Sections 50, 72 and 74 – Brought-forward business loss and brought-forward long-term capital loss can be set off against deemed short-term capital gains u/s. 50 arising on sale of factory building

6. [2019] 104 taxmann.com 129 (Mum) ITO vs. Smart Sensors & Transducers Ltd. ITA No.: 6443/Mum/2016 A.Y.: 2011-12 Dated: 6^th March, 2019

Sections 50, 72 and 74 – Brought-forward
business loss and brought-forward long-term capital loss can be set off against
deemed short-term capital gains u/s. 50 arising on sale of factory building

FACTS

The assessee
company in its original return of income declared long-term capital loss on the
sale of its factory building. During the course of assessment proceedings, the
Assessing Officer (AO) noted that the factory building was a depreciable asset
and the gain on sale of such depreciable asset was to be treated as deemed
short-term capital gains as per section 50 of the Act. Subsequently, the
assessee revised its return of income and offered the gains from the sale of
factory building as short-term capital gains after setting-off brought-forward
business loss and brought-forward long-term capital loss.

The AO noted that
in view of section 74 of the Act, long-term capital loss can be set off only
against long-term capital gains and that as per section 72 of the Act,
brought-forward business loss can be set off against business income and not
against short-term capital gains. The AO, thus, disallowed the assessee’s claim
for brought-forward business loss and brought-forward capital loss.

The aggrieved
assessee preferred an appeal to the CIT(A) who, considering the decision of the
Bombay High Court in CIT vs. Manali Investments [(2013) 219 Taxman 113 (Bom
HC)] allowed the assessee’s appeal.

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal,
following the decision of the Bombay High Court in the case of CIT vs.
Manali Investments (supra), allowed the assessee’s claim for set-off of
brought-forward long-term capital loss against deemed short-term capital gains
u/s. 50. The Tribunal noted that the Hon’ble Bombay High Court in its decision
had held that by virtue of section 50, only the capital gain is to be computed
u/s. 50 and the deeming fiction is restricted only for the purposes of section
50 and the benefit of set-off of long-term capital loss u/s. 74 has to be
allowed.

As regards the
set-off of brought-forward business loss, this issue was also covered by the
decision of the Bombay High Court in CIT vs. Manali Investments (supra).
The Tribunal held that the CIT(A) had rightly allowed the assessee’s claim for set-off of brought-forward business loss as well as
brought-forward long-term capital loss against deemed short-term capital gains
computed u/s. 50.

The Tribunal
dismissed the appeal filed by the Revenue.