2018 (12) TMI 312 - AT - Income Tax

Assessee's Discretion on Setting Off Losses and Gains: Tribunal's Decision Clarifies Income-tax Rules

Sh. Ajay Kumar Singhania Versus The DCIT, CPC, Banglore

The Tribunal held that the assessee has the discretion to set off business losses against capital gains under section 71 of the Income-tax Act, 1961, but ... Set off the business losses against the capital gains - option v/s mandation - reliance on provisions of section 71 - The assessee in the return of income did not set off the business loss against the short term capital gain. However, after adjusting the capital gains of the year against the brought forward short term capital loss and claiming deduction u/s 80 returned the taxable income at ‘nil’ with carry forward business loss Held that:- A perusal of the above Legislative history reveals that the assessee has always been given an option to set off his losses against the income from capital gains. However, as per the provisions of sub section (3) of section 71, the assessee is not allowed to set off capital loss against income under any other head. The above view is fortified by the decision of ‘Coated Fabrics (P) Ltd. vs JCIT’ [2006 (1) TMI 228 - ITAT PUNE-A]. No justification on the part of the lower authorities in making the impugned adjustments and, therefore, the same are set aside. The Assessing officer is directed to accept the returned income /computation of the assessee, as such. - Decided in favour of assessee. Issues:1. Interpretation of section 71 of the Income-tax Act, 1961 regarding setting off business losses against capital gains.Analysis:The appeal involved the interpretation of section 71 of the Income-tax Act, 1961, specifically addressing whether the assessee has the option to set off business losses against capital gains or if it is mandatory to do so. The case concerned an assessee who had business losses and short term capital gains during the relevant assessment year. The assessee did not set off the business loss against the capital gain in the return of income but adjusted the capital gains against brought forward short term capital loss and claimed deductions. However, the lower authorities adjusted the current year capital gains against the current year business loss, resulting in a dispute.The legislative history of section 71 was examined, highlighting amendments made over the years. It was noted that the assessee has always been given the option to set off losses against income from capital gains. Subsection (3) of section 71 specifically prohibits setting off capital loss against income under any other head. The decision of the Pune Bench of the Tribunal in 'Coated Fabrics (P) Ltd. vs JCIT' was cited to support this interpretation.Based on the legislative history and legal precedents, the Tribunal found that the assessee has the discretion to set off losses against capital gains but cannot set off capital loss against income under any other head. Consequently, the Tribunal set aside the adjustments made by the lower authorities and directed the Assessing Officer to accept the returned income/computation of the assessee. As a result, the appeal of the assessee was allowed, providing clarity on the issue of setting off business losses against capital gains under section 71 of the Income-tax Act, 1961.