IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 20.01.2015 CORAM: HONOURABLE MR.JUSTICE R.SUDHAKAR and HONOURABLE MR.JUSTICE R.KARUPPIAH Tax Case (Appeal) No.758 of 2007 M/s.Southern Travels Opp. Camp I Thermal Nagar, Tuticorin .. Appellant versus Assistant Commissioner of Income Tax Circle - I(1), Tuticorin .. Respondent PRAYER: Tax Case Appeal filed under Section 260A of Income Tax Act, 1961 as against order dated 25.07.2006 made in I..T.A..No.1225/mds/04 on file of Income Tax Appellate Tribunal, Madras 'C' Bench for assessment year 1999-2000. For appellant : Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar Padmanabhan For respondent : Mr.M.Swaminathan Standing Counsel for Income Tax. JUDGMENT (Judgment of Court was delivered by R.SUDHAKAR,J.) This Tax Case (Appeal) is filed by assessee as against decision of Special Bench of Income Tax Appellate Tribunal 2 constituted to consider following questions of law: "In view of provisions of section 32(2)(iii) whether it is possible to set off brought forward depreciation loss against capital gains?" 2. brief facts of case are as follows: appellant is partnership firm, engaged in business of plying taxis and letting out heavy equipments like dumper and cranes on hire basis. For assessment year 1999-2000, appellant filed return of income declaring 'nil' income after setting off of carry forward depreciation loss under Section 32(2) of Income Tax Act relating to assessment years 1995-96 and 1997-98 and business loss under Section 72 relating to assessment year 1997-98. While completing assessment for assessment year 1997-1998 in March 2000 under Section 143(3) of Income Tax Act, Assessing Officer reduced carry forward loss for setting off under Sections 72 and 32(2) of Income Tax Act. 3. For assessment year 1999-2000, of which we are now concerned, Assessing Officer initiated re-assessment proceedings under Section 147 of Income Tax Act by issuing notice dated 23.03.2001 under Section 148, on ground that income had 3 escaped assessment due to setting off carry forward business and depreciation loss for assessment year 1997-1998 against income from short term capital gains arising on sale of business asset. 4. Before Assessing Officer, assessee contended that short term capital gains in terms of Section 50 of Income Tax Act had arisen out of sale of depreciable assets, viz., Shoval Loader and Crane, held by assessee and used for purpose of earning income, which was assessable to tax under head 'income from business '. It was also contended that gain arising on sale of such depreciable assets is taxable under head 'short term capital gains', by virtue of Section 50 of Income Tax Act, if written down value of particular block to which it belongs is less than sale consideration. assessee, therefore, relied upon provisions of Section 32(2) of Income Tax Act and contended that carry forward depreciation loss was admissible to be set off against profit and gains arising from business in subsequent year and such profits and gains from business included gains arising from sale of business asset, though it was assessable under separate head of income for purpose of computation. In support of this contention, assessee relied upon decisions of Supreme Court in 4 case of CIT Vs Cocanada reported in 57 ITR 306 and Sasoon Vs. CIT reported in 86 ITR 575. 5. Assessing Officer, however, rejected claim of assessee and brought to tax short term capital gains to tax. 6. Not satisfied with order of Assessing Officer, assessee preferred appeal before Commissioner of Income Tax (Appeals), who held against assessee, thereby dismissed appeal. Hence, assessee pursued matter before Income Tax Appellate Tribunal. Tribunal constituted Special Bench to decide question, which we have already referred supra. 7. Before Tribunal, assessee/appellant had raised following grounds: "2. assessing Officer and Commissioner of Incometax (Appeals) - I Madurai, erred in law in holding that unabsorbed depreciation loss of earlier years cannot be adjusted against short term capital gains arising on sale of business assets. 3. Commissioner of Income tax (Appeal) failed to note that Sec.32(2) and Sec.72 deal with same aspect of carry forward of past years loss though arising 5 from different sources. 4. decision of Supreme Court in CIT Vs. Cocanada Radhaswami Bank Limited (57 ITR 306) and CIT Vs. Ramanath Goenka (259 ITR 26) (Mds) applies to facts of case and carry forward depreciation loss needs to be adjusted against short term capital gains arising on sale of business assets." 8. In above factual matrix, Tribunal has framed question of law to decide as to whether in view of provisions of Section 32(2)(iii), whether it is possible to set off brought forward depreciation loss against capital gains for assessment year 1999-2000. 