2025 (11) TMI 889 - AT - Income Tax

Assessee entitled to set off interest taxed under other sources against carried-forward and current year depreciation under Section 72(3) (3)

ITAT, Kolkata allowed the appeal and directed the AO to permit set-off of interest income taxed under 'income from other sources' against the ... Set off of the income under the head income from other sources is possible against the depreciation losses - HELD THAT:- A perusal of the facts of the present case clearly shows that the assessee has categorically mentioned in the reply to the rectification notice that the interest income is liable to be set off against the carried forward depreciation loss as also the depreciation of the impugned assessment year. AO has not considered the submission of the assessee and has treated the interest income which has been assessed under the head income from other sources as income liable to be taxed and has not provided the set off against the income carried forward of depreciation loss. This being so, in view of the provisions of Section 72(3) of the Act, the AO is directed to grant the assessee benefit of set off of interest income against the carried forward depreciation loss. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest on an income-tax refund assessed under the head 'Income from Other Sources' can be set off against carried forward depreciation loss and current year depreciation under Section 72(3) of the Income-tax Act. 2. Whether such interest income can be set off against carried forward business loss. 3. Whether the Assessing Officer's failure to consider the assessee's objections in a suo motu rectification under Section 154 affects the correctness of the assessment with respect to the set-off claimed. ISSUE-WISE DETAILED ANALYSIS Issue 1: Set-off of interest on income-tax refund (assessed as 'Income from Other Sources') against carried forward depreciation loss under Section 72(3) Legal framework: Section 72(3) permits set-off of income under one head against loss under another specified head where statutory conditions are satisfied; interest on income-tax refund is assessable under the head 'Income from Other Sources'. Precedent Treatment: No prior judicial precedents were cited or relied upon in the record. The Tribunal proceeded to interpret the statute on its face. Interpretation and reasoning: The assessee specifically raised the claim in response to the Assessing Officer's rectification notice, asserting that the interest income (assessed under other sources) is eligible for set-off against carried forward depreciation loss and depreciation of the assessment year. The Assessing Officer failed to consider that submission and treated the interest as taxable without granting the set-off. The Tribunal examined the statutory provision (Section 72(3)) and concluded that where interest is assessable under 'Income from Other Sources', it falls within the class of income that can be set off against depreciation loss as contemplated by the provision. The Tribunal treated the Assessing Officer's omission to apply Section 72(3) to the interest income as an error in assessment. Ratio vs. Obiter: Ratio - The Court held as a matter of law that interest on income-tax refund assessed under 'Income from Other Sources' is capable of being set off against carried forward depreciation loss under Section 72(3), and the Assessing Officer is required to grant that set-off when claimed and substantiated. Conclusions: The Assessing Officer is directed to allow the set-off of the interest income of Rs. 30,59,290 against carried forward depreciation loss (and against current year depreciation as appropriate), in accordance with Section 72(3). Issue 2: Prohibition on set-off of such interest income against carried forward business loss Legal framework: Statutory rules distinguish the heads of income and the permissible cross-set-offs; carried forward business losses are subject to specific set-off provisions which generally restrict cross-head set-offs. Precedent Treatment: No precedent was cited; Revenue's contention was grounded on the general principle that business loss cannot be set off by income charged under other heads. Interpretation and reasoning: The Tribunal noted the parties' mutual concession and the Assessing Officer's stance that interest assessed under other sources cannot be set off against carried forward business loss. The Tribunal did not disturb that position and confined relief to the permissible cross-set-off under Section 72(3) against depreciation losses. The Court thus implicitly accepts the distinction between business losses and depreciation losses for set-off purposes in the present statutory context. Ratio vs. Obiter: Obiter (limited) - The Tribunal's allowance of set-off was expressly limited to carried forward depreciation loss; no broader rule altering the settled restriction on set-off against business loss was laid down. Conclusions: The interest income is not to be set off against carried forward business loss; the Tribunal limited relief to set-off against depreciation loss only. Issue 3: Effect of Assessing Officer's failure to consider objections in suo motu rectification under Section 154 Legal framework: Proceedings under Section 154 permit rectification of mistakes apparent from record; objections filed by the assessee in response to proposed rectification are material and must be considered by the Assessing Officer before finalizing rectification. Precedent Treatment: No case law was cited; the Tribunal applied basic principles of administrative fairness and statutory obligation to consider material submissions. Interpretation and reasoning: The assessee filed detailed objections during the rectification process asserting entitlement to set-off under Section 72(3). The Assessing Officer recorded that objections were filed but did not consider them substantively and proceeded to deny the claimed set-off. The Tribunal treated this omission as a failure to apply the statutory provision when the claim was squarely made and supported; accordingly, the rectification/order could not stand to the extent it ignored the assessee's submissions and applicable statutory relief. Ratio vs. Obiter: Ratio - Where an assessee files objections in response to a proposed rectification, and those objections raise a statutory entitlement to relief (here, set-off under Section 72(3)), the Assessing Officer must consider and decide those objections; failure to do so renders the rectification/order unsustainable insofar as it denies the statutory entitlement. Conclusions: The Assessing Officer's rectification/order is set aside to the extent it denied the set-off; the AO is directed to grant the claimed set-off after giving effect to Section 72(3) and the assessee's substantiated objections. Disposition The appeal is allowed: the Assessing Officer is directed to grant the set-off of interest on income-tax refund (assessed as Income from Other Sources) against carried forward depreciation loss (and current year depreciation, if applicable) in terms of Section 72(3), while not permitting set-off against carried forward business loss.