addition under section 68/69 and set off

[JB]

can the addition made u/s 68/69 be set off against business loss/unabsrobed depreciation? As per my knowledge there is one judgment of Madras High Court in case of Chensing Ventures (291 ITR 258) in which addition u/s 69 was allowed to be set off against business loss. However, some CIT(A)s have taken view that such set off is not permissible as addition u/s 68/69 are headless income as they do not fall under any particular head. This view was derived from the Gujarat High court judgment in case of Fakir Mohammad Haji Hasan (247 ITR 209). This view was furthered on the reasoning that section 71 prescribes headwise set off and hence headless income can not be set off. I request learned friends and senior members to kindly share views on this topic alongwith judgments/decisions, if any. Regards

[pawansingla]

2011-TIOL-152-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAIN TRIBUNAL
BENCH 'D' AHMEDABAD

ITA No.2897,2898/Ahd/2008
Assessment Year:1997-1998

INCOME TAX OFFICER
WARD-4(3), ROOM NO 106
1st FLOOR, NAVJEEVAN TRUST BUI LDING
OFF ASHRAM ROAD, AHMEDABAD

Vs

HYTAISUN MAGNETICS LTD
MARUTI HOUSE, OPP AIR INDIA
ASHRAM ROAD, AHMEDABAD
PAN NO:AAACH3873P

ITA No.2722/Ahd/2008
Assessment Year: 1997-1998

HYTAISUN MAGNETICS LTD
MARUTI HOUSE, OPP AIR INDIA
ASHRAM ROAD, AHMEDABAD

Vs

INCOME TAX OFFICER
WARD-4(3), ROOM NO 106
1st FLOOR, NAVJEEVAN TRUST BUI LDING
OFF ASHRAM ROAD, AHMEDABAD

T K Sharma, JM and N S Saini, AM

Dated: January 25, 2011

Appellant Rep by: None
Respondent Rep by: Shri K Sridhar, CIT(DR)

Income tax – Sections 32(2), 69, 70, 271(1)(c) – Whether when AO makes
additions for undisclosed income u/s 69, assessee is not entitled to
set off for carried forward depreciation and unabsorbed losses against
such income treated as income from other sources.

A) AO made assessment making additions on account of unaccounted
income from illegal transactions of Rs. 3,85,35,407/- u/s 69. AO also
did not allow set off for the carry forward losses of earlier years
stating that since the income was earned out of illegal
transactions/unrecorded transaction and as the book results have been
rejected, the earlier years loss was not allowed to be set off against
the computed income of the year. Assessee contended that there was no
illegality in the transaction carried out by the assessee as the
purchase and sales were not prohibited under any law and could not be
considered to be illegal or barred by any act.

CIT (A) held that unabsorbed business loss could not be set off
against the income from undisclosed source under section 69 of the Act
but unabsorbed depreciation could be set off against the income under
any head and so it could be set off against the income from other
source. The addition u/s 69 was also reduced to Rs. 2,34,10,540/-.

B) AO levied penalty of Rs. 99,88,000/- u/s 271(1)(c) – CIT (A)
deleted the addition observing that after allowing unabsorbed
depreciation, there was loss and therefore, as the assessed income is
loss, no penalty can be levied following the decision of Virtual Soft
Systems Ltd. vs. CIT reported in - (2007-TIOL-18-SC-IT).

After hearing both the parties, the ITAT held:

++ that it is not in dispute that during the year under consideration
the assessee had income of Rs.2,34,10,540/- assessed under the head
income from other sources in view of provisions of section 69 of the
Act. Further, it is also not in dispute that the assessee had brought
forward unabsorbed depreciation of Rs.10.13 crores in Assessment Year
1993-94, Rs.1.59 crores in Assessment Year 1994- 95 and Rs.68.44 lacs
in Assessment Year 1995-96 which is available for set off against
income of the current year. As per provisions of section 32(2),
unabsorbed depreciation are deemed as part of current year's
depreciation to the extent of available income. There is no provision
under the Income Tax Act to prohibit set off of current year's
business loss against income of the assessee which is assessable under
the head income from other sources. Section 70 does not prohibit such
set off. Thus the CIT (A) rightly allowed the set off of unabsorbed
depreciation against the addition made u/s 69;

Further the Gujarat High court judgement is disinguished by Hon'ble High court in case of DCIt v/s Radhe developers Ltd.198 TAXMAN 58 (MAG)

[JB]

Thank you Pawanji. It is a good one. In one of the cases recently assigned to me, the income offered as income from shares by the assessee is likely to be treated as income from undisclosed sources u/s 68. There is a business loss as well as unabsorbed depreciation of current year. I intend to claim set off in case section 68 is invoked and sales of shares is treated as income from undisclosed sources. In orissa corporation (159 ITR 78), the supreme court observed that cash credit u/s 68 may either be assessed as business income or income from other sources. in either case, i do not have any problem. However, if they treat it as deemed income i.e. head less income following Fakir Mohammad Haji Hasan judgment of Gujarat HC, then i think there lies some problem.in set off. The reason being section 68 & 69 are not classified under any  of the five heads of income and section 70 as well as section 71 speaks of set off of intrahead and interhead losses.
Sir, i got the feed back that in Ahmedabad, some CIT(A)s denied such set off following the above mentioned reasonings few years back. Even benefit of section 32(2) was denied on this reasoning. However, i did not find any decision clarifying this. The Madras HC judgment cited by me and the Ahmedabad ITAT decison cited by your goodself allow such set off but the reasning mentioned above is not discussed. I will be really grateful if you can provide some light on this aspect. Regards

[JB]

Pawanji, i have also gone through the Gujarat HC judgment in case of Radhe Developers (329 ITR 1). There the HC has found that Fakir Mohammad judgment was not applicable to the case before them. In fact, in earlier judgment in case of Krishna Textiles (310 ITR 227), the Gujarat HC observed that Fakir Mohammad wil apply only to section 69 (and not section 69A or 69B or section 69C) and obsevation of the court in the context of other sections were just obiter. Now in Radhe Developers, the HC says that  the Act does not envisage taxing any income not envisaged under section 14. However, while saying so, the judgment of Fakir Mohammad is distinguished but not overruled. Hence, i feel that all the three judgment are rendered more in the factual matrix of the cases. The department is always taking the stand of deemed income and i found in some cases before tribunal, they have won. To me, the theory of deemed income still appears to be confusing in the absence of any clear pronouncement.