Ms. Linhares At The Outset Submits That The Itat's Impugnedorder Is Contrary To The Decision Of The Special Bench Of The Itat Atbengaluru In Case Of Nandi Steel v. Alcon Developers

1 TXA NO.15-2017 IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO.15 OF 2017 The Pr. Commissioner of Income TaxAaykar Bhavan, Patto,Panaji Goa. VersusM/s. Alcon Developers,Sukerkar Mansion, First Floor,M.G. Road, Panaji,Goa 403 001. ... Appellant ... Respondent Ms. Susan Linhares, Standing Counsel for the Appellant.Mr. P. Pardiwala, Senior Advocate with Mr. Vinod Korgaonkar,Advocate for the Respondent. Coram:-M. S. SONAK &SMT. BHARATI H. DANGRE, JJ. th Reserved on:-20 January 2021 Pronounced on:- 22ndJanuary 2021 JUDGMENT (Per M. S. Sonak, J.): Heard Ms. Susan Linhares for the appellant and Mr. P. Pardiwalalearned Senior Advocate with Mr. Vinod Korgaonkar for therespondent. 2. The tax effect in this appeal is `75,17,162/-. Therefore, interms of CBDT Circular No.17/2019, the same, should not have been 2 TXA NO.15-2017 ordinarily pursued by the Revenue. However, Ms. Linhares, oninstructions, submitted that this was a matter where the revenue auditobjections had been raised and accepted by the department andtherefore, the revenue wishes to pursue this appeal, consistent with theexemptions provided in CBDT Circular No.17/2019 and 21/2015.Accordingly, we have heard the learned counsel on merits. 3.This Appeal was admitted on 27.09.2017 on the followingsubstantial questions of law:- “(a) Whether the Hon'ble ITAT is right in ignoring theprovisions of Section 263 wherein the Hon'ble Pr. CIT, Panajirightly invoked the proceedings under Section 263 in respect ofthe Assessment Order which was erroneous and prejudicial tothe interest of revenue? (b) Whether the Hon’ble ITAT is right in ignoring the settledlegal position on the issue involved in the case and withouttaking into consideration the decision of Special BenchBengaluru ITAT Bench in the case of Nandi Steels Limited(2012) 17 Taxmann.co. 93(Bang.)(SB) and Hon'ble SupremeCourt's decision in the case of Express Newspapers Ltd., on theidentical facts of the instant case?” 4. The respondent-assessee in the present case is a firm involved inthe business of building and property development as also themanufacture of ground granulated blast furnace slab (GGBS),microfine slag, microfine cement, and cement products. 3 TXA NO.15-2017 income declaring total income of `23,28,174/- after setting off thebrought forward loss of `4,45,36,935/-. The assessment officer (AO)vide order dated 31.03.2014 assessed under Section 143(3) of theIncome Tax Act, 1961 (said Act) and determined the total income ofthe assessee at `88,47,561/- after making addition of `65,19,381/- tothe returned income of the assessee. 6. The Principal Commissioner of Income Tax (PCIT) vide orderdated 24.03.2016 made under Section 263 of the said Act invoked hisrevisional jurisdiction and set aside the assessment order dated31.03.2014 on the ground that the same was both erroneous andprejudicial to the interest of the Revenue since the brought forwardloss of `4,45,36,935/- was allowed to be set off against the incomefrom the capital gains of the assessee during the relevant assessmentyear, though, the same was not liable under Section 72 of the said Act.The PCIT directed the AO to make a fresh assessment after examiningthe relevant facts and in the light of the legal position expounded bythe PCIT after affording the assessee an opportunity of being heard. 7. The respondent-assessee appealed to the Income Tax AppellateTribunal (ITAT) and the ITAT, by its order dated 15.09.2016 set asidePCIT's order dated 24.03.2016 and restored the AO's order dated31.03.2014. Hence the present appeal on the aforesaid substantialquestions of law. 4 TXA NO.15-2017 7. The respondent-assessee appealed to the Income Tax AppellateTribunal (ITAT) and the ITAT, by its order dated 15.09.2016 set asidePCIT's order dated 24.03.2016 and restored the AO's order dated31.03.2014. Hence the present appeal on the aforesaid substantialquestions of law. 4 TXA NO.15-2017 8.Ms. Linhares at the outset submits that the ITAT's impugnedorder is contrary to the decision of the Special Bench of the ITAT atBengaluru in case of Nandi Steels Ltd. v. ACIT – (2012) 17Taxmann.com 93 (Bang.) (SB) as well as the decision of the Hon'bleSupreme Court in the case of CIT v. Express Newspapers Ltd. -(1964) 53 ITR 250 (SC). She submits that in both these decisions ithas been categorically held that the brought forward business lossesmay be set off only against the income from the business for thesubsequent but relevant assessment year. She submits that the broughtforward business losses cannot be set off against the income fromcapital gains, which is what was done by the AO in the present case.She, therefore, submits that the AO's order dated 31.03.2014 was botherroneous as well as prejudicial to the interest of the Revenue and therewas no error on the part of the PCIT in invoking its revisionaljurisdiction under Section 263 of the said Act. She submits that sincethe ITAT has not appreciated this aspect and even not followed thedecision of the Special Bench of the ITAT and the Hon'ble SupremeCourt in Express Newspapers Ltd. (supra), the substantial questions oflaw as framed may be answered in favour of the Revenue and againstthe assessee. 