Set-off of unabsorbed business loss against deemed short-term capital gain is legitimate when gains arise from business assets.

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.06.2025 CORAM THE HON'BLE MR.K.R.SHRIRAM, CHIEF JUSTICE AND THE HON'BLE MR.JUSTICE SUNDER MOHAN TCA No.407 of 2011 M/s.Bojaraj Textile Mills Ltd, Sitalakshmi Mills Premises, Tirunagar, Madurai 625 006 : Appellant versus The Assistant Commissioner of Income Tax, Madurai : Respondent Prayer: Appeal filed against the order of the Income Tax Appellate Tribunal, Chennai Bench “B” dated 08.04.2011 in ITA No.1503/Mds/2007.

For Appellant : Mr.R.Kumar For Respondent : Mr.J.Narayanaswamy, Senior Standing Counsel JUDGMENT (Judgment of the Court was delivered by the Hon'ble Chief Justice)

The following three substantial questions of law were framed on

10 October 2011:

“1. Whether the facts and circumstances of the case, the Appellate Tribunal is right in law in justifying the reassessment proceedings initiated for alleged incorrect set off of business loss, on a different ground viz., carry forward of unabsorbed depreciation allowance?

2. Whether the Appellate Tribunal is right in law and acted within its powers in deciding an issue which was not raised by the appellant (the Revenue) in its grounds of appeal before the Tribunal?

3. Whether the Appellate Tribunal is right in law in not adjudicating the appellant's claim for set off of brought forward business loss against short term capital gains on depreciable business assets computer under Section 50 an issue decided in assessee's favour by decisions of the the Hon'ble Supreme Court and this Hon'ble High Court?”

2. Shri Kumar, counsel for appellant, relying on an order of a Division Bench of the Bombay High Court, in which one of us was a member, (Chief Justice), in Commissioner of Income Tax-III, Mumbai vs. Galiakot Containers Pvt. Ltd. Mumbai, [2021: BHC-OS :3404-DB], submitted that the questions of law proposed are squarely covered by the said order.

3. The order of the Bombay High Court is reproduced below:

1. This is an Appeal under Section 260 A of the Income Tax Act , 1961 (“the Act”) filed by the Revenue impugning an order dated 14th May, 2008 passed by the Income Tax Appellate Tribunal for AY 2002-03. Respondents had filed return of income declaring total income under Minimum Alternate Tax (MAT) at Rs.17,88,797/-. The return was processed under Section 143 (1) on 8th April, 2004 accepting the return of income. The case was reopened on 13th June, 2005 after recording reasons for re-opening that the assessee had set off unabsorbed business loss against capital gain. Assessee vide its letter dated 30th June, 2005 had objected to the reopening. Finally after granting a personal hearing and hearing the assessee the Assessment Officer has passed an order dated 7th December, 2006 disallowing the set off against short term capital gains by assessee of the earlier years’ unabsorbed depreciation and carry forward a business loss against capital gain. The assessee had sold block of assets, i.e., buildings / development, factory building, and plant and machinery and had shown short term capital gain of Rs.1,55,63,915/-. The assessee also sold immovable property, i.e., land and the long term capital gain shown is Rs.72,70,784/-. While computing the total income assessee had set off the earlier years unabsorbed depreciation and carry forward of business loss against this capital gain. The Assessment Officer had allowed set off of unabsorted depreciation against short term capital gain as an admissible adjustment but disallowed set off of carry forward of business loss against either short term capital gain or long term capital gain.

2. Aggrieved by this order of the Assessment Officer, Respondents preferred an appeal under Section 246 A (1) (B) of the Act before the CIT (Appeals). CIT (Appeals) passed an order dated 26th November, 2007 dismissing the appeal.

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