Income Tax Appellate Tribunal - Delhi
Hotel Dhanolti vs Deputy Commissioner Of Income Tax on 17 April, 2002
Equivalent citations: [2002]82ITD821(DELHI)
ORDER
R.M. Mehta, Vice-President
1. A number of grounds have been raised in this appeal directed against the order passed by the CIT(A) but at the outset, the learned counsel did not press grounds 1 and 2 pertaining to the decision of the CIT(A) to dispose of the appeal ex parte. These are being rejected. All the other grounds pertain to a solitary issue and that being whether the AO in law can make an "adjustment" under Section 143(1)(a) in respect of the assessee's claim to adjust brought forward unabsorbed depreciation against income from short-term capital gain under Section 50 of the IT Act, 1961.
2. The assessee filed a return showing a carried forward loss of Rs. 2,34,720. This came about as a result of adjustment on account of brought forward losses but which the AO added back in the intimation under Section 143(1)(a) which resulted in a total income of Rs. 40,90,518. According to the AO, brought forward losses could not be set off against income under the head "Capital gains".
3. Against the "adjustment", the assessee filed application under Section 154 as also a revised return and in the latter the business losses were bifurcated into (i) business loss, and (ii) unabsorbed depreciation. The plea was that set off be allowed in respect of brought forward unabsorbed depreciation.
4. The AO considered the submissions made and referring to the provisions of Section 32(2) as amended by Finance Act, 1996, w.e.f. 1st April, 1997, he opined that the income under the head "Capital gains" could not be equated with the "profits and gains of any business or profession" against which a set off could be allowed in respect of unabsorbed depreciation. It was noted in the order under Section 154 that carry forward of business loss was already allowed against business income.
5. In rejecting the assessee's stand, the learned AO referred to the provisions of Section 32(2)(iii)(a) inserted w.e.f. 1st April, 1997, and also relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Express Newspapers Ltd. (1964) 53 ITR 250 (SC), more precisely the following observations :
"the profits and gains of business and capital gains are two distinct concepts in the IT Act; the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from the business during that year."
6. On further appeal, the CIT(A) upheld the view taken by the AO on the ground that the claim made was patently wrong and inadmissible and, therefore, the "adjustment" under Section 143(1)(a) was in order.
7. Before us, the matter was argued at length by both the parties. The learned counsel took us through a string of decisions pertaining to the subject-matter of "adjustments" under Section 143(1)(a) and prior to which he took us through the scheme of the section itself. The decisions cited were :
1. S.R.F. Charitable Trust v. Union of India and Ors. (1992) 193 ITR 95 (Del);
2. Kamal Textiles v. ITO and Ors. (1991) 189 ITR 339 (MP);
3. Pradeep Kumar Har Saran Lal v. AO (1998) 229 ITR 46 (All);
4. Khatau Junkar Ltd and Anr. v. K.S. Pathania, Dy. CIT (1992) 196 ITR 55(Bom);
5. JKs Employee's Welfare Fund v. ITO (1993) 199 ITR 765 (Raj);
6. Modem Fibotex India Ltd. and Am. v. Dy. CTT (1995) 212 ITR 496 (Cal);
7.. Coates of India Ltd. v. Dy. CIT (1995) 214 ITR 498 (Cal);