9. Mr. Pardiwala, the learned senior advocate for the respondent-assessee submitted that the decision of the Hon'ble Supreme Court inExpress Newspapers Ltd. (supra) was in the context of provisions ofSection 26(2) of the Income Tax Act, 1922 and the same, has been 5 TXA NO.15-2017 explained by the Hon'ble Supreme Court in the subsequent decisionsin CIT v. Chugandas and Co. - (1965) 55 ITR 17 (SC) and CITv. Cocanada Radhaswami Bank Ltd. - (1965) 57 ITR 306 (SC).He, therefore, submits that the ITAT's order dated 15.09.2016 is notcontrary to the law laid down in Express Newspapers Ltd. (supra) butrather is consistent with the decisions of the Hon'ble Supreme Courtin Chugandas and Co. (supra) and Cocanada Radhaswami Bank Ltd.(supra). 10.Mr. Pardiwala also pointed out that the ITAT's decision isentirely consistent with the decision of the ITAT in DigitalElectronics Ltd. v. Additional CIT – 135 TTJ (Mumbai) 419, inwhich it is held that the unabsorbed business losses could be set offagainst the capital gains charged under Section 50 of the said Act. Hesubmits that this Court in CIT v. Hickson and Dadajee (P.) Ltd. -(2020) 122 Taxmann.com 94 (SC) has noted the statement of thelearned counsel appearing on behalf of the Revenue that the decisionof the ITAT in Digital Electronics Ltd. (supra) had been accepted bythe Revenue. He, therefore, submitted that it is now not open to theRevenue to urge any position contrary to that expressed in DigitalElectronics Ltd. (supra). 11. Mr. Pardiwala submitted that in this matter there is no disputethat the assessee had sold one of its business undertaking namely theundertaking relating to the GGBS business and made a profit of 6 TXA NO.15-2017 `4,74,16,156/-. He submitted that since a business undertaking wassold, the assessee was entitled to recoupment of depreciation charged inrespect of that business at least to the extent of `2,84,31,062/- sincethe same was like business income. He also relied upon ExpressNewspapers Ltd. (supra) in support of this contention. 11. Mr. Pardiwala submitted that in this matter there is no disputethat the assessee had sold one of its business undertaking namely theundertaking relating to the GGBS business and made a profit of 6 TXA NO.15-2017 `4,74,16,156/-. He submitted that since a business undertaking wassold, the assessee was entitled to recoupment of depreciation charged inrespect of that business at least to the extent of `2,84,31,062/- sincethe same was like business income. He also relied upon ExpressNewspapers Ltd. (supra) in support of this contention. 12. Mr. Pardiwala submitted that since there was no error in theview taken by the AO, the PCIT was not justified in invoking itsrevisional jurisdiction under Section 263 of the said Act in this matter.Mr. Pardiwala, without prejudice to the aforesaid submissions andpurely by way of concession, submitted that the assessee, having regardto some observations in paragraph 10 of the ITAT's order dated15.09.2016, will accept that the AO had allowed excess set off to theextent of `22,34,366/- and therefore pay the proportionate taxthereon. 13. The rival contentions now fall for our determination. 14. The AO, vide his order dated 31.03.2014 allowed therespondent-assessee to set off the brought forward losses of`4,50,84,063/- against the income from capital gains derived by therespondent-assessee by selling its undertaking relating to GGBSbusiness for 8 Crores. After deducting the net worth of the saidundertaking which was `3,25,83,844/- the profit from the sale of thisasset was determined at `4,74,16,156/-. 7 TXA NO.15-2017 15. Now there is no dispute that concerning this GGBSundertaking, the respondent-assessee had claimed depreciation of`2,64,53,052/- for the assessment year 2010-11 and depreciation of`19,78,010/- for the assessment year 2011-12. Thus, the totaldepreciation claimed by the respondent-assessee in respect of theGGBS business undertaking was `2,84,31,062/-. Based thereon, therespondent-assessee had claimed that from out of the income of`4,74,16,156/- from the sale of the GGBS business undertaking, atleast an amount of `2,84,31,062/- was nothing but the recoupment ofdepreciation charged in respect of that business undertaking andtherefore, the same was like business income which was quite correctlyset off during the relevant assessment year. 16.The ITAT in its impugned order dated 15.09.2016 has acceptedthe aforesaid contention of the respondent-assessee by relying onExpress Newspapers Ltd. (supra), which has explained that if the