9. Special Bench of Tribunal referred to provisions of Sections 32(2), 32(2)(i), (ii) and (iii), Section 71 as also Section 72 of Income Tax Act Act and was of view that in facts of present case, claim of assessee that unabsorbed depreciation should be allowed to be adjusted against capital gains is incorrect, as said provisions are not attracted to facts of present case. 10. Aggrieved by order of Tribunal, assessee is before this Court and this Tax Case (Appeal) was admitted by this Court on following substantial question of law: 6 Whether on facts and in circumstances of case, Tribunal was right in law in holding that appellant is not entitled to set off of brought forward depreciation loss relating to assessment year 1997-98 against profit and gains arising from sale of business assets for assessment year 1999-2000?" 11. Learned counsel appearing for assessee submitted that depreciation loss carried from assessment year 1997-98 could be set off against short term capital gains arising from sale of depreciable assets for assessment year 1999-2000. Under Section 32(2) of Income Tax Act, carried forward depreciation had to be set off against income from profits and gains of business. In present case, profit on sale of depreciable assets had arisen in carrying on business activity, though profit arising on sale of depreciable assets was taxed under short term capital gains by deeming provision of Section 50 of Income Tax Act. He further submitted that Section 50 of Income Tax Act does not state about capital gain on sale of assets. It only provides for withdrawal of depreciation already allowed on depreciable asset at time of sale. Hence, carry forward depreciation allowance for assessment year 1997-98 as originally allowed is in order and there is no income 7 escaping assessment. He also submitted that Tribunal had not adverted to decisions of Supreme Court in case of CIT Vs Cocanada reported in 57 ITR 306 and Sasoon Vs. CIT reported in 86 ITR 575, wherein, it was held that income arising from business activities, though taxed as income under different heads, constitute business income. Further more, Tribunal had not addressed issue that in terms of Section 32(2)(iii), whether assessee will be entitled to set off brought forward depreciation loss against capital gains. 12. Per contra, learned Standing Counsel appearing for Revenue supported decision of Special Bench of Tribunal and contended that if business from which depreciation claim arose is not carried out in any of assessment years, assessee would not be entitled to set off. 13. Heard learned counsel appearing for assessee and learned Standing Counsel appearing for Revenue and perused materials placed before this Court. 8 14. Before going into merits of case, for better appreciation of issue, we would like to consider provisions of Section 32(2) of Income Tax Act as it stood prior to amendment and after amendment vide Finance Act (No.2) Act, 1996, with effect from 1997 and same is quoted hereunder :- Before Amendment After Amendment provision of Section 32(2) as it (2) Wherein assessment of stood prior to amendment by assessee full effect cannot be Finance (2) Act, 1996, is as under given to any allowance under "(2) Where, in assessment of clause (ii) of sub-section (1) in any assessee, full effect cannot be previous year owing to there being given to any allowance under no profits or gains chargeable for clause (ii) of sub-section (1) in any that previous year or owing to previous year, owing to there profits or gains being less than being chargeable being less than allowance, then, allowance or allowance, then, subject to the part of allowance to which provisions of sub-section (2) of effect has not been given section 72 and sub-section (3) of (hereinafter referred to as section 73, allowance or part unabsorbed depreciation of allowance to which effect allowance), as case may be, _ has not been given, as case (i) shall be set off against profits may be, shall be added to and gains, if any, or any business or amount of allowance for profession carried on by him and depreciation for following assessable for that assessment year; previous year and deemed to be (ii) if unabsorbed depreciation part of that allowance, or if there is allowance cannot be wholly set off no such allowance for that previous under clause (i), amount not so set year, be deemed to be allowance off shall be set off from income for that previous year, and so on for under any other head, if any, succeeding previous years. assessable for that assessment year; (iii) if unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), amount of allowance not so set off shall be carried forward to following assessment year and (a) it shall be set off against profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; 9 Before Amendment After Amendment (b) if unabsorbed depreciation allowance cannot be wholly so set off, amount of unabsorbed depreciation allowance not so set off shall be carried forward to following assessment year not being more than eight assessment years immediately succeeding assessment year for which aforesaid allowance was first computed: Provided that business or profession for which allowance was originally computed continued to be carried on by him in previous year relevant for that assessment year. (emphasis supplied) 15. Section 72 of Income Tax Act provides for carry forward and set off of business loss and Clause (2) of Section 72 of Income Tax Act provides manner in which carry forward and set off of business loss should be computed. Section 72 of Income Tax Act reads as follows: Carry forward and set off of business losses. 