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Nandi Steels Ltd. Vs ACIT - Section 72 of the Income-tax Act, 1961 - Losses - Carry forward and set-off of business losses.
March, 28th 2013
            IN THE INCOME-TAX APPELLATE TRIBUNAL
               BANGALORE BENCH `A', BANGALORE


BEFORE HON'BLE VICE PRESIDENT SHRI N.BARATHVAJA SANKAR,
             VICE PRESIDENT SHRI G.C.GUPTA
                          AND
           SMT. P MADHAVI DEVI, JUDICIAL MEMBER

                      I.T.A. No.546(Bang.)/2008
                 (Assessment Year : 2003 -2004)

M/s Nandi Steels Limited,
F4, Richmond Plaza,
Richmond Circle,
Bangalore-560 025.
PAN No.AAACN4849D                                            Appellant
                                  Vs
The Assistant Commissioner of Income-tax,
Circle-12(2),
Bangalore                                                  Respondent

        For Assessee by : Shri S. Ramasubramanian, CA
           For Revenue by : Shri G.V.Gopala Rao, CIT-I

                Date of hearing : 17-10-2011
            Date of pronouncement : 09-12-2011




                              ORDER

PER SMT. P. MADHAVI DEVI, JM;


     The present Special Bench has been constituted u/s 255(3) of the

IT Act, 1961. The Special Bench was constituted under the following

circumstances.


     2. The assessee company which is engaged in the business of

manufacture/production of Iron and Steel has filed its return of income

for the relevant assessment year on 14-10-2003, declaring an income of
                                    2         ITA No.1546(B)2008 (SB)


Rs.98,27,270/- under the head `capital gains'. The return was

processed u/s 143(1) on 20-01-2004 and a refund of Rs.4,77,163/- was

issued. Subsequently, the AO noticed that the assessee had set off the

long term capital gains of Rs.43,36,640/- against the brought forward

business loss and depreciation contrary to the provisions of Sec.72 of

the IT Act.   In view of the same, the AO believed that the income

chargeable to tax has escaped assessment within the meaning of

Sec.147 and issued notice u/s 148 on 8-07-2005. In response to notice

u/s 148, the assessee filed its return of income on 17-04-2006 as

returned in the original return of income. The assessee also requested

the AO to furnish a copy of the reasons recorded for re-opening of the

assessment. The AO furnished the reasons recorded for reopening of the

assessment to the assessee. In the proceedings u/s 143(3) read with

Sec.148 of the IT Act, the AO held that the brought forward business

loss and unabsorbed depreciation cannot be set off against the income

from capital gains.   He observed that the assessee has sold the land

situated at Tumkur road along with the building and bore well which

were all used for the business.     Taking note of the decision of the

Hon'ble Apex Court in the case of M/s Killick Nixon & Co., Vs CIT

reported in 66 ITR 714(SC), wherein it was held that only income which

is earned by carrying on business is entitled to be set off, he held that

the carry forward business loss cannot be set off against the income

from capital gains, as it is against the provisions of law.     He also

observed that the assessee has admitted the profit and sale of land etc.




s
                                    3         ITA No.1546(B)2008 (SB)


as long term capital gains and offered to tax at the rate of 20%. He

accordingly, computed the income of the assessee.


      3. Aggrieved, the assessee preferred an appeal before the CIT(A)

who confirmed the order of the AO and the assessee came in appeal

before the Tribunal.


      3.1 Before the Tribunal, the assessee has raised various grounds

relating to validity of the assessment u/s147 of the Act and also with

regard to disallowance of the set of carry forward business loss and

depreciation against the long term capital gains arising from the sale of

land and buildings used for the purpose of business.       The Division

Bench of this Tribunal vide its reference dated 11-12-2008 have decided

the first four grounds of appeal and also the additional ground of appeal

raised by the assessee and with regard to ground no.5 & 6 a reference

was made to the Hon'ble President for the constitution of a Special

Bench of the Tribunal.    The reasons for the reference was that the

asseseee has relied upon the decision of the Bangalore Bench of the

Tribunal in a reported case of M/s Steelcon Industries (P) Ltd., Vs ITO

dated 27-12-2004 in ITA No.571(Bang.)1989 for the assessment year

1985-86, wherein the issue was decided in favour of the assessee

holding that the carry forward loss can be set off against the income

from capital gains. For coming to this conclusion, the Tribunal has

followed the decisions of the Hon'ble Supreme Court in the case of CIT

Vs   Cocanada Radhaswami Bank (1965) 55 ITR 17(SC)          and CIT Vs




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                                     4          ITA No.1546(B)2008 (SB)


Chugandas & Co.,(1965) 55 ITR 17(SC). The Division Bench however,

noticed that there is another judgment of the Hon'ble Supreme Court in

the case of CIT Vs Express Newspapers Ltd.,53 ITR 250(SC) wherein it

was held that the capital gains are connected with the capital assets of

the business and therefore, it cannot make them the profit of the

business and cannot be set off against the carry forward business loss.

