Fourth Income-tax Officer Vs. Balakrishna Mills (P.) Ltd. - Court Judgment

Excerpt:
1. the revenue's contention in this appeal is that the earlier years, business loss carried forward cannot be set off against the current year's profit under section 41(2) of the income-tax act, 1961 ("the act"), since no business was carried on by the assessee. the stated facts are that the assessee-company, which was formerly carrying on textile business, derived income by leasing out its assets for the preceding assessment year 1976-77. during the accounting year ended 30-6-1976, relevant to the assessment year 1977-78, under present appeal, the assessee sold the assets and derived profit of rs. 6,185.the ito assessed it as income under section 41(2), under the head "profits and gains of business or profession" for the reasons discussed in the appellate order for the assessment year.....

Judgment:
1. The revenue's contention in this appeal is that the earlier years, business loss carried forward cannot be set off against the current year's profit under section 41(2) of the Income-tax Act, 1961 ("the Act"), since no business was carried on by the assessee. The stated facts are that the assessee-company, which was formerly carrying on textile business, derived income by leasing out its assets for the preceding assessment year 1976-77. During the accounting year ended 30-6-1976, relevant to the assessment year 1977-78, under present appeal, the assessee sold the assets and derived profit of Rs. 6,185.

The ITO assessed it as income under section 41(2), under the head "Profits and gains of business or profession" for the reasons discussed in the appellate order for the assessment year 1976-77. The ITO did not set off the loss brought forward from the earlier years against the above income, no reasons being assigned in the assessment order for this denial. The assessee contended before the Commissioner (Appeals) that the carried forward business loss for the earlier years should be set off against the profit under section 41(2). The Commissioner (Appeals) allowed the assessee's claim referring to his predecessor's order in IT Appeal No. 61 (Mds.) of 1979-80 dated 9-10-1980, wherein he had held that the lease income from letting out the assets and the income assessed under section 41(2) is business income and that loss and unabsorbed depreciation brought forward from the earlier years could be set off against it.

2. We have heard the parties and are of the view that the revenue's contention is well founded. It is an admitted position that unlike in fast year, this year there was no leasing of the properties and the only income derived was the profit under section 41(2) by disposal of the assets. Thus no business was carried on during the relevant accounting year. Section 41(2) and 72(1) of the Act are reproduced below : "41(2) Where any building, machinery, plant of furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable, in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, exceed the difference between the actual cost and the written down value shall be chargeable to income-tax is income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

Explanation : Where the money's payable in respect of the building machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year." "72(1) Where for any assessment year, the net result of the computation under the head 'profits and gains of business or profession' is a loss to the assessee, not being a 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 section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section 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, business or profession carried on by him and assessable for that assessment year : Provided that the business or profession which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; It is thus patent that under section 72(1) the brought forward losses from the earlier years can be carried forward and set off only against the profits and gains of any other business for the subsequent year provided that the business for which the loss was originally computed continued to be carried on by him in the subsequent year. It is an admitted position by the assessee that the exception in section 41(5), which provide that the loss which arose in the business during the previous year in which it ceased to exist, could be carried forward and set off for a subsequent year against the income assessed, inter alia, under section 41(2) has no application in the assessee's case, since for the preceding assessment year 1976-77, in which the business ceased, there was only positive income and no loss. In the present case, the assessee had sold the income and no loss. In the present case, the assessee had sold the assets of the business and the profit under section 41(2) is assessed as the income of the business only by virtue of the Explanation to section 41(2) which enjoins that the provisions of section 41(2) shall apply as if the business is in existence in the accounting year in which the sale took place. Thus the presumption of the business being in existence is only for the limited purpose of applying section 41(2) and cannot be extended to section 72(1), which requires that the business should have been actually carried on by the assessee. In the above view of the matter, we disagree with the Commissioner (Appeals) and would hold that the brought forward loss of the earlier year cannot be set off against the profit under section 41(2) for the assessment year 1977-78. The revenue's appeals succeeds.