered u/s.68 against the loss incurred by the assessee - AO had not allowed the set off of the income offered u/s.68 against the loss incurred in all the regular heads of income specified in Section 14 - HELD THAT - As in M/S. ERODE ANNAI SPINNING MILLS P. LTD. 2015 (11) TMI 587 - ITAT CHENNAI business loss of the assessment year under consideration could be set off against the income assessed u/s.68 under the head other sources . However the issue on hand before us in this appeal is whether unabsorbed depreciation of earlier years could be set off against deemed income u/s.69 of the Act or not which is totally different issue. Section 72 of the Act does not permit set off of accumulated losses and unabsorbed depreciation against any other head of income other than the income from profits and gains of business or profession . Being so the above order of the Tribunal has no application to the facts of the present case. Once unabsorbed depreciation is considered as part of current depreciation no doubt the net result of computation under the head Profits and gains of business or profession for any given year would be inclusive of such unabsorbed depreciation. Needless to say that any loss as a result of such computation whether on account of unabsorbed depreciation or not would not be susceptible to a set off against income under the head salaries on account of specific Bar contained in sub-s. (2A) of s. 71 of the Act. Neither s. 72 nor s. 32(2) of the Act would in any way affect the inter-head adjustments specified u/s 71 of the Act nor the application of specific bar contained in sub-s. (2A) thereof. This being the case we are of the opinion that the AO as well as the learned CIT(A) was well justified in not allowing the claim of the assessee for having its unabsorbed depreciation from earlier years to be set off against salary income. Accordingly we are of the opinion that the CIT(A) is justified in disallowing set off of unabsorbed depreciation from earlier years against income from other sources. Hence the appeal of Revenue is allowed.

Summary

Issues:
- Allowance of set off of business loss from unexplained cash credits u/s.68 of the Act
- Interpretation of Section 14, 32, and 72 of the Income Tax Act for set off of losses

Analysis:
1. Allowance of set off of business loss from unexplained cash credits u/s.68 of the Act:
The appeal was filed by the Revenue against the order of the Learned Commissioner of Income Tax(A)-1, Coimbatore, regarding the assessment year 2006-07. The Revenue contended that the order of the Ld.CIT(A) allowing set off of business loss from unexplained cash credits u/s.68 of the Act was against the law and facts of the case. The Revenue cited a jurisdictional High Court decision to support its argument, emphasizing that necessary expenditure should not be deducted when unexplained cash credits are added to income. However, the Ld.CIT(A) relied on judgments from the Madras High Court and Gujarat High Court, emphasizing that income tax is levied on the sum total of income classified under various heads, and the Act does not envisage taxing any income under a head not specified in Section 14. The Ld.CIT(A) directed the AO to allow set off of carried forward depreciation loss in accordance with Section 72 and Section 32 of the Act for the assessment year 2006-07, leading to the Revenue appealing the decision.

2. Interpretation of Section 14, 32, and 72 of the Income Tax Act for set off of losses:
The Tribunal analyzed previous judgments to determine the applicability of set off rules for losses. In a similar case, the Tribunal clarified that unabsorbed depreciation of earlier years cannot be set off against deemed income u/s.69 of the Act, as Section 72 does not permit set off of accumulated losses and unabsorbed depreciation against any other head of income except "profits and gains of business or profession." Additionally, a judgment from the Chennai Tribunal highlighted the interplay between Sections 71, 72, and 32(2) of the Act, emphasizing that unabsorbed depreciation falls under the head 'Profits and gains of business or profession.' The Tribunal concluded that the AO and the CIT(A) were justified in disallowing the set off of unabsorbed depreciation from earlier years against income from other sources. Therefore, the Revenue's appeal was allowed based on the interpretation of the relevant sections of the Income Tax Act.

In conclusion, the judgment by the Appellate Tribunal ITAT Chennai delves into the intricate details of allowing set off of business loss from unexplained cash credits and the interpretation of Sections 14, 32, and 72 of the Income Tax Act for set off of losses. The decision emphasizes the legal principles and precedents to arrive at a conclusion that aligns with the provisions of the Act and established case law.