2010 (10) TMI 722 - AT - Income Tax

ITAT Mumbai: Recomputation of Disallowance under Section 14A, Set Off of Business Losses

The ITAT Mumbai directed the AO to recompute the disallowance under section 14A in accordance with a recent Bombay High Court judgment, granting the ... Disallowance - Under s. 14A r/w r. 8D - the issue is no more res integra in view of the recent judgment dt. 12th Aug., 2010 by the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT (2010 (8) TMI 77 - BOMBAY HIGH COURT), wherein, it has been held that while r. 8D has no retrospective application, the provisions of s. 14A are applicable in such circumstances and the disallowance has to be worked out by the AO on some reasonable basis. Under such circumstance, we direct the AO to decide the quantum of disallowance as per the aforenoted judgment, after allowing a reasonable opportunity of being heard to the assessee.Set off of the brought forward business loss of earlier years of Rs. 39,85,596 against the profit realized on sale of business assets - Their Lordships held that as long as the profits and gains are in the nature of business profits and gains, and even if these profits are liable to be taxed under a head other than income from business and profession, the loss carried forward can be set off against such profits of the assessee. In this view of the matter, the objection raised by the authorities below, in our humble understanding, are devoid of any legal substance. Coming to the judicial precedents cited by the CIT(A), we find that in the case of CIT vs. Milling Trading Co. (P) Ltd. (1993 -TMI - 19720 - GUJARAT High Court), their Lordships were concerned with the question whether or not the assessee had option of not setting off the losses incurred against the income from different sources under the head 'Business income'. The issue was thus confined to the question as to how the total income for a particular assessment year is to be computed. Issues:1. Disallowance under section 14A r/w rule 8D of the IT Rules, 1962.2. Set off of brought forward business loss against profit on sale of business assets.Issue 1: Disallowance under section 14A r/w rule 8D of the IT Rules, 1962:The Assessing Officer (AO) disallowed Rs. 5,00,000 as expenditure for earning tax-free dividend income under section 14A. The Commissioner of Income Tax (Appeals) remitted the matter back to the AO following a Tribunal decision. The appellant challenged this decision citing a recent judgment by the Bombay High Court. The ITAT directed the AO to recompute the disallowance as per the Bombay High Court judgment, allowing an opportunity for the appellant to be heard.Issue 2: Set off of brought forward business loss against profit on sale of business assets:The AO denied the set off of brought forward business losses against short-term capital gains on the sale of business assets, citing section 72. The appellant argued that the profits from the sale of business assets should be treated as business income and thus eligible for set off. The ITAT analyzed the provisions of section 72 and relevant judicial precedents. It held that as long as gains are from any business or profession carried on by the assessee and assessable for that year, they can be set off against carried forward business losses. The ITAT allowed the appellant's claim for set off, disagreeing with the AO and CIT(A) interpretations. The appellant's appeal was treated as allowed for statistical purposes.This comprehensive analysis of the judgment highlights the key issues addressed by the ITAT Mumbai regarding disallowance under section 14A and the set off of brought forward business losses against profits on the sale of business assets.