2025 (6) TMI 1943 - HC - Income Tax

Validity of reassessment proceedings - alleged incorrect set off of business loss on a different ground viz. carry forward of unabsorbed depreciation allowance - HELD THAT - As decided in Galiakot Containers Pvt. Ltd. Mumbai 2021 (9) TMI 1577 - BOMBAY HIGH COURT Tribunal answered the first question reopening in favour of revenue and assessee has not challenged that finding. Disallowing the set off against short term capital gains by assessee of the earlier years unabsorbed depreciation and carry forward a business loss against capital gain - Section 72(1) of the Act employs the expression computation under the head profits and gains of business or profession whereas Section 72(1) (i) does not use the said expression but it says against profits and gains if any of any business or profession . Therefore what is required to be seen is whether profits and gains against which the loss is sought to be set off was part of the business activity of the assessee or business asset of the assessee. Assessee had sold block of assets i.e. buildings / development factory building plant and machinery and had shown short term capital gain plus long term capital gain by sale of immovable property. The assessee was in the business of manufacturing metal containers and the computations of gain was under a different head nevertheless the profit or gain on sale of depreciable assets to extent of recoupment of depreciation is nothing but business income in substance. The assessee is entitled to set off brought forward loss against income which has the attributes of business income even though the same is assessible to tax under head other than profit and gain from business. We find support for this view from Alcon Developers 2021 (2) TMI 284 - BOMBAY HIGH COURT and Nandi Steels Ltd. 2021 (3) TMI 737 - KARNATAKA HIGH COURT Decided in favour of assessee.

Summary

Three substantial questions of law were framed for consideration: (1) Whether the Appellate Tribunal was justified in upholding reassessment proceedings initiated on a ground different from that originally stated, specifically regarding carry forward of unabsorbed depreciation allowance instead of incorrect set off of business loss; (2) Whether the Appellate Tribunal acted within its powers in deciding an issue not raised by the appellant (Revenue) in its grounds of appeal; and (3) Whether the Appellate Tribunal erred in not adjudicating the appellant's claim for set off of brought forward business loss against short term capital gains on depreciable business assets under Section 50, an issue previously decided in favor of the assessee by higher courts.

The core legal questions thus centered on the legality of the reassessment ground, the Tribunal's jurisdiction to decide unraised issues, and the permissibility of setting off brought forward business losses against short term capital gains arising from sale of depreciable business assets under Section 50 of the Income Tax Act.

Regarding the first two questions, the Court relied heavily on a recent authoritative decision of a Division Bench of the Bombay High Court, which dealt extensively with the third question and incidentally addressed the procedural and jurisdictional concerns. The Bombay High Court's order arose from a similar factual matrix involving reassessment proceedings initiated on grounds different from those originally recorded, and the Tribunal's consideration of issues not explicitly raised by the Revenue in its grounds of appeal.

The Bombay High Court's analysis focused primarily on the third question concerning the set off of brought forward business loss against deemed short term capital gains under Section 50. The relevant statutory provision, Section 72(1) of the Income Tax Act, was examined in detail. Section 72(1) permits the set off of business losses carried forward from previous years against profits and gains of any business or profession in the relevant assessment year. The Court emphasized the distinction between the "computation under the head profits and gains of business or profession" and the "profits and gains, if any, of any business or profession" against which losses may be set off.

The Court noted that the assessee had sold a block of depreciable business assets including buildings, factory infrastructure, and plant and machinery, resulting in short term capital gains assessed under Section 50. Although the gains were assessed under the head "Capital Gains," the Court reasoned that the true nature and character of such gains, to the extent they represented recoupment of depreciation previously allowed, was business income in substance. Therefore, the profits or gains arising from sale of depreciable business assets should be regarded as part of the business activity, albeit assessed under a different head.

The Court relied on precedents such as Principal Commissioner of Income Tax vs. Alcon Developers and Nandi Steels Ltd. vs. Assistant Commissioner of Income Tax, which supported the view that brought forward business losses can be set off against such gains. The rationale was that the substance of the income, not merely the head under which it is assessed, determines the applicability of set off provisions. The Court held that the assessee was entitled to set off brought forward business losses against income possessing the attributes of business income, even if assessed under a different head.

Applying these principles to the facts, the Tribunal's decision allowing set off of brought forward business losses against short term capital gains under Section 50 was upheld. The Court found no error in the Tribunal's reasoning or its exercise of jurisdiction in deciding the issue, even though the Revenue had not specifically raised it in its grounds of appeal. The procedural objections were thus rejected in light of the substantive correctness of the Tribunal's decision and the binding precedents.

Consequently, the Court answered the substantial questions of law in favor of the assessee, affirming the legality of the reassessment proceedings and the Tribunal's jurisdiction, and confirming the entitlement to set off brought forward business losses against deemed short term capital gains on sale of depreciable business assets.

In sum, the significant holdings include the following:

"Section 72(1) of the Income Tax Act, 1961 employs the expression 'computation under the head profits and gains of business or profession' whereas Section 72(1)(i) speaks of set off against 'profits and gains, if any, of any business or profession.' The true nature and character of income arising from sale of depreciable business assets to the extent of recoupment of depreciation is business income in substance, notwithstanding its assessment under the head Capital Gains."

"The assessee is entitled to set off brought forward business loss against income which has the attributes of business income even though the same is assessible to tax under a different head."

"The Tribunal was correct in allowing the set off of brought forward business loss under Section 72(1) against the deemed short term capital gain assessed under Section 50."

"The Appellate Tribunal acted within its powers in deciding the issue of set off, even though it was not specifically raised by the Revenue in its grounds of appeal, as the issue was squarely covered by binding judicial precedents."

These principles establish that the substance of income, rather than the head under which it is assessed, governs the permissibility of set off of business losses. The Court's final determination upheld the Tribunal's decision allowing set off of brought forward business losses against short term capital gains arising from sale of depreciable business assets, thereby favoring the assessee and dismissing the Revenue's appeal.