THE issues before the Bench are - Whether when the assessee carries forward business loss, the same has to be necessarily set off against business profits and not income under other heads in the subsequent year; Whether I-T Act is silent on the issue of setting off carried forward business loss against business profits in subsquent years and Whether, for the purpose of setting off carried forward business loss, rental income and income from other sources also represent business profit of the assessee. And the verdict goes in favour of the assessee.
Facts of the case
Assessee is carrying on the business of sale and purchase of properties and also earning rental and other income. The assessee set off the business loss brought forward against its income by way of rent, car and computer hire charges and
Assessee is carrying on the business of sale and purchase of properties and also earning rental and other income. The assessee set off the business loss brought forward against its income by way of rent, car and computer hire charges and
commission income and declared a net loss. AO held that rental income was chargeable to tax under the head “income from house property” and that the hire charges and commission income was chargeable to tax under the head “income from other sources”, therefore, the brought forward business loss was not permitted to be set off against the income shown under these two heads of income u/s 72(1). The relevant Section permitted adjustment of brought forward business loss only against profits assessed under the head “business”.
Assessee contended that business of leasing, selling and renting of real estate properties was one of the main objects of the company as per the Memorandum of Association and the hire charges and commission income was also business income, therefore, the brought forward business losses could be properly set off against these items of income. Though the rental income was chargeable to tax under the head “income from house property” and the hire charges and commission income were assessed under the head “income from other sources”, that was only because of the provisions of the Income Tax Act but were in fact income from business and since there was no bar u/s 72(1) to the brought forward losses being set off against the aforesaid items of income, losses had to be set off.
AO observed that the assessee was not in the business of let out of property but in the business of sale and purchase of properties which had not been carried out during the year and the rental income could not be considered as business income. House-owning cannot be a business or trade for the purpose of the Income Tax Act and even on this reasoning rental income could not be adjusted against the brought forward business loss. It was further noted that assessee had not claimed any depreciation on such rented buildings also. Regarding commission income, the assessee contended that it procured business for ‘T’ and filed a copy of the confirmation. AO rejected the claim of the assessee observing that the commission income could be classified and assessed only under the residual head and not as the business income of the assessee. Regarding hire charges AO observed that the assessee “finding its cars and computers idle, decided to give them on hire to others and to earn some income from such activity of hiring out of the assets”. Such income could not be considered as business income. Thus AO refused for set off of brought forward business loss against the income by way of rent, car and computer hire charges and commission income.
CIT (A) allowed the appeal of the assessee regarding rental income observing that the let out properties were shown in the balance sheet as stock in trade and thus constituted trading assets and thus, rental income was available for adjustment against the brought forward business loss. Regarding income from car and computer hire charges, CIT (A) observed that the activities of letting out the vehicles and computers and earning commission income amounted to business carried on by the assessee, even on the footing that income derived by letting out idle business assets, though temporary, can amount to business. Carrying on a business activity was not confined to activities by way of trade, commerce or manufacture, but also took into account the rendering of services to others, which may be of a variegated character, which would also amount to business. Thus, the CIT (A) held that the brought forward business loss could be set off against the rental income, car and computer hire charges and the commission income u/s 72(1). ITAT reversed the order of the CIT (A) stating that the business loss brought forward from the earlier year cannot be set off against the rental income and income from car and computer hire charges, commission income, etc. It is against the decision of the Tribunal that the assessee has filed the present appeal.
After hearing both the parties, the Hon’ble High Court that,
++ the opening part of the sub-section (1) of section 72A refers to the net result of the computation under the head “profits and gains of business or profession”. Thus the computation of the loss should have been made under the particular head of income. However, when it comes to the set off of the loss computed under the head “profits and gains of business” against the profits and gains of the business of assessee in the subsequent year, the condition that the computation of the profits and gains of the business carried on by the assessee in the subsequent year should be under the head “profits and gains of business or profession” is conspicuously absent. This will be clear from clause (i) of the sub-section which does not refer to the head of income but merely makes reference to “the profits and gains, if any, of any business or profession carried on by him”. In the subsequent year in which the assessee claims set off of the brought forward business loss, there is no condition that the business income against which the brought forward loss is claimed to be sought for should have been computed under the head “profits and gains of business”. The income against which the brought forward loss is claimed to be set-off should represent business income judged by the application of commercial principles, and not on an application of the provisions of the Act;
++ it calls for an inquiry as to whether the rental income and the income by way of hire charges and commission earned by the assessee, though assessed under the head “income from house property” and "income from other sources" can be treated as the business income of the assessee as to be eligible for adjustment against the brought forward loss. There has to be distinction between the slotting of the income of an assessee under different heads of income in accordance with the Act and the business income or profits and gains of business as understood in accordance with commercial principles. ITAT decided the appeal merely on the basis that the rental income has to be statutorily assessed under the head “income from house property” and the hire charges and commission income have to be assessed compulsorily as “income from other sources”. One had to apply the provisions of Section 72 (1) to ascertain whether, notwithstanding the pigeon-holing of the receipts into the specific heads of income as provided under the Act, by applying commercial principles these receipts could be considered as the business income of the assessee company on a commercial perspective. The Tribunal had missed this aspect in its order;
++ the main objects of the assessee company are, according to its memorandum of association the carrying of business of leasing, selling and renting of real estate properties, and others. The question whether the activities carried on by the assessee amounted to a business has to be decided not on the basis of the head of income under which the result of those activities is assessed for the purposes of the Income Tax Act, but on the basis of commercial principles. There is no doubt that the rental income, hire charges from car and computer and the commission income all represent the profits and gains of business carried on by the assessee. Thus, the brought forward business loss can be set off against these items of income.