Having observed that the Bench of the Tribunal at Bangalore in the case

of M/s Steelcon Industries Ltd.,(supra) has not considered the decision

of the Hon'ble Supreme Court in the case of Express Newspapers Ltd.,

cited supra, the Division Bench felt that the decision of the Tribunal in

the case of M/s Steelcon Industries Pvt.Ltd., requires re-consideration

by a Special Bench constituting of three Members for a decision. Thus,

they referred the grounds of appeal nos.5 & 6 to the Special Bench. The

Hon'ble President of ITAT after considering the reference in detail u/s

255(3) made by the Division Bench of this Tribunal (vide order dated 11-

12-2008 constituted a Special Bench) for disposal of the ground nos.5 &

6. We accordingly, proceed to decide the appeal.


      4. Ground no.5 & 6 raised by the assessee in the appeal are as

under;


          "Ground no.5: That the learned CIT(A) erred in law
          and on facts that the appellant is not entitled to set off
          carry forward business loss of Rs.39,99,652/- against
          the long term capital gain arising on sale of land used
          for the purpose business".




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                                         5           ITA No.1546(B)2008 (SB)


                Ground no.6: That the authorities below ought to have
                appreciated that there is no cessation of business and
                the appellant is entitled to set off the carry forward
                business loss".

         5.      The    learned     counsel    for     the   assessee    Shri

S.Ramasubramanian, submitted that during the previous year relevant

to the assessment year 2003-04, the assessee sold the land, building

and bore well of the assessee used for its business purposes for a

consideration of Rs.1,55,00,000/-. He submitted that the assessee had

claimed depreciation in the earlier years on the building and the bore

well.    According to him, the factory building and plant & machinery

stood on the same land and since these assets were connected to the

business of the assessee, the gain from sale of these assets has been

rightly set off against the carried forward business loss from the earlier

years.        According to him, the long term capital gains on transfer of

business assets had the character of business income and therefore,

business loss brought forward from earlier years can be set off against

such income though, it was not computed under the head " profits and

gains of business or profession". In support of his contention, he placed

reliance upon the following decisions;

1. United Commercial Bank Ltd., 32 ITR 688
2. Chugandas & Co., 55 ITR 17
3. Cocanada Radhaswami Bank Ltd., 57 ITR 306

         6. He also drew our attention to the rationale laid down by the

Hon'ble Apex Court's decision to the effect that though the income was






s
                                     6          ITA No.1546(B)2008 (SB)


computed under the different heads of income, but when it has the

character of business income, the brought forward business loss can be

set of against such income. He submitted that the decision of the

Hon'ble Supreme Court in the case of CIT Vs Express Newspapers Ltd.,

cited supra, was considered by the subsequent bench of the Supreme

Court in the case of CIT Vs Cocanada Radhaswami Bank Ltd., cited

supra and after taking into consideration of the same, it has been held

that the break up of income under different head is only for the purpose

of computation of total income and it does not cease to be income from

the business.

      7. Another argument put forth by the learned counsel for the

assessee is that Sec.72 of the Act permits the carry forward of

unabsorbed loss and clause-(i) thereof permits set off of such loss from

the income, if any, of any business of the assessee.             Therefore,

according to him, it is enough, if such profits and gains have a nexus

with business. He also submitted that whenever legislature wanted to

refer to a particular head, it specifically stated so.       He drew our

attention to the reference to the head `profits and gains of business or

profession" in the explanation (baa) to sec.80HHC, wherein while

defining the profits of business it is provided that it means the profits of

business as computed under the head `profits and gains of business or

profession". He submitted that the similar expression is used in clause-

(d) of the Explanation to sec.80HHE.       Thus, according to him, since

sec.72 does not state that the loss can be set off only from income




s
                                    7         ITA No.1546(B)2008 (SB)


computed under the head "profits and gains of business or profession",

it can be set off against the profits and gains of business or profession

even if it is computed under any other head of income.