saleprice exceeds the written down value, but does not exceed the originalcost price, the difference between the original cost and the writtendown value shall be deemed to be profits of the year previous to that inwhich the sale takes place, that is to say, the difference between theprice fetched at the sale and the written down value is deemed to bethe escaped profits for which the assessee is made liable to tax. As thesale price was higher than the written down value, the differencerepresents the excess depreciation mistakenly granted to the assessee.Therefore, in substance, brings to charge an escaped profit or gain of 17.Applying this reasoning, the ITAT, concluded that from out ofthe income of `4,74,16,156/- from the sale of the GGBS businessundertaking, at least an amount of `2,84,31,062/- was nothing but therecoupment of depreciation which was allowed as a business deductionand therefore, this amount was like business income even though thesame may have been assessed under the head “capital gains” forcomputing the total income in terms of the provisions of the ITAT.According to us, the view taken by the ITAT in this matter is certainlya plausible view and therefore, gives rise to no substantial question oflaw as such, in the facts and circumstances of the present case. 17.Applying this reasoning, the ITAT, concluded that from out ofthe income of `4,74,16,156/- from the sale of the GGBS businessundertaking, at least an amount of `2,84,31,062/- was nothing but therecoupment of depreciation which was allowed as a business deductionand therefore, this amount was like business income even though thesame may have been assessed under the head “capital gains” forcomputing the total income in terms of the provisions of the ITAT.According to us, the view taken by the ITAT in this matter is certainlya plausible view and therefore, gives rise to no substantial question oflaw as such, in the facts and circumstances of the present case. 18. Besides, we find that the Revenue is attempting to interpret thedecision in Express Newspapers Ltd. (supra), rather widely, eventhough, the Hon'ble Supreme Court itself, in its subsequent decisionshas clarified that the observations upon which Ms. Linhares relies, weremade in the context of the provisions of Section 26(2) of the I.T. Act,1922. 19.In Express Newspapers Ltd. (supra), the Hon'ble Supreme Courtwas deciding whether the capital gains made by the Free PressCompany was liable to be assessed in the hands of the ExpressCompany (successor) under Section 26(2) of the I.T. Act, 1922. It isin the context of such an issue that the Hon'ble Supreme Court held 9 TXA NO.15-2017 that the tax payable by the assessee under the head “capital gains” inrespect of any profits or gains arising from the sale of a capital asseteffected during a prescribed period. However, the deeming clause doesnot lift the capital gains from the sixth head in Section 6 and placethem under the fourth head. The legal fiction is limited to the purposefor which it was created and could not be extended beyond itslegitimate field. Therefore, the loss falling under one head of incomecannot be set off against any income falling under any different head. 20.In Chugandas and Co. (supra) the Hon'ble Supreme Court wasconsidering the question of whether an assessee is entitled to benefit ofSection 25(3) of the I.T. Act, 1922 in respect of the interest onsecurities. There was no dispute in this matter that the principalbusiness of the assessee was dealing in securities. The securities held bythe assessee were its stock in trade and interest on those securities wasreceived from time to time. The Revenue had relied upon ExpressNewspapers Ltd. (supra) and the Hon'ble Supreme Court, afterquoting the very passage relied upon by Ms. Linhares in the presentmatter held that it was quite obvious having regard to special nature of“capital gains” which are not in truth income but are deemed incomefor the purpose of taxation and the phraseology used, the liability ofthe successor under the proviso to Section 26(2) is only in respect oftax on income, profit, and gains of the business strictly so-called, to becomputed under section 10 read with section 6(iv) and not in respectof all receipts which may be regarded as income of the business. The 10 TXA NO.15-2017 schemes of section 25(3) and section 26(2), proviso, are different. Thefirst grants an exemption because there has been a double levy of tax,and an intention to exempt all income, profits, and gains of businessfrom taxation may be attributed to the legislature. Section 26(2)fastens liability of the predecessor, if he cannot be found, upon thesuccessor and must be strictly construed. The legislature has imposedby section 26(2) liability upon the successor to be assessed for profitsearned in the business carried on by his predecessor, and unless there isa clear intention expressed in the statute to include in that expressionwhat in