Section 72 — Capital gains arising on sale of land and building used for business purposes cannot be set off against brought forward business loss.
Facts: The assessee-company was engaged in the business of manufacture/production of iron and steel. In the proceedings u/s.143(3) r.w.s. 148 the Assessing Officer (AO), relying on the decision of the Supreme Court in the case of Killick Nixon & Co. v. CIT, (66 ITR 714) (SC), held that the brought forward business loss and unabsorbed depreciation cannot be set off against income from capital gains arising on sale of land and building used for the purposes of the business. He noted that the SC has in the said case held that only income which is earned by carrying on business is entitled to be set off. Accordingly, he denied the set-off of gains arising on sale of land and building which were computed under the head ‘Capital Gains’ against brought forward business loss.
Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the order of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.
Before the Division Bench, the assessee relied upon the decision of the Bangalore Bench of the Tribunal in the case of Steelcon Industries (P) Ltd. v. ITO, ITA No. 571 (Bang.) 1989, A.Y. 1985-86, order dated 27-12- 2004) wherein the issue was decided in favour of the assessee by following the decisions of the SC in the cases of CIT v. Cocanada Radhaswami Bank, (55 ITR 17) (SC) and CIT v. Chugandas & Co., (55 ITR 17) (SC). The Division Bench noticed that there is another judgment of the SC in the case of CIT v. Express Newspapers Ltd., (53 ITR 250) wherein the SC held that 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 brought forward business loss. This decision of the SC was not considered by the Tribunal in the case of Steelcon Industries (P) Ltd (supra) and therefore, the Division Bench felt that the decision in the case of Steelcon Industries (P) Ltd. (supra) requires reconsideration by a Special Bench. The President constituted a Special Bench for disposal of the following two grounds of the appeal filed by the assessee —
“(1) 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 of business.
(2) 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.”
Held:
Section 72 permits carry forward of business loss to subsequent assessment years and allows it to be set off against profits & gains, if any, of any business or profession carried on by the assessee and assessable for the relevant assessment year. The term ‘profits and gains of business or profession’ means income earned out of business carried on by the assessee and not any income which is in some way connected to the business carried on by the assessee.
SB did not agree with the contention of the assessee that the assets sold by the assessee were business assets. It held that these were un-disputedly capital assets and 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 assessee till it is either converted into stock-in-trade or is disposed of. The income earned by the assessee by carrying on the business by use of stock-in-trade only is the business income of the assessee.
SB held that the decision of the SC in Express Newspapers Ltd. (supra) is squarely applicable to the facts of the present case and that the Coordinate Bench of the Tribunal in the case of Steelcon Industries Pvt. Ltd. (supra) has wrongly placed reliance upon the decision of the Apex Court in the cases of United Commercial Bank Ltd. and M/s. Cocanada Radhaswami Bank Ltd. It held that the gains arising on sale of land and building were not eligible for set-off against the brought forward business loss u/s.72.
These grounds of appeal filed by the assessee were decided against the assessee.
