2013 (11) TMI 1056 - HC - Income Tax

High Court affirms Settlement Commission's benefit for assessee by considering losses in undisclosed income assessment.

The High Court of Kerala upheld the benefit granted to the appellant assessee by the Settlement Commission, emphasizing the importance of considering ... Block assessment - set off of losses - Held that:- Analysing section 158BB(4) read with Explanation (a) thereto, one finds that only brought forward losses of the past years under Chapter VI and unabsorbed depreciation under section 32(2) are to be excluded while aggregating the total income or loss of each previous year in the block period but set off of the loss suffered in any of the previous year in the block period against the income assessed in other previous years in the block period is not prohibited. Following E.K.Lingamurthy and another v. Settlement Commissioner (IT and WT) and another [2009 (1) TMI 8 - SUPREME COURT] - The learned Judge was not justified in disallowing the benefit granted to the assessee by the Settlement Commission so far as losses brought forward pertaining to the house property -Section 158BB(4) read with Explanation (a) the loss brought forward could be considered while determining the undisclosed income and the benefit thereunder is in accordance with the procedure under the Act – Decided in favour of assessee. Issues:- Dispute over the deduction of losses brought forward by the appellant assessee.- Interpretation of Section 158BB(4) read with Explanation (a) regarding the aggregation of income/loss in a block period.- Validity of the Settlement Commission's decision on set off of losses and depreciation.Deduction of Losses Brought Forward:The appeals arose from a common judgment regarding the deduction of losses brought forward by the appellant assessee. The firm, of which the appellant and their wife were partners, faced a search of premises in 1996. The Settlement Commission considered various aspects, including long-term capital gains and losses under the house property. The appellant sought a reduction of losses and interest paid on borrowings. The Settlement Commission agreed with the set off of house property loss and interest paid, leading to a net capital gains figure. The department challenged this decision, and the Single Judge upheld most of the Commission's decision but disagreed on allowing the deduction of carried forward loss. The appellant argued that if the loss is brought forward within the block period, it should be considered part of the undisclosed income. Citing a Supreme Court decision, the Court agreed that such losses should be considered while determining undisclosed income.Interpretation of Section 158BB(4):The Court analyzed Section 158BB(4) in conjunction with Explanation (a) to determine the treatment of losses and depreciation in a block period assessment. The Court highlighted that while certain losses and unabsorbed depreciation are excluded, set off of losses suffered in any previous year against income assessed in other years of the block period is not prohibited. The Court found that the Settlement Commission erred in disallowing the application for set off of losses and depreciation within the block period. The Court emphasized that the benefit of considering brought forward losses is in line with the statutory procedure.Validity of Settlement Commission's Decision:Based on the interpretation of Section 158BB(4) and Explanation (a), the Court concluded that the Single Judge was unjustified in disallowing the benefit granted to the assessee by the Settlement Commission regarding losses brought forward. The Court upheld the decision of the Settlement Commission and allowed the appeal of the party assessee while dismissing the appeal of the department. The Court highlighted that both the losses brought forward and the interest paid on borrowings were justified under the statutory provisions.In conclusion, the High Court of Kerala upheld the benefit granted to the appellant assessee by the Settlement Commission, emphasizing the importance of considering losses brought forward within the block period while determining undisclosed income. The Court's analysis of Section 158BB(4) and Explanation (a) supported the inclusion of such losses in the assessment process, leading to the dismissal of the department's appeal and the allowance of the party assessee's appeal.