TaxTMI 
TaxTMI 
2010 (8) TMI 430
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....lhi-VI has erred in maintaining the order of the ld. ITO, Ward 17(2), dated 30-11-2007 and treating the same as erroneous by ignoring relevant facts, circumstances and pleadings of the appellant. (3) The ld. Commissioner of Income-tax, Delhi-VI has also erred in maintaining that the order of the ld. ITO, dated 30-11-2007 applying section 41(2) of Income-tax Act, 1961 for granting set off against brought forward losses, is unsustainable, and, therefore, resulted in under assessment as the ITO failed to tax short-term capital gain to the tune of Rs. 42,60,394. (4) The ld. Commissioner of Income-tax, Delhi-VI has erred in rejecting the submissions made by the assessee and subjectively holding the view that the original order passed by the Assessing Officer is prejudicial to the interest of the revenue. (5) The ld. Commissioner of Income-tax, Delhi-VI has further erred in considering set off brought forward business losses as speculative loss, by ignoring objective facts, circumstances and pleading of the appellant. (6) The ld. Commissioner of Income-tax, Delhi-VI has erred in observing deduction on depreciation of land, cannot be granted to the assessee by ignoring the facts and c....
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....ery, plant or furniture sold exceeds the WDV so much of the excess as does not excess the difference between the actual cost and WDV shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due. In view of the explanations given therein above, section 50(1) read with section 48 do not apply since these sections deal with the provisions for computing capital gains and mode of computation under head Capital Gains respectively. The submission made by the assessee company appeared to be correct and is accepted. After discussion with AR of the assessee the declared loss is accepted." 2.2 Thereafter, the ld. Commissioner of Income-tax issued a notice under section 263 of the Act on 24-9-2008 mentioning inter alia that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of revenue thereby requesting the assessee to explain why the same may not be cancelled for making de novo assessment. In this notice, matters regarding computation of profit on sale of depreciable asset, rental income, applicability of section 73(1) read with its Explanation in r....
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....revenue. These two conditions have to be satisfied cumulatively as held by Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83. 4.1 In regard to computation of business profits, our attention was drawn towards the computation of total income, in which a sum of Rs. 33,40,000 has been added back to the book profits in respect of profit on sale of building, thereby computing the profit for this year at Rs. 34,46,610. From this amount, a sum of Rs. 1,04,334 has been deducted as loss on sale of fixed assets, leading to the computation of business profit at Rs. 33,42,276. This profit has been adjusted against brought forward loss, which stood at Rs. 34,67,355. After adjusting this amount, the loss of Rs. 1,25,080 has been carried forward to the subsequent year. The finding of the ld. CIT in this matter is that since the block of assets has been exhausted, the Assessing Officer should have computed short-term capital gain under section 50 of the Act. Such gain did not constitute business profit and, therefore, brought forward losses of earlier years could not be adjusted against this gain. The case of the ld. counsel is that the head of income under ....
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....al gains. The reason for this conclusion is stated to be that the deeming clause in section 12B only introduces a limited fiction that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make them profits or gains of business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field. The profits and gains of business and capital gains are two distinct concepts in the Income-tax Act, the former arises from the activity which is called the business and the latter accrues because capital assets are disposed off at a value higher than what they cost to the assessee. They are placed under different heads; they are derived from different sources and the income is computed under different methods. The fact that capital gains are connected with capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from business during the year. 4.3 Further, he relied on the decision of Hon'ble Supreme Court in the case of Western States....
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.... that the assessee would be entitled to get a set-off under section 24(2) if the shares on account of which the dividends were received formed part of assessee's trading assets. In this connection, the case of Cocanada Radhaswami Bank Ltd. (supra) was quoted with approval. Thus, the ratio of this case, as in the case of Cocanada Radhaswami Bank Ltd. (supra), is that if income has been received from trading assets, it will be of the nature of business income against which the loss of the business may be set-off. 4.3A Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Nectar Beverages (P.) Ltd. v. Dy. CIT [2009] 314 ITR 3142. The question for determination in that case was - whether, the concept of balancing charge in section 41(2) could be read into section 41(1) of the Income-tax Act, 1961? The assessee was a manufacturer of soft drinks and he purchased bottles and crates, each item costing less than Rs. 5,000. Therefore, the whole of the amount was deducted as depreciation in the year in which the assets were acquired. When the bottles and crates got worn out, they were sold and proceeds therefrom were credited to miscellaneous income account in the ....