        8. The other argument raised by the assessee is that the lower

authorities have rejected the claim of the assessee mainly on the ground

that the assessee has not carried on the business during the previous

year ending 31-03-2002 and therefore, the decisions of the Hon'ble

Supreme Court in the cases of United Commercial Bank and Cocanada

Radhaswami Bank Ltd (cited supra) and that of Bangalore Bench in the

case of M/s Steelcon's case are not applicable. He submitted that this

finding of the lower authorities is incorrect because, the AO himself has

determined the loss of Rs.9,67,922/- under the head `profits and gains

from business or profession' and this is a pointer to the fact that the

asseseee had carried on the business during the year ending 31-03-

2003.     He thereafter, drew our attention to the details of turnover

effected by the asseseee during various financial years till 31-03-2009

to demonstrate that during the financial year 2003-04 the turnover was

Rs.33,09,862/- for the assessment year 2007-08 it was Rs.8,02,775/-

for assessment year 2008-09 it was Rs.86,40,160/-. He submitted that

there was no turnover during the financial years : 2000-01,2001-02 and

2002-03 and that this only shows that there was a temporary lull in the

business of the asseseee and it does not amount to closure of the

business. For this proposition, the assessee placed reliance upon the

following decisions;




s
                                    8         ITA No.1546(B)2008 (SB)


    1. CEPT Vs Srilakshmi Mills Ltd., 20 ITR 451 (SC)
    2. CIT Vs Vikram Cotton Mills Ltd.,(1988) 169 ITR 597(SC)
    3. M/s Lakshmi Narayan Board Mills Pvt.Ltd., Vs CIT (1994) 205 ITR
       88(Cal.)
    4. M/s Karsondas Ranchhoddass Vs CIT (1972) 83 ITR 1(Bom)
    5. L.VE Vairavan Chettiar Vs CIT (1969) 72 ITR 114(Mad.)
    6. M/s Emdee Exports     Vs   Eleventh Income Tax Officer (1985) 13
       ITD 8(Bang.)



    8.1. The learned counsel for the assessee therefore, prayed that the

grounds of the appeal of the assessee before the Special Bench may be

allowed.

    9. The learned DR on the other hand, supported the orders of the

authorities below and submitted that the assets sold by the assessee are

in fact capital assets and therefore, the assessee by itself offered the

income from the sale of these assets under the head "capital gains and

has also paid taxes at the rate at which capital gains are taxed. He

submitted that any gain or loss on the sale of a capital asset cannot be

referred to as business income and it cannot be set off against the

brought forward loss of earlier years.    He drew our attention to the

provision of Sec.72 of IT Act to demonstrate that it is only business

income against which the brought forward loss can be set off.        He

strongly relied upon the judgment of the Hon'ble Supreme Court in the

case of M/s Express Newspapers Ltd., (cited supra) and submitted that

the findings of the Hon'ble Supreme Court should be considered in the

light of the facts and circumstances before the Hon'ble Court. He also




s
                                    9         ITA No.1546(B)2008 (SB)




submitted that in both the cases i.e M/s United Commercial Bank Ltd.,

and M/s Cocanada Radhaswami Bank Ltd., the capital gains were on

account of sale of securities and the Hon'ble Supreme Court has taken

note of the fact that these securities were in fact trading assets of the

assessee's therein and therefore, though the income was to be taxed

under the head" Income from securities" it does not lose the character of

business income and therefore, brought forward loss of earlier years can

be set off against such income. He submitted that in the case before us,

assets were fixed assets as shown in the balance sheet of the assessee

and were undoubtedly capital assets. He submitted that the assessee

even claimed depreciation on the building and bore well in the earlier

years.    He submitted that merely because, there is a nexus between the

business carried on by the assessee and the assets sold, the gains on

the sale of such assets cannot get the character of business income.

Thus, according to him, the findings of lower authorities are to be

upheld.

    10. Having heard both the parties and having considered the rival

contentions and the material on record, we find that the only question

before us for consideration is whether the brought forward loss from the

earlier years can be set off against the income from "capital gains" u/s

72 of the IT Act.     For the purpose of ready reference, the relevant

portion of sec.72 is reproduced here under;




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                                     10          ITA No.1546(B)2008 (SB)




            " 72 (1) Where for any assessment year, the net
           result of the computation under the head "Profits
           and gains of business or profession" is loss to the
           assessee, not being loss sustained in a speculation
           business, and such loss cannot be or is not wholly
           set off against income under any head of income
           in accordance with the provisions of sec.71, so
           much of the loss as has not been so set off or ..
           where he has no income under any other head, the
           whole loss shall, subject to the other provisions of
           this Chapter, be carried forward to the following
           assessment year, and ­
            (i) it shall be set off against the profits and gains,
           if any , of any business or profession carried on by
           him and assessable for that assessment year;....