reality is not income, but is deemed income, the liability toassessment would justifiably be limited to profits o the business whichis computable under section 10. schemes of section 25(3) and section 26(2), proviso, are different. Thefirst grants an exemption because there has been a double levy of tax,and an intention to exempt all income, profits, and gains of businessfrom taxation may be attributed to the legislature. Section 26(2)fastens liability of the predecessor, if he cannot be found, upon thesuccessor and must be strictly construed. The legislature has imposedby section 26(2) liability upon the successor to be assessed for profitsearned in the business carried on by his predecessor, and unless there isa clear intention expressed in the statute to include in that expressionwhat in reality is not income, but is deemed income, the liability toassessment would justifiably be limited to profits o the business whichis computable under section 10. 21.Thus, it is clear that the observations in Express NewspapersLtd. (supra) were in the context of the specific provisions of Section26(2) of the I.T. Act, 1922, and the same were not intended to be ofsome general application as contended by Ms. Linhares in the presentcase. 22.This position is further clarified in Cocanada Radhaswami BankLtd. (supra) where the Hon'ble Supreme Court was considering thequestion whether on the facts and circumstances of the case before it,the assessee was entitled to set off the business loss of `59,912/-brought forward from the preceding year against the entire incomeincluding interest on securities held by the assessee. In this case, as well, 11 TXA NO.15-2017 the Revenue had urged that the income from business and incomefrom securities fell under different heads and that they were mutuallyexclusive. Therefore the losses under the head “business” could not becarried forward from the preceding year to the succeeding year and setoff under Section 22(4) of the I.T. Act, 1922 against the income fromsecurities held by the assessee. The Revenue had strongly relied uponthe aforesaid observations from Express Newspapers Ltd. (supra). 23.The Hon'ble Supreme Court, after quoting the observationsfrom Express Newspapers Ltd. (supra) upon which reliance has beenplaced by Ms. Linhares, held that though such observations divorcedfrom text may appear to be wide, the said decision was mainly basedupon the character of the capital gains and not upon their non-inclusion under the heading "business". The Hon'ble Supreme Courtthen referred to its own decision in Chugandas & Co. (supra) andstated that this decision has explained the limited scope of the earlierdecision in Express Newspapers Ltd. (supra). The matter wasultimately decided against the Revenue and in favour of the assesseeholding that the assessee was entitled to set off the business lossesbrought forward from the preceding year against the entire incomeincluding the income from interest on securities held by the assessee. 24.Therefore, upon taking into consideration the decisions of theHon'ble Supreme Court in the case of Chugandas & Co. (supra) andCocanada Radhaswami Bank Ltd. (supra) explaining the limited scope 12 TXA NO.15-2017 of the decision in Express Newspapers Ltd. (supra), we are afraid, wecannot accept the submissions of Ms. Linhares that the ITAT's order iscontrary to the law laid down by the Hon'ble Supreme Court inExpress Newspapers Ltd. (supra). 25.Digital Electronics Ltd. (supra) was cited on behalf of theassessee before the PCIT who made the order dated 23.03.2016invoking his revisional jurisdiction under Section 263 of the said Act.However, the PCIT, held that the decision of the ITAT in DigitalElectronics Ltd. (supra) was made “without taking into considerationthe Apex Court decision given in identical factual text in the case ofExpress Newspapers Ltd.”. The PCIT further relied upon the decisionof the Special Bench Bengaluru in Nandi Steels Ltd. (supra), whichhad again relied upon Express Newspapers Ltd. (supra) and chosen tointerpret the said decision widely and not restrictively. 25.Digital Electronics Ltd. (supra) was cited on behalf of theassessee before the PCIT who made the order dated 23.03.2016invoking his revisional jurisdiction under Section 263 of the said Act.However, the PCIT, held that the decision of the ITAT in DigitalElectronics Ltd. (supra) was made “without taking into considerationthe Apex Court decision given in identical factual text in the case ofExpress Newspapers Ltd.”. The PCIT further relied upon the decisionof the Special Bench Bengaluru in Nandi Steels Ltd. (supra), whichhad again relied upon Express Newspapers Ltd. (supra) and chosen tointerpret the said decision widely and not restrictively. 