Brought Forward Business Losses can be set off against STCG

Digital Electronics Ltd. vs. Addl. CIT (2011) 49 DTR 484/135 TTJ 419 (Mum.)(Trib.)

Brief Facts

In the course of assessment proceedings, the AO noted that the assessee has set off brought forward losses against short-term capital gains on sale of factory building and plant and machinery. The AO was of the view that in terms of the provisions of section 72, which governs the carry forward and set off of business losses, so much of the carry forward losses as cannot be set off against any profits and gains of business has to be carried forward to the following year upto eight assessment years. The carry forward business losses cannot be set off against any other head of income other than profits and gains of business or profession. It was in this backdrop of these observations by the AO, that the assessee was required to show cause as to why brought forward business losses should not be allowed to be set off against short-term capital gains on sale of plant and machinery and factory building

Held by Hon’ble Tribunal

After hearing both the parties, the Hon’ble Tribunal concurred with the submissions of the assessee & observed that:-

1. Prior to insertion of Sec 50, the sale of factory building/plant & machinery/furniture & fixture was covered by Sec 41(2) wherein the excess of sale proceeds over the WDV was treated as Sec 41(2) profit and the loss, if any, were treated as balancing charge/terminal allowance while computing income from business. Applying the same yardstick, the profit /loss on sale of factory building/plant & machinery/furniture & fixture is to be treated as business income [J.K. Chemicals Ltd. –vs.-ACIT 33 BCAJ (April, 2001) p.36 relied on].

2. Income assessed by the assessee 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 business though assessed as capital gains under section 50 and therefore, assessee is entitled to set off of brought forward business losses against the said capital gains. [CIT –vs.- Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) relied on].