      Much stress has been laid by both the parties on the term "profits

and gains if any, of any business or profession" mentioned in sub-

clause ­(i) of sub-sec.(1) of sec.72 of the IT Act. What are the profits and

gains of business or profession ?.        Whether it should be the income

earned out of the business carried on by the assessee or it may be the

income in any way connected to the business or profession carried on

by the assessee ?. The answer to this question entirely depends on the

interpretation to be given to the term "of any business or profession

carried on by the assessee and assessable for that assessment year" for

determination of the issue. It is not in dispute that the land, building




s
                                    11         ITA No.1546(B)2008 (SB)


and bore well sold by the assessee were used by the assessee for its

business purposes. It is also not disputed that these assets were fixed

assets of the assessee. The only argument of the assessee has been that

they have direct nexus with the business carried on by the assessee and

therefore, are business assets and any gains from the sale of such

assets would also have the character of business income.          We are

unable to agree with this contention of the assessee that the assets sold

by the assessee were business assets. Undisputedly, they were capital

assets and the capital receipts are not taxable nor are the capital

payments deductible from the income of the assessee. The capital is to

be used for the purpose of carrying on the business of the assessee and

it shall remain in the business of the assesee till it is either converted

into stock-in-trade or is disposed off.     The income earned by the

assessee by carrying on the business by use of the stock in trade only is

the business income of the assessee. Likewise, any expenditure incurred

by the assessee for carrying on of business and for earning the income

from such business or profession is only allowable as deduction. After

taking into account the receipts and payments for carrying on the

business of the assessee only the profit or gain or loss from the

business is computed. If the profit or loss relate to the same assessment

year from one source then it can be set off from another source under

the same head of income u/s 70 Act, and it can be set off against the

income from any other head of income u/s 71 of the Act.     Sec.72 of the

Act however, permits the carry forward business loss to subsequent




s
                                     12         ITA No.1546(B)2008 (SB)


assessment years and allows it to be set off against profit & gains, if

any, of any business or      profession carried on by the assessee and

assessable for the relevant assessment year. Thus, it is clear that it is

only the business loss that can be carried forward u/s 72 of the Act and

it can also be set off only against the business income of the assessee,

be it from the same business or from any other business. In the cases

relied upon by the learned counsel for the assessee, the Hon'ble

Supreme Court was dealing with the cases of the assessee's whose

business was dealing in securities also and it was thus held that these

securities were trading assets and therefore, the income therefrom

though to be computed under the head "income from securities" does

not lose the character of "business income".      But in the case of M/s

Express Newspapers Ltd., cited supra, the facts of the case are little

different and after taking into consideration the facts of the case

therein, the Hon'ble Supreme Court has held that the capital gains on

sale of capital assets is not to be set off against the brought forward loss

of earlier years.   In our opinion, the decision of the Hon'ble Supreme

Court in the case of M/s Express Newspapers Ltd., is fairly applicable to

the facts of the case before us.   The Coordinate Bench of the Tribunal

in the case of M/s Steelcon Industries Pvt.Ltd., cited supra, has

misplaced its reliance upon the decision of the Apex Court in the cases

of M/s United Commercial Bank Ltd., and M/s Cocanada Radhaswami

Bank Ltd., In view of the same, we are inclined to reject the grounds of




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                                   13        ITA No.1546(B)2008 (SB)


appeal nos.5 & 6 raised by the assessee. Thus, the reference is

answered in favour of revenue.

      11. The case is now to be posted before the Division Bench to give

effect to the order of the special Bench and also to give effect to the

order of the Division Bench on the grounds of appeal nos. 1 to 4 decided

by it while making the reference to the Hon'ble President for the

Constitution of a Special Bench.



(N.BARATHVAJA SANKAR) (G.C.GUPTA) (SMT. P. MADHAVI DEVI)
 VICE PRESIDENT     VICE PRESIDENT JUDICIAL MEMBER
Place: Bangalore
Dated: 09-12-2011
am*
Copy to :
   1. The Assessee
   2. The Revenue
   3. CIT(A)
   4. CIT
   5. DR
   6. GF(B'lore)
                                                  By Order


                                                  AR, ITAT, BANGALORE




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