TaxTMI 
TaxTMI 
2010 (8) TMI 430
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....2) That the ld. Commissioner of Income-tax, Delhi-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 ....
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....ordingly income from sale of buildings, furniture etc. on which depreciation was claimed and allowed in earlier years has been shown under section 41, sub-section (2) of the Income-tax Act, 1961, which says that if the income from the buildings, machinery, 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 requ....
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.... these four points. It is argued that the revisionary order is bad in law because as for assuming jurisdiction under section 263, two conditions have to be satisfied, -(i) the order sought to be revised is erroneous, and (ii) it is prejudice to the interests of 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 c....
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....T v. Express Newspapers Ltd. [1964] 53 ITR 250 (SC), wherein it had been held that section 26(2) and its proviso deal only with profits and gains of a business, profession or vocation and they do not provide for assessment of income under any other head, e.g., capital 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 busin....
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....hole of the year or that the machinery or plant should have been used for whole of the accounting period or if the assessee worked only for a part of the year and then sold out, the loss that he incurred was not a business loss. In regard to the second question, it was held 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 314^2. 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 i....
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....ve the amount of such loss set-off against this income, if any, assessable for that assessment year under any other head.' It was contended that this being so, there is no justification on the part of the Assessing Officer to refuse the set-off. 5. Learned DR, Smt. Kusum Gupta, on 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....
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.... provision contained in this sub-section is reproduced below:- "(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of 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....
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....ous year, i.e., after commencement and before its expiration. It may be mentioned here that the facts of the case are that the block of assets had ceased to exist at a particular point of time in the previous year but assets of the same class were purchased before the expiration of the previous year. TheHon'ble Court 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....
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....siness income although taxable under a different head "interest on securities". Therefore, brought forward business losses can be set-off against such interest income. The ratio of this case is not applicable to the facts of this case as the depreciable asset held by the assessee is a fixed asset and not stock-in-trade. This 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 & C....
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..... Here we are concerned with the nature of income, i.e., whether it arises from business operations or from transfer of a capital asset. Thus, it is clear that the case of the assessee is not supported by law. 7.1 This leaves us with a further question, which we raised with the counsel of the assessee during the course of 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 re....
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....nged in the year of setting-off of the losses; and (ii) there is a contradiction in the finding of the ld. CIT in paragraphs 3.1 and 5. In paragraph 3.1 it is mentioned that the loss has arisen on account of purchase and sale of shares which is in the nature of speculative loss under the provisions of section 73(1) read with its 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 assesse....
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....of either the land or the building. The order is clearly erroneous. It is also prejudice to the interest of revenue as higher depreciation has been allowed. Therefore, it is held that the ld. CIT was right in restoring this matter to the file of the Assessing Officer for reconsideration of the matter. 10. No specific ground has been taken before us in regard the head of taxation of rental income by the Assessing Officer. Therefore, the arguments made by the ld. counsels are taken to be in pursuance of ground No. 1. The finding of the ld. CIT is that it should have been taxed under the head "income from house property". Accordingly he has restored the matter to the file of the Assessing Officer. The case of the ld. counsel is that income from property has been consistently brought to tax as business income while the case of the ld. DR is that if errors have been committed in past, the same should not be perpetuated in this year also. In this connection, reliance has placed on the observations made in the case of Distributors Baroda (P.) Ltd. v. Union of India [1985] 155 ITR 120 (SC) and K.K. Khullar v. Dy. CIT [2009] 116 ITD 301 (Delhi). The case of Ld. counsel in rejoinder is th....