2022 (1) TMI 1156 - AT - Income Tax

Tribunal denies set-off of operational loss against income, citing prior judicial precedents.

Secunderabad Club, HYDERABAD Versus Income Tax Officer, Ward-10 (2), HYDERABAD

Secunderabad Club, HYDERABAD Versus Income Tax Officer, Ward-10 (2), HYDERABAD - TMI Issues Involved:1. Delay in filing the appeal.2. Set-off of net operational loss against income from house property and other sources.3. Applicability of the principle of mutuality to the income and expenditure of the assessee club.4. Treatment of operational losses as business loss under Section 28(iii) of the Income Tax Act.5. Applicability of Section 71 and Section 72 of the Income Tax Act for set-off and carry forward of losses.Issue-wise Detailed Analysis:1. Delay in Filing the Appeal:The appeal filed by the assessee for the Assessment Year (AY) 2016-17 suffered from a delay of 320 days. The delay was attributed to reasons beyond the assessee’s control, and there was no rebuttal from the departmental side. Consequently, the delay was condoned.2. Set-off of Net Operational Loss Against Income from House Property and Other Sources:The assessee’s primary grievance was the denial of set-off of net operational loss of Rs. 9,11,16,126/- against income from house property and other sources. The CIT(A) had previously held that the deficit from mutual activities cannot be considered a loss for income tax purposes and thus cannot be set off against taxable income. The CIT(A) reiterated this stance, emphasizing that the operational deficit within the circle of mutuality is essentially a consumption expenditure and not allowable as a deduction while computing total income.3. Applicability of the Principle of Mutuality:The principle of mutuality was central to the case. The CIT(A) discussed that the assessee, being a social and recreational club, is covered under the principle of mutuality. However, it was noted that the principle of mutuality does not extend to interest income from member banks or rental income from member tenants. The Andhra Pradesh High Court and the Supreme Court had previously ruled that such interest income does not fall under the principle of mutuality and is taxable.4. Treatment of Operational Losses as Business Loss Under Section 28(iii):The CIT(A) clarified that the operational loss from mutual activities cannot be treated as a business loss under Section 28(iii) of the Income Tax Act. The principle of mutuality dictates that both profits and losses from mutual transactions are outside the purview of taxation. Thus, the loss from mutual activities cannot be set off against taxable income from other sources or heads.5. Applicability of Section 71 and Section 72 for Set-off and Carry Forward of Losses:The CIT(A) and the tribunal held that operational losses from mutual activities cannot be set off against taxable income under Section 71, nor can they be carried forward under Section 72. The tribunal referenced several Supreme Court judgments to support this position, stating that losses from activities not chargeable to tax cannot be set off against taxable income. The tribunal also noted that the legislative expression “head” of income in Section 71 must be one of the five heads of income provided under Section 14 of the Act.Conclusion:The tribunal upheld the CIT(A)’s decision, denying the set-off of the assessee’s operational loss against income from other sources and house property. The appeal was dismissed, and the tribunal emphasized that the losses from mutual activities are outside the ambit of taxation and cannot be set off against taxable income. The tribunal also referenced prior judicial precedents to support its decision. The order was pronounced in the open court on 27th January 2022.