2025 (6) TMI 71 - AT - Income Tax

Adjustments made u/s 143(1) - set off of business losses against short term capital gain - assessee has contended the issue of set off of brought forward business losses against the short term capital gain from sale of assets used for business is a debatable issue and therefore such prima-facie adjustments cannot be made in the returns processed u/s.143(1)(a) HELD THAT - We fail to find any merit in such contention of ld. Counsel for the assessee for the reason that there are numerous cases where due to interpretation by the Hon ble Courts divergent views on same issue are available along with change of facts. It is not possible for the CPC to give command for each and every type of such debatable issues in the computer system to prevent the prima-facie adjustments. Returns processed by CPC are governed by the provisions of section 143(1)(a) of the Act and in case there is any issue and the assessee is aggrieved with the adjustments made by CPC then the assessee is not left remediless as the option is very much available to the assessee to file appeal before CIT(A) and raise relevant grounds. In case income assessed u/s.143(3) of the Act then the assessee has proper opportunity to make submissions before Assessing Authority and the issue can be decided by the Assessing Authority as per the judicial precedents. In view thereof the ground No.3 raised by the assessee is dismissed. Assessee s claim of setting off of brought forward business losses against the short term capital gain from sale of business asset - There are no specific provisions under the Act which clearly provides that the short term capital gains assessable u/s.50 of the Act can be set off against the brought forward business losses because if claim of assessee is considered then the question will arise whether short term capital loss u/s.50 of the Act can be set off against the business income. It will further question the intent of section 50 of the Act which deals with the special provisions for computation of capital gains in case of depreciable assets. Question will also arise about section 71(3) of the Act which provided that if the net result of the computation under the head capital gain 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 the income under the other head. Thus we deem it proper to remit back this issue to the file of Jurisdictional Assessing Officer before whom assessee shall file requisite details. Jurisdictional Assessing Officer is directed to dispose of the issue in light of our directions and in accordance with law after affording reasonable opportunity of hearing to the assessee. Ground No.4 raised by the assessee is allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to: (i) the validity of adjustments made under section 143(1) of the Income-tax Act, 1961 ('the Act'), particularly whether such adjustments can be made without prior intimation as mandated by the first proviso to section 143(1); (ii) the permissibility of disallowance under section 36(1)(va) for delayed deposit of employees' contributions to PF/ESIC within the scope of adjustments under section 143(1); (iii) the correctness of disallowing set off of brought forward business losses against short term capital gains arising from sale of depreciable business assets under section 143(1); and (iv) the substantive legal entitlement of the assessee to set off brought forward business losses against short term capital gains from sale of business assets, in light of judicial precedents.

The first two issues concerning procedural compliance and the debatable nature of disallowance under section 36(1)(va) were not pressed by the appellant and thus dismissed as not pressed. The Tribunal's detailed analysis focuses primarily on the third and fourth issues related to the set off of brought forward business losses against short term capital gains arising from sale of depreciable business assets.

Regarding the third issue, the Tribunal examined the scope of permissible adjustments under section 143(1) of the Act. The income-tax return filed by the assessee declared a short term capital gain of Rs.94,03,288/- from the sale of depreciable business assets, computed under section 50 of the Act. The assessee claimed set off of brought forward business losses against this gain. The Tribunal noted that section 72(1)(i) permits set off of brought forward business losses only against profits and gains from business or profession assessable in the relevant year. The short term capital gain in question, though arising from sale of business assets, is classified under the head 'Capital Gains' and not 'Business Income'. The Tribunal further observed that the income-tax return form and the Central Processing Centre (CPC) processing system do not provide a mechanism to set off brought forward business losses against short term capital gains, particularly gains computed under section 50. The CPC processes returns automatically based on prescribed software commands and does not account for such debatable issues.

The Tribunal rejected the appellant's contention that the issue was debatable and thus such adjustment was impermissible under section 143(1), reasoning that numerous issues may be debatable, but the CPC cannot be programmed to accommodate every such exception. The Tribunal emphasized that the assessee has recourse to appeal before the Commissioner of Income Tax (Appeals) or to file objections if aggrieved by such adjustments, and in case of assessment under section 143(3), there is an opportunity for detailed adjudication. Hence, the Tribunal dismissed this ground.

On the fourth issue concerning the substantive entitlement to set off brought forward business losses against short term capital gains from sale of depreciable business assets, the assessee relied on two High Court decisions: (i) the Hon'ble Jurisdictional Bombay High Court in PCIT v. Alcon Developers, and (ii) the Hon'ble Karnataka High Court in Nandi Steels Ltd. v. ACIT. The Tribunal noted that the appellant had relied on the Bombay High Court decision before the Commissioner (Appeals), but the latter had not addressed this precedent in the appellate order. The Karnataka High Court decision was not relied upon before the Commissioner (Appeals).

The Tribunal distinguished the facts of the Alcon Developers case, which involved revisionary proceedings under section 263 of the Act and the question whether the Assessing Officer had taken a permissible view, whereas the present case concerns a return processed under section 143(1)(a). The Tribunal also highlighted the absence of any explicit provision in the Act allowing set off of short term capital gains computed under section 50 against brought forward business losses. It pointed out that such a claim raises interpretative questions, including whether short term capital losses under section 50 can be set off against business income, and the intent of section 50 which provides special computation rules for capital gains on depreciable assets.

The Tribunal further referred to section 71(3) of the Act, which restricts set off of capital losses against income under other heads, underscoring the legislative intent to segregate capital gains and business income for loss set off purposes. Given these complexities and the divergent judicial views, the Tribunal found it appropriate to remit the issue to the jurisdictional Assessing Officer for fresh adjudication after affording the assessee a reasonable opportunity of hearing and upon filing requisite details.

The Tribunal thus allowed the fourth ground for statistical purposes, directing the Assessing Officer to dispose of the issue in accordance with law and the directions given. The remaining grounds were either dismissed or not pressed, and the appeal was partly allowed for statistical purposes.

Significant holdings include the Tribunal's affirmation that adjustments made under section 143(1) of the Act by the CPC are governed by the prescribed automated processing system and that debatable issues may not be accommodated at this stage, with remedies available through appeals or assessments under section 143(3). The Tribunal emphasized that the absence of a mechanism in the return filing system and the CPC processing to allow set off of brought forward business losses against short term capital gains computed under section 50 is a practical limitation, not a legal denial of the claim.

Further, the Tribunal established that the question of set off of brought forward business losses against short term capital gains arising from sale of depreciable business assets is a complex legal issue lacking explicit statutory provision and marked by conflicting judicial interpretations. It recognized the need for detailed examination by the Assessing Officer with due opportunity to the assessee rather than a summary disallowance at the stage of return processing under section 143(1).

In conclusion, the Tribunal held:

"We deem it proper to remit back this issue to the file of Jurisdictional Assessing Officer before whom assessee shall file requisite details. Jurisdictional Assessing Officer is directed to dispose of the issue in light of our directions and in accordance with law after affording reasonable opportunity of hearing to the assessee."

This preserves the principle that substantive disputes involving complex legal questions and conflicting precedents require adjudication beyond the automated processing stage, ensuring procedural fairness and adherence to legal standards.