8. CIT v. L.D. Satija (1999) 104 Taxman 388 (P&H);
9. CIT v. Orbit Travel and Tours (P) Ltd. (1999) 238 ITR 931 (AP);
10. Parikh Engg. and Body Building Co. Ltd. and Anr. v. Union of India and Ors. (1999) 238 ITR 554 (Pat);
11. Jhalani Tools (India) Ltd. v. Dy. CJT (1999) 65 TTJ (Del) 723 : (1999) 69 ITD 273 (Del);
12. Surat Vankar Sahakari Sangh Ltd. v. Dy. CIT (1998) 96 Taxman 195 (And) (Mag);
13. Eicher Motors Ltd. v. Dy. CIT (1992) 40 ITD 595 (Ind);
14. Asstt. CIT v. Geeta Mayor (2000) 69 TTJ (And) 18 : (2000) 74 ITD 314 (AM);
15. Atul Ltd. v. Asstt. CIT (1999) 64 TTJ (And) 741 : (1999) 69 ITD 187 (And);
16. Dy. CIT v. Rampur Distillery and Chemical Co. Ltd. (1998) 60 TTJ (Del) 630 : (1998) 64 ITD 279 (Del);
17. Jila Sahakari Bhoomi Vikas Bank Ltd, v. Dy. CIT (1998) 61 TTJ (Jp) 431: (1998) 98 Taxman 231 (Mag);
18. AIMS Oxygen (P) Ltd. v. Dy. CIT (1998) 99 Taxman 326 (Ahd)(Mag); and
19. Thermax Babcock and Wilcox Ltd. v. Dy. CIT (2000) 67 TTJ (Pune) 813 ; (2000) 73 ITD 5 (Pune).
8. The further submissions of the learned counsel as summarized from the written note filed before the Tribunal were :
(i) The gain of Rs. 37,24,826 was not short-term capital gain under Section 45 in view of the provisions of Section 41(2) of the IT Act, which were introduced simultaneously w.e.f. 1st April, 1998. That the capital gain arising from sale of depreciable assets was to be assessed as business profits under Section 41(2);
(ii) That the unabsorbed depreciation was required to be set off because the assessee carried on the business in the current year and the unabsorbed depreciation would become part of the current year's depreciation in the light of the judgment of the Hon'ble Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P) Ltd. (1985) 155 ITR 711 (SC);
(iii) That making an adjustment under Section 143(1)(a) cast a greater responsibility on the AO as he was to ensure that whatever was allowable was to be allowed although not claimed and in case the AO was to treat the gain arising from sale of depreciable assets as giving rise to capital gains and not business profits than opportunity was required to be given to the assessee. Reliance was placed on the decision of the Chandigarh Bench of the Tribunal in the case of H.P. Financial Corporation v. Dy. CIT reported in (1999) 70 ITD 247 (CM):
(iv) That the assessee had duly stated that WDV of assets sold aggregated Rs. 18,51,895 and reducing therefrom the sale value, the excess amount of Rs. 38,78,105 was the gain, which consisted of Rs, 37,24,826 as business profits under Section 41(2) and it was only the balance of Rs. 1,53,279 which represented short-term capital gain assessable under Section 50 of the IT Act; and
(v) In the instant case, it could not be said that there was no controversy as to the nature of the income or the extent thereof. Profits and gains of a business may include income chargeable under other heads of income, but which incomes are derived from a business activity and viewed from this angle the short-term capital gains no doubt computed under Section 50 were of a similar nature i.e., business income.
9. Reliance was placed on :
(i) E.D. Sassoon and Co. Ltd. v. CIT (1972) 86 ITR 757 (SC);
(ii) Western States Trading Co. (P) Ltd. v. CIT (1971) 80 ITR 21 (SC);
(iii) O.RM.M.SP.SV. Firm v. CIT (1967) 63 ITR 404 (SC);
(iv) Bengal and Assam Investors Ltd. v. CIT (1966) 59 ITR 547 (SC); and
(v) CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC)
10. The learned counsel also relied on a decision of the Bombay Bench of the Tribunal in the case of J.K. Chemicals Ltd. v. Asstt CIT (2000-2001) BGAJ p. 36 for the same proposition. He also invited attention to the speech of the Hon'ble Finance Minister in 222 ITR (St) 36.
11. The learned Departmental Representative, on the other hand, strongly supported the orders passed by the tax authorities and subsequent arguments advanced by him were a reiteration of the reasons recorded by the said authorities in rejecting the assessee's stand. The following were highlighted :
(i) Revised return was filed by the assessee after the "adjustment" under Section 143(1)(a);
(ii) No mention in grounds of appeal before the CIT(A) that the computation under Section 50 is incorrect;
(iii) No mention of Section 41(2) in the grounds of appeal either before CIT(A) or the Tribunal;
(iv) No mention of Section 41(2) in the assessee's own computation of income placed on the paper book;
(v) Provisions of Section 32(2)(iii) introduced w.e.f. 1st April, 1997, were quite clear since the unabsorbed depreciation could be set off only against the profits and gains of any business or profession carried on by an assesses but under no circumstances could it be set off against income under the head "Capital gains";
(vi) When there was no ambiguity in a provision then nothing was to be read further into it;
(vii) Vis-a-vis the speech of the Hon'ble Finance Minister nothing was inserted in the section itself which ultimately came on the statute book;
(viii) "Prima facie inadmissible" meant vis-a-vis provisions of Section 143(1)(a) and the AO was empowered to make an "adjustment" on the basis of information furnished by the assessee itself; and
(ix) The arguments raised on behalf of the assessee went beyond the pale of Section 143 (1)(a) and were more in the realm of Section 143(3) proceedings.
12. In conclusion, it was urged that the orders passed by the tax authorities be upheld.
13. Reliance was placed on :
(i) M. Rangaswamy v. CWT (1996) 221 ITR 39 (Mad):
(ii) CIT v. Smt. Shun Chui Ai (1995) 216 ITR 155 (Gau);
(iii) CIT v. D.P.S. (I) (P) Ltd. (1996) 222 ITR 371 (Cal); and
(iv) CIT v. Champarun Sugar Works Ltd. (1997) 225 ITR 863 (All).
