Business loss set-off cannot be denied by tax authorities on alleged breach of separate regulatory law

Income-tax authorities cannot deny a business loss or its set-off by enforcing compliance with a separate regulatory statute where the underlying activity is not per se unlawful. The court held that questions under the Income-tax Act are confined to whether an item is income or loss, and the Assessing Officer could not disallow the cement division loss on the basis of an alleged contravention of the RBI regime. Since the relevant licence had been granted and the RBI was the sole regulator for that activity, the loss remained allowable and the Tribunal's acceptance of set-off was upheld.

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Issues: Whether the Assessing Officer could disallow the loss from the cement division and refuse set-off against the finance division profits on the ground that the assessee's dual activities were impermissible under the Reserve Bank of India Act.

Analysis: The taxable question under the Income-tax Act is whether an amount is income or loss within the Act; the legality of the underlying business activity is not ordinarily for the income-tax authorities to enforce. The Court held that the assessee's activities were not per se prohibited by law, and that the Reserve Bank of India was the sole regulator of non-banking finance activity. Since the RBI had granted the relevant licence, the Assessing Officer could not examine compliance with the RBI regime and disallow the claimed business loss on that basis. The Appellate Commissioner and the Tribunal were therefore right in holding that the cement division loss could not be denied set-off in these proceedings.

Conclusion: The issue was decided in favour of the assessee; the disallowance was unsustainable.

Final Conclusion: The Court affirmed the Tribunal's view that income-tax authorities cannot enforce the regulatory provisions of the Reserve Bank of India Act in order to deny a business loss claim, and the appeal failed.

Ratio Decidendi: In income-tax proceedings, the tax authority cannot refuse a claimed business loss on the basis of an alleged contravention of a separate regulatory statute when the business is not per se unlawful and the relevant regulator alone controls permission to carry on the activity.

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