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.... the other hand, could not canvass any other provision of law to controvert the proposition of law canvassed by the Sr. Advocate. In view thereof, we hold that the assessee is eligible to the set-off." 4.5 It was argued that the impugned order has been passed under section 263 of the Act. What is to be seen for validity of such an order is the position of law existing at the time of passing the revisionary order, as held in the case of CIT v. Max India Ltd. [2007] 295 ITR 282 (SC). For the sake of ready reference, the relevant portion of the portion at placitum 2 is reproduced below:- "At this stage we may clarify that under paragraph 10 of the judgment in the case of Malabar Industrial Co. Ltd. [2000] 243 ITR 83 this court has taken the view that the phrase "prejudicial to the interests of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of reven....
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....the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets." 5.1 Further, she drew our attention to section 14 of the Act, which mandates that the computation of total income shall be classified under five heads. The provision contained in this section is reproduced below:- "14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:- A- Salaries. B- ......... C- Income from house property. D- Profits and gains of business or profession. E- Capital gains F- Income from other sources" 5.2 It has been argued that under the scheme of computation of total income, income has to be classified under different heads, which are distinct and apart. Therefore, the heads of income need not be repeated again and again in various provisions of the Act. Section 72....
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....t came to the conclusion that the block of assets did not cease to exist during the previous year and, therefore, the provision of section 50(2) was not applicable. 5.5 On the basis of the aforesaid arguments, it has been argued that the order of the Assessing Officer was erroneous as well as prejudicial to the interest of the revenue. Therefore, the decision in the case of Malabar Industrial Co. Ltd. (supra) supported the case of the revenue. Accordingly, it was urged that the order of the Ld. CIT may be upheld on this ground. 6. In the rejoinder, it is mentioned that the ld. DR wrongly relied on the decision in the case of Eastman Industries Ltd. (supra). The case is squarely covered by the decision of Western States Trading Co. (P.) Ltd.'s case (supra), Cocanada Radhaswami Bank Ltd.'s case (supra) and Ankay Khanna Management & Consultants (P.) Ltd.'s case (supra). It is further mentioned that there is a difference between the expression "attributable to" and "derived from", as held by Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. In view of this decision, the capital gains on transfer of business assets can be said to....
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....his becomes more clear from the decision in the case of Express Newspapers Ltd. (supra), wherein it is mentioned that section 26(2) and its proviso deal with the profits and gains of business but they do not provide for assessment of income under any other head, for example, capital gains. The decision in the case of Western States Trading Co. (P.) Ltd. (supra) is on the same lines as in the case of Cocanada Radhaswami Bank Ltd. (supra) and Express Newspapers Ltd.'s case (supra), in which dividends were received on shares which formed part of assessee's trading asset. The facts of the case of Nectar Beverages (P.) Ltd. (supra) are distinguishable as the concept of block of assets did not exist at the relevant point of time. Section 41(2) also stood deleted with the introduction of concept of "block of assets". The decision in the case of Ankay Khanna Management & Consultants (P.) Ltd. (supra) was rendered under section 71(1) dealing with set-off of loss under any other head against capital gains of the same year. In the instant case, we are dealing with set-off of brought forward losses against profits computed under section 50 in respect of depreciable and fixed assets. The case o....
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....f reply by the ld. DR, but it was not answered. The question is whether, the depreciation claimed in past and recouped in this year on transfer of fixed assets could be said to be the income in the nature of business income, thereby entitling the assessee to a set-off to the extent of the amount representing the difference between actual cost and the WDV? As this question has not been elaborated upon before us, we do not think it necessary to give our finding in the matter. The fact remains that the profits have been earned on transfer of fixed assets, which are not in the nature of business income. We have already reproduced the provision contained in section 72(1) which permit setting-off of the loss computed under the head "profits and gains of business or profession" in earlier years against profits and gains of any business carried on in the previous year relevant to the assessment year of set-off. The Courts have made a distinction between "profits and gains of any business" employed in section 72(1)(i) and computation of income under the head "profits and gains of business or profession". However, liberal meaning granted to the word used in clause (i) is applicable only in r....
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....Explanation, while in paragraph 5 it is mentioned that trading in shares is the main activity of the assessee since its incorporation. In view thereof, it was agitated that the revisionary order does not establish that the assessment order was erroneous and prejudicial to the interests of revenue. On the other hand, the ld. DR relied on the order of the ld. CIT. 8.1 We have considered the facts of the case and submissions made before us. We find that the ld. CIT has given a categorical finding that trading of shares has been the main business activity of the assessee since its incorporation. Section 73(1) and the Explanation lay down two criteria for determining the nature of loss arising from trading in shares, namely, - (i) quantitative test regarding income assessed under various heads of income, and (ii) the test of main activity of the assessee. In view of the finding in paragraph No. 5 of the impugned order, the loss cannot be taken to be speculative loss. Further, this year is the year of setting-off of the losses brought forward from earlier years. In earlier years, the losses were classified as business losses and not speculative losses. This position cannot be changed ....