26.In Hickson and Dadajee (P.) Ltd. (supra) the first substantialquestion of law was whether on the facts and in the circumstances ofthe case and law, the ITAT was justified in allowing set-off of broughtforward business loss against deemed short-term capital gains arisingfrom the sale of building and plant and machinery. The ITAT, in thesaid case, had allowed the appeal of the respondent-assessee on theissue of set-off of the brought forward losses against deemed short termcapital gains arising on the sale of building, plant, and machineryfollowing the decision of its coordinate bench in Digital Electronics 13 TXA NO.15-2017 Ltd. (supra). In Digital Electronics Ltd. (supra) the ITAT had heldthat under Section 72 of the said Act, the loss under the head “profitsand gains of business or profession” can be carried forward and thesame can be set off against profits of any business or profession. It washeld that it was not the requirement of Section 72 of the said Act thatsuch gain or profit must be taxable under the head “profits and gainsof business or profession”. Thus carry forward business losses could beset off against the short-term capital gains on the sale of the building. 27.In Hickson and Dadajee (P.) Ltd. (supra) the learned counselappearing for the Revenue had very fairly stated that the decision ofthe ITAT in Digital Electronics Ltd. (supra) had been accepted by theRevenue. This Court, also observed that no distinguishing features inthe facts before it had been demonstrated by the Revenue, whichwould warrant taking of a different view from that taken by the ITATin Digital Electronics Ltd. (supra) which was accepted by the Revenue.Accordingly, the first substantial question of law was answered againstthe Revenue and in favour of the assessee. 28.Thus, it is quite clear that the view taken by the ITAT in itsimpugned order dated 15.09.2016, is entirely consistent with the viewtaken by the coordinate bench of the ITAT in Digital Electronics Ltd.(supra). As was noted by this Court in Hickson and Dadajee (P.) Ltd.(supra), the Revenue, has accepted the decision of the ITAT in DigitalElectronics Ltd. (supra). Based thereon, this Court has accepted the 14 TXA NO.15-2017 position that it is not the requirement of Section 72 of the said Actthat such gain or profit must be taxable only under the head of “profitsand gains of business or profession”. The carryforward business losseswould therefore be set off against theshort-term capital gains on thesale of building, plant, and machinery. This is yet another reason notto accept the submissions of Ms. Linhares and to answer thesubstantial questions of law against the Revenue and in favour of theassessee. 14 TXA NO.15-2017 position that it is not the requirement of Section 72 of the said Actthat such gain or profit must be taxable only under the head of “profitsand gains of business or profession”. The carryforward business losseswould therefore be set off against theshort-term capital gains on thesale of building, plant, and machinery. This is yet another reason notto accept the submissions of Ms. Linhares and to answer thesubstantial questions of law against the Revenue and in favour of theassessee. 29.Although, we may not be entirely in agreement with the ITATon the aspect of invocation of the revisional jurisdiction under Section263 of the said Act by the PCIT, we feel that the impugned ordermade by the ITAT warrants no interference because there is nothingfundamentally wrong in the view taken by the ITAT having regard tothe decisions of the Hon'ble Supreme Court in the case of Chugandas& Co. (supra), Cocanada Radhaswami Bank Ltd. (supra) and thedecision of this Court in Hickson and Dadajee (P.) Ltd. (supra).Therefore, there is no point in dilating on the first substantial questionof law when the second substantial question of law which relates to themerits will have to be answered against the Revenue and in favour ofthe assessee. 30.Besides, Mr. Pardiwala, the learned counsel for the assessee basedon instructions from the assessee has fairly stated that the assessee willpay proportionate tax on the basis that the AO allowed excess set off to 15 TXA NO.15-2017 the extent of `22,34,366/-. In fact, even the ITAT, in paragraph 10 ofits order had held that the AO, if at all, had allowed excess set-off of`22,34,366/- and therefore the appeal of the assessee is “partlyallowed”. This would mean that the assessee was still to payproportionate tax since the AO had allowed excess set-off of`22,34,366/-. 31.Accordingly, this appeal is disposed of by making the followingorder: (a) The substantial questions of law as framed are decided againstthe Revenue and in favour of the assessee ; the Revenue and in favour of the assessee ; (b) However, the respondent-assessee, consistent with thestatement made on its behalf is directed to pay proportionate taxbased on the premise that the AO had allowed excess set off tothe extent of `22,34,366/-. This payment to be made withinthree months from today. (c)In the facts and circumstances of the present case, thereshall be no order as to costs. SMT. BHARATI H. DANGRE, J. M. S. SONAK, J. ss