Set off of Brought forward losses against STCG

First , understand the terms ‘long term and short term capital loss ‘ , ‘short term capital gain’  , and if an item is a capital item or a revenue item.

Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right.

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is comes under the category ‘income’, and hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term.

Short-term capital asset an asset held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18.

For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.
 

 Long-term capital asset an asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewelry, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).

The assets are:

a. Equity or preference shares in a company listed on a recognized stock exchange in India

b. Securities (like debentures, bonds, govt. securities etc.) listed on a recognized stock exchange in India

c. Units of UTI, whether quoted or not

d. Units of equity oriented mutual fund, whether quoted or not

e. Zero coupon bonds, whether quoted or not

Types of Business Losses

There are many types of business losses apart from the ordinary cost associated with doing business. These include losses associated with damaged products, costs incurred resulting from returning used products, business loss associated with lost customers, and loss associated with property loss or increased rent expenses.

 Other factors that can be considered business losses include irregular and extraordinary losses from natural disasters. Some businesses also experience loss associated with theft, depending on the nature of business in which an owner engages.

 

Thus the following ruling case law decided

ITO Vs. M/s Smart Sensors & Transducers Ltd. (ITAT Mumbai)

As regards to set off of business loss against gain on sale of depreciable asset of factory building by the assesse, we find that the Tribunal in the case of M/s. Raj Shree Road linesvs.ITO forA.Y. 2007-08 has considered the issue of business loss of unabsorbed depreciation and eligible business loss can be set off against short term capital gain computed under section.50 of the Act.

The Tribunal, after considering the provisions of section 32(2), 72(2) and 73(3) of the Act opined that while deciding the issue of carrying forward of loss/unabsorbed depreciation (balancing charge under UK  tax laws ) and the amendment made in these section from time to time are applicable for carrying forward of depreciation/loss with effect from 1.4.2002.

For this proposition, the Tribunal has relied on the decision of Hon’ble Bombay High Court in the case of CIT vs. Hathway Investments (P) Ltd.

Found the above proposition is supported by the decision of Hon’ble Bombay High Court in the case of Manali Investment (supra), wherein, it is held that short term capital gain computed under section.50 of the Act can be set off against brought forward capital loss and also brought forward business loss.

 Accordingly, it is found they have considered the view that the CIT (A) has rightly allowed the claim of the assesse (with precedence) and affirmed the same.

FULL TEXT OF THE ITAT JUDGEMENT

The appeal filed by the department that revenue is arising. The Assessment was framed by the Income Tax Officer, Ward-7(2)(4) (in short ‘ITO/ AO’) for the A.Y. 2011-12 vide order dated 30.03.2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

 The only issue in this appeal of the revenue is against the order of the CIT(A) in allowing set off of brought forward business loss and brought forward long term capital loss against the deemed short term capital gain computed by the assesse. For this, the revenuedepartment has raised following two grounds:

“1. The ld CIT(A) has erred in not appreciating the fact that provisions under section.72 of the income tax act 1961 allows only business loss to be set off against business income and provisions u/s.74 of the income tax act, 1961 allows only LTCL can be set off against LTCG,.

2. The CIT (A) has erred on facts and in law in allowing set off claim of brought forward business loss and brought forward long term capital loss of against short term capital gain as per section 50 of the I.T.Act.”

3. Briefly stated the facts are that the Assessing Officer during the course of assessment proceedings noticed that the assesse in the original return of income has claimed long term capital loss on account of sale of its factory building.

The Assessing Officer noted that since the factory building is a depreciable asset, the resultant capital gain on the sale of such depreciable asset is to be treated as short term capital gain as envisaged by the provisions of section 50 of the Act.

Consequent to this, the assesse revised its return of income and offered the gain from sale of factory building as short term capital gain

The assesse claimed set off of brought forward business loss \and brought forward long term capital loss of against the short term capital gain claimed in the revised return on account of sale of factory building at.

The Assessing Officer noted that in view of the provisions of section 74 of the Act, only long term capital loss can be set off against long term capital gains. He also noted that as per the provisions of section 72 of the Act, the business loss can be set off against business income and not against short term capital gains computed by the assesse in terms of section 50 of the Act.

Accordingly, the Assessing Officer disallowed the claim of brought forward business loss and brought forward long term capital gains. Aggrieved, the assesse preferred appeal before the CIT (A).

4. The CIT (A) after considering the submissions of the assesse and also considering the decision of Honorable Bombay High Court in the case of CIT vs. Manali Investments vs. ACIT, allowed the claim of brought forward business loss and brought forward long term capital loss to be set off against short term capital gain computed under section 50 of the Act.

 4. As regards ground No. 1, the facts are that the appellant has sold its factory building and claimed long term capital loss. During the course of assessment proceedings the appellant submitted revised computation showing short term capital gain which was found to be in order by the AO. In the revised computation, the appellant claimed set off of brought forward business loss and brought forward long term capital loss the appellant relied on various decisions as mentioned in the Assessment order (i.e. precedence law cases for tax rulings under the Indianlaw). However, the AO did not accept the claim.

4.1 Honourable ITAT had observed that post amendment on 1/4/2002 unabsorbed depreciation can be set off against any income and relied on the decision of Suresh Industries Pvt. Ltd. and Sri Padmavati Srinivas Cotton and Ginning Process Factory 125 TTJ 411.

 Similarly in the case of Digital Electronics Ltd vs. Addl. CITG 135 ttj 419 (Mum), Mumbai Tribunal held that income earned by the assesse in the relevant year on sale of factory building, plant and machinery although not taxable as profits and gains of business or profession is an income in the nature of income of business though assessed as capital gains under section 50 and therefore the assesse is entitled to set off of brought forward business losses against the said capital gain.

4.2 Further the Honorable Bombay High Court in the case of CIT vs. Pursarth Trading Company P. Ltd also held that b/f long term capital loss can be set off against short term capital gain computed u/s 50C following the decision in the case of Manal Investments vs. ACIT (2011).

Hon’ble Bombay^ High Court in the case of CIT vs Manali Investments.dated 13/3/2013 held that short term capital gain computed u/s 50 on long term capital gain asset can be set off against long term capital loss .

 Thus both the claims of the appellant are covered in its favour by the decision of Hon’ble Jurisdictional High Court and Jurisdictional Tribunal. As discussed in the submission of the appellant the decisions relied upon by the appellant are distinguishable on facts and by latest decisions of Hon’ble Jurisdictional Tribunal/High Court. Therefore considering the facts of the case, the grounds taken by the appellant are allowed.”

 Aggrieved against the order of the CIT(A) and allowance of set off of brought forward business loss and brought forward long term capital loss against short term capital gain computed under section 50 of the Act, the revenue came in appeal before the Tribunal.