72. (1) Where for any assessment year, net result of computation under head "Profits and gains of business or profession" is loss to assessee, not being loss sustained in speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with provisions of section 71, so much of loss as has not been so set off 10 or where he has no income under any other head, whole loss shall, subject to other provisions of this Chapter, be carried forward to following assessment year, and (i) it shall be set off against profits and gains, if any of any business or profession carried on by him and assessable for that assessment year; (ii) if loss cannot be wholly so set off, amount of loss not so set off shall be carried forward to following assessment year and so on: Provided ..... (a)..... (b).... (2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to provisions of this section. (3)......." (emphasis supplied) 16. In present case, Tribunal came to hold that depreciation for set off relates to assessment year 1997-1998 and business is still continuing. In such situation, Tribunal went on to hold that Section 32(2) (i) and 32(2) (ii) do not get attracted. This is not case of appellant/assessee. only plea is that if Section 32(2) (iii) provides that unabsorbed depreciation allowance 11 cannot be wholly set off under clause (i) and clause (ii), amount of allowance not so set off shall be carried forward to following assessment year and it shall be set off against profit and gains, if any, of any business or profession carried on by him and assessable for that assessment year in terms of Section 32(2)(iii)(a) of Income Tax Act. following assessment year in this case is 1999-2000. 17. Unfortunately, Tribunal has not addressed issue in light of said provision Section 32(2)(iii)(a) of Income Tax Act. In paragraph 7 of order, Tribunal went on to hold that unabsorbed depreciation being two years older to present assessment year, viz., 1999-2000, assessee would be entitled to carry forward said unabsorbed depreciation to be set off against profit and gains of business to which this depreciation is related to is still carried on and same shall be allowed to be carried forward for following six assessment years. There is no dispute on this finding of Tribunal. 18. But core issue is whether in terms of Section 32(2)(iii) of Income Tax Act, assessee will be entitled to set off brought forward depreciation loss against capital gains. That issue, apparently, 12 has not been addressed by Tribunal in order in question. All that Tribunal says in paragraph 9 of order is that, though it is abundantly clear that Section 32(2)(iii) is operational in case of assessee, it only says that unabsorbed depreciation can be carried forward to successive years. That is not issue raised in appeal. 19. At risk of repetition, we once again reiterate that issue to be decided in case is whether capital gains arising out of sale of depreciable assets could be set off against profits and gains of business for assessment year 1999-2000. That issue, unfortunately, has not been considered by Tribunal. Furthermore, decisions of Supreme Court in case of CIT Vs Cocanada reported in 57 ITR 306 and Sasoon Vs. CIT reported in 86 ITR 575 raised in grounds of appeal by assessee have also not been adverted to. decision of Supreme Court clearly gives pointer to issue as to whether appellant/assessee is entitled to set off of brought forward depreciation loss as against profits and gains of business arising from sale of depreciable assets for assessment year 1999-2000. 13 20. In this view of matter, we are inclined to remand matter back to Tribunal to consider and pass orders on entire issues raised by assessee. Accordingly, order of Tribunal stands set aside and matter is remanded back to Tribunal for consideration of entire issues afresh. In result, this Tax Case (Appeal) stands disposed of. No costs. Index: Yes / No (R.S.,J.) (R.K.,J.) Internet: Yes / No 20.01.2015 sl To 1. Income Tax Appellate Tribunal, Madras 'C' Bench (Special Bench). 2. Commissioner of Income Tax (Appeals)-I, Madurai. 3. Assistant Commissioner of Income Tax Circle I (1), Tuticorin. 14 R.SUDHAKAR,J. AND R.KARUPPIAH,J. sl Tax Case (Appeal) No.758 of 2007 20.1.2015 M/s. Southern Travels v. Assistant Commissioner of Income-tax Circle - I(1), Tuticorin