Whether when assessee makes capital gains on sale of property, there is any bar u/s 158BB(4) to claim deduction of carried forward losses pertaining to house property - NO: HC

THE issue before the Bench is - Whether when the assessee makes capital gains on sale of property, there is any bar u/s 158BB(4) to claim deduction of carried forward losses pertaining to house property. And the answer goes in favour of the assessee.

Facts of the case

The assessee and his wife were partners of a firm known as M/s.Century Complex at Manjeri. There was a search of the premises of the appellant. The firm had filed its returns of income for

the assessment years 1993-94 to 1995-96. The assessee sought for settling the tax pertaining to the block period before the Settlement Commission, that was, block period ending with 01.02.1996. The Settlement Commission, while considering income of the house property and the capital gains on sale of Century Complex at Manjeri, had taken into account the sale price apart from brokerage as well as index cost of land appearing in the document. Ultimately the long term capital gains was arrived at Rs. 22,54,446/-. The applicant had sought reduction of losses under two categories under the head of house property - loss from the house property carried forward amounting to Rs. 5,15,389/- and interest paid on borrowings for previous years that was Rs. 8,20,028/-. So far as brokerage was concerned whether it was excessive or not, it was not the subject matter of dispute.

After considering the stand of the applicant as well as the department, ultimately the net capital gains was arrived at Rs. 59,57,984/-. The Settlement Commission entirely agreed with the claim of the applicant in respect of set off of house property loss carried forward and as well as interest paid on borrowals that is Rs. 5,15,389/- and Rs. 8,20,058/- respectively. Department challenged the said order of the Settlement Commission before the Single Judge, though the Single Judge confirmed the opinion of the Settlement Commission, so far as interest paid on borrowers, did not agree with the settlement commission so far as allowing deduction of Rs. 5,15,389/- opining that there was a clear bar against granting of carried forward loss, except in the case of regular assessment under Section 158BB(4) of the Act.

On appeal before the High Court, the counsel for the assessee submitted that if loss was brought forward pertaining to the block period itself which was initially not reflected in the regular assessment, he was entitled to seek benefit of such loss pertaining to the income computed after the search, that was, determination of undisclosed income. In other words, according to him, as long as it formed part of the undisclosed income for the block period, he was entitled to claim such losses brought forward. He places reliance on the reported decision of the Apex Court in E.K.Lingamurthy and another v. Settlement Commissioner (IT and WT) and another (SC) (2009-TIOL-07-SC-IT).

Held that,

++ reading of the above judgment and the interpretation given to Section 158BB(4) read with Explanation (a) thereto, we are of the opinion, the Single Judge was not justified in disallowing the benefit granted to the assessee by the Settlement Commission so far as losses brought forward pertaining to the house property that is Rs. 5,15,389/-. In the light of observation of the Apex Court pertaining to Section 158BB(4) read with Explanation (a) how the loss brought forward could be considered while determining the undisclosed income and the benefit thereunder is in accordance with the procedure under the Act. So far as the interest paid on borrowals, it is also justified. Therefore, the appeal of the department fails and appeal of the party assessee deserves to be allowed.