Assessee contended that business of leasing, selling and renting of real estate properties was one of the main objects of the company as per the Memorandum of Association and the hire charges and commission income was also business income, therefore, the brought forward business losses could be properly set off against these items of income. Though the rental income was chargeable to tax under the head “income from house property” and the hire charges and commission income were assessed under the head “income from other sources”, that was only because of the provisions of the Income Tax Act but were in fact income from business and since there was no bar u/s 72(1) to the brought forward losses being set off against the aforesaid items of income, losses had to be set off.
AO observed that the assessee was not in the business of let out of property but in the business of sale and purchase of properties which had not been carried out during the year and the rental income could not be considered as business income. House-owning cannot be a business or trade for the purpose of the Income Tax Act and even on this reasoning rental income could not be adjusted against the brought forward business loss. It was further noted that assessee had not claimed any depreciation on such rented buildings also. Regarding commission income, the assessee contended that it procured business for ‘T’ and filed a copy of the confirmation. AO rejected the claim of the assessee observing that the commission income could be classified and assessed only under the residual head and not as the business income of the assessee. Regarding hire charges AO observed that the assessee “finding its cars and computers idle, decided to give them on hire to others and to earn some income from such activity of hiring out of the assets”. Such income could not be considered as business income. Thus AO refused for set off of brought forward business loss against the income by way of rent, car and computer hire charges and commission income.
CIT (A) allowed the appeal of the assessee regarding rental income observing that the let out properties were shown in the balance sheet as stock in trade and thus constituted trading assets and thus, rental income was available for adjustment against the brought forward business loss. Regarding income from car and computer hire charges, CIT (A) observed that the activities of letting out the vehicles and computers and earning commission income amounted to business carried on by the assessee, even on the footing that income derived by letting out idle business assets, though temporary, can amount to business. Carrying on a business activity was not confined to activities by way of trade, commerce or manufacture, but also took into account the rendering of services to others, which may be of a variegated character, which would also amount to business. Thus, the CIT (A) held that the brought forward business loss could be set off against the rental income, car and computer hire charges and the commission income u/s 72(1). ITAT reversed the order of the CIT (A) stating that the business loss brought forward from the earlier year cannot be set off against the rental income and income from car and computer hire charges, commission income, etc. It is against the decision of the Tribunal that the assessee has filed the present appeal.
After hearing both the parties, the Hon’ble High Court that,
++ the opening part of the sub-section (1) of section 72A refers to the net result of the computation under the head “profits and gains of business or profession”. Thus the computation of the loss should have been made under the particular head of income. However, when it comes to the set off of the loss computed under the head “profits and gains of business” against the profits and gains of the business of assessee in the subsequent year, the condition that the computation of the profits and gains of the business carried on by the assessee in the subsequent year should be under the head “profits and gains of business or profession” is conspicuously absent. This will be clear from clause (i) of the sub-section which does not refer to the head of income but merely makes reference to “the profits and gains, if any, of any business or profession carried on by him”. In the subsequent year in which the assessee claims set off of the brought forward business loss, there is no condition that the business income against which the brought forward loss is claimed to be sought for should have been computed under the head “profits and gains of business”. The income against which the brought forward loss is claimed to be set-off should represent business income judged by the application of commercial principles, and not on an application of the provisions of the Act;
++ it calls for an inquiry as to whether the rental income and the income by way of hire charges and commission earned by the assessee, though assessed under the head “income from house property” and "income from other sources" can be treated as the business income of the assessee as to be eligible for adjustment against the brought forward loss. There has to be distinction between the slotting of the income of an assessee under different heads of income in accordance with the Act and the business income or profits and gains of business as understood in accordance with commercial principles. ITAT decided the appeal merely on the basis that the rental income has to be statutorily assessed under the head “income from house property” and the hire charges and commission income have to be assessed compulsorily as “income from other sources”. One had to apply the provisions of Section 72 (1) to ascertain whether, notwithstanding the pigeon-holing of the receipts into the specific heads of income as provided under the Act, by applying commercial principles these receipts could be considered as the business income of the assessee company on a commercial perspective. The Tribunal had missed this aspect in its order;
++ the main objects of the assessee company are, according to its memorandum of association the carrying of business of leasing, selling and renting of real estate properties, and others. The question whether the activities carried on by the assessee amounted to a business has to be decided not on the basis of the head of income under which the result of those activities is assessed for the purposes of the Income Tax Act, but on the basis of commercial principles. There is no doubt that the rental income, hire charges from car and computer and the commission income all represent the profits and gains of business carried on by the assessee. Thus, the brought forward business loss can be set off against these items of income.
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