14. In reply, the learned counsel for the appellant stated that provisions of Section 41(2) could only have been referred to provided an opportunity of being heard was given by the AO and this could only come about in case the matter could have been taken up in proceedings under Section 143(3). It was emphasized that Section 41(2) had been reinserted w.e.f. 1st April, 1998 and since the intimation under Section 143(1)(a) had been issued after this date the same was required to be taken into account. It was once again reiterated that the surplus arising on the sale was partly taxable under the head "Capital gains" and partly as business profit under Section 41 (2) but the same had a direct nexus to the assessee's profits and gains of business and profession.
15. We have examined the rival submissions and have also perused the orders passed by the tax authorities. The decisions cited at the Bar have also been taken into account. We are in agreement with the learned counsel vis-a-vis the numerous decisions cited at the Bar that the scope of "adjustment" under Section 143(1)(a) is very limited and debatable issues of law cannot be raked up since these necessarily have to be discussed in proceedings under Section 143(3) after giving reasonable opportunity of being heard to the assessee. It is also an accepted legal proposition that the Department should not capitalise on a mistake on the part of the assessee either to disclose an item in a particular manner or to quote a wrong provision of the Act since it is. incumbent on the part of the Department not to take advantage of an assessee's ignorance.
16. Keeping in mind the aforesaid well laid down propositions, we may refer to relevant facts of the case as also relevant provisions of law. We begin with Section 32(2) effective 1st April, 1997, wherein it was specifically mentioned in Clause (iii) that unabsorbed depreciation allowance, which cannot be wholly set off during a particular assessment year is to be carried forward to the following assessment year and set -off against the profits and gains, if any, of a business or profession carried on by an assessee and assessable for that assessment year and further if there still remains some unabsorbed depreciation, then the same shall be carried forward to the following assessment years' not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed.
17. The learned counsel has referred to the speech of the Hon'ble Finance Minister vis-a-vis the aforesaid change in law but in our opinion the provision which ultimately found its way to the Act has to be interpreted and this is what we propose to do.
18. We now refer to Section 50, which deals with the transfer of depreciable assets and the treatment to be given to the surplus arising therefrom. The said section states that the excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets vis-a-vis the calculation set out in items I to III.
19. The main thrust of the Revenue's case is that the assessee has earned capital gains on transfer of depreciable assets and has shown the same as such and, therefore, considering the provisions of Section 32(2)(iii) the unabsorbed brought forward depreciation cannot be set off against such capital gains. We may mention at this stage that Section 41(2) omitted w.e.f. 1st April, 1988, was reintroduced w.e.f. 1st April, 1998, and any surplus arising under the said section is necessarily to be treated as income from business or profession. The said section no doubt was not adverted to in the return of income or in the proceedings before the tax authorities but in our opinion the same having been reintroduced w.e.f. 1st April, 1998, was required to be taken into account by the AO since the assessment year under consideration was 1998-99.
20. We do not find it necessary to deal with numerous other arguments advanced by the parties as in our opinion the views already expressed by us can lead to only one conclusion and i.e., the matter in hand was one where two opinions could be expressed and there could be a degree of debate and once we reach this conclusion, there is no option but to hold that an "adjustment" of the type carried out by the AO was definitely outside the pale of Section 143(1)(a) and the numerous decisions relied upon by the learned counsel would become squarely applicable. We have in fact referred to the relevant provisions of the Act, which were relevant for consideration at the "adjustment" stage i.e., Sections 32(2)(iii), 50 and 41(2). The AO considered the first two but not the last. We would not like to say anything more on the matter as this would give an impression that we are dealing with an appeal pertaining to provisions of Section 143(3) whereas we are dealing strictly with the provisions of Section 154/143(1)(a).
21. Before we part with this appeal, we would like to deal with some of the arguments advanced on behalf of the Revenue and these being the non-mention of the provisions of Section 41(2) in the return, before the AO in 154 proceedings, before the CIT(A) and lastly in the grounds of appeal before the Tribunal. In our opinion, the Tribunal is obliged to decide an issue as per relevant provisions of law and in case such a relevant provision is not brought to the notice of the tax authorities nothing precludes the assessee from doing so before the Tribunal. After all, Section 41(2) has been brought on the statute book w.e.f. 1st April, 1998, and we are dealing with asst. yr. 1998-99.
22. In the final analysis, we set aside the orders passed by the tax authorities opining that the AO could not have made an "adjustment" under Section 143(1)(a) in respect of the unabsorbed depreciation brought forward and claimed against the surplus arising on the sale of depreciable assets.
23. In the result, the appeal is allowed.