IN THE INCOME-TAX APPELLATE TRIBUNAL BANGALORE BENCH A, BANGALORE

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1 IN THE INCOME-TAX APPELLATE TRIBUNAL BANGALORE BENCH A, BANGALORE BEFORE HON BLE VICE PRESIDENT SHRI N.BARATHVAJA SANKAR, VICE PRESIDENT SHRI G.C.GUPTA AND SMT. P MADHAVI DEVI, JUDICIAL MEMBER I.T.A. No.546(Bang.)/2008 (Aement Year : ) M/ Nandi Steel Limited, F4, Richmond Plaza, Richmond Circle, Bangalore PAN No.AAACN4849D V The Aitant Commiioner of Income-tax, Circle-12(2), Bangalore Appellant Repondent For Aeee by : Shri S. Ramaubramanian, CA For Revenue by : Shri G.V.Gopala Rao, CIT-I Date of hearing : Date of pronouncement : PER SMT. P. MADHAVI DEVI, JM; O R D E R The preent Special Bench ha been contituted u/ 255(3) of the IT Act, The Special Bench wa contituted under the following circumtance. 2. The aeee company which i engaged in the buine of manufacture/production of Iron and Steel ha filed it return of income for the relevant aement year on , declaring an income of

2 2 R.98,27,270/- under the head capital gain. The return wa proceed u/ 143(1) on and a refund of R.4,77,163/- wa iued. Subequently, the AO noticed that the aeee had et off the long term capital gain of R.43,36,640/- againt the brought forward buine lo and depreciation contrary to the proviion of Sec.72 of the IT Act. In view of the ame, the AO believed that the income chargeable to tax ha ecaped aement within the meaning of Sec.147 and iued notice u/ 148 on In repone to notice u/ 148, the aeee filed it return of income on a returned in the original return of income. The aeee alo requeted the AO to furnih a copy of the reaon recorded for re-opening of the aement. The AO furnihed the reaon recorded for reopening of the aement to the aeee. In the proceeding u/ 143(3) read with Sec.148 of the IT Act, the AO held that the brought forward buine lo and unaborbed depreciation cannot be et off againt the income from capital gain. He oberved that the aeee ha old the land ituated at Tumkur road along with the building and bore well which were all ued for the buine. Taking note of the deciion of the Hon ble Apex Court in the cae of M/ Killick Nixon & Co., V CIT reported in 66 ITR 714(SC), wherein it wa held that only income which i earned by carrying on buine i entitled to be et off, he held that the carry forward buine lo cannot be et off againt the income from capital gain, a it i againt the proviion of law. He alo oberved that the aeee ha admitted the profit and ale of land etc.

3 3 a long term capital gain and offered to tax at the rate of 20%. He accordingly, computed the income of the aeee. 3. Aggrieved, the aeee preferred an appeal before the CIT(A) who confirmed the order of the AO and the aeee came in appeal before the Tribunal. 3.1 Before the Tribunal, the aeee ha raied variou ground relating to validity of the aement u/147 of the Act and alo with regard to diallowance of the et of carry forward buine lo and depreciation againt the long term capital gain ariing from the ale of land and building ued for the purpoe of buine. The Diviion Bench of thi Tribunal vide it reference dated have decided the firt four ground of appeal and alo the additional ground of appeal raied by the aeee and with regard to ground no.5 & 6 a reference wa made to the Hon ble Preident for the contitution of a Special Bench of the Tribunal. The reaon for the reference wa that the aeeee ha relied upon the deciion of the Bangalore Bench of the Tribunal in a reported cae of M/ Steelcon Indutrie (P) Ltd., V ITO dated in ITA No.571(Bang.)1989 for the aement year , wherein the iue wa decided in favour of the aeee holding that the carry forward lo can be et off againt the income from capital gain. For coming to thi concluion, the Tribunal ha followed the deciion of the Hon ble Supreme Court in the cae of CIT V Cocanada Radhawami Bank (1965) 55 ITR 17(SC) and CIT V

4 4 Chuganda & Co.,(1965) 55 ITR 17(SC). The Diviion Bench however, noticed that there i another judgment of the Hon ble Supreme Court in the cae of CIT V Expre Newpaper Ltd.,53 ITR 250(SC) wherein it wa held that the capital gain are connected with the capital aet of the buine and therefore, it cannot make them the profit of the buine and cannot be et off againt the carry forward buine lo. Having oberved that the Bench of the Tribunal at Bangalore in the cae of M/ Steelcon Indutrie Ltd.,(upra) ha not conidered the deciion of the Hon ble Supreme Court in the cae of Expre Newpaper Ltd., cited upra, the Diviion Bench felt that the deciion of the Tribunal in the cae of M/ Steelcon Indutrie Pvt.Ltd., require re-conideration by a Special Bench contituting of three Member for a deciion. Thu, they referred the ground of appeal no.5 & 6 to the Special Bench. The Hon ble Preident of ITAT after conidering the reference in detail u/ 255(3) made by the Diviion Bench of thi Tribunal (vide order dated contituted a Special Bench) for dipoal of the ground no.5 & 6. We accordingly, proceed to decide the appeal. under; 4. Ground no.5 & 6 raied by the aeee in the appeal are a Ground no.5: That the learned CIT(A) erred in law and on fact that the appellant i not entitled to et off carry forward buine lo of R.39,99,652/- againt the long term capital gain ariing on ale of land ued for the purpoe buine.

5 5 Ground no.6: That the authoritie below ought to have appreciated that there i no ceation of buine and the appellant i entitled to et off the carry forward buine lo. 5. The learned counel for the aeee Shri S.Ramaubramanian, ubmitted that during the previou year relevant to the aement year , the aeee old the land, building and bore well of the aeee ued for it buine purpoe for a conideration of R.1,55,00,000/-. He ubmitted that the aeee had claimed depreciation in the earlier year on the building and the bore well. According to him, the factory building and plant & machinery tood on the ame land and ince thee aet were connected to the buine of the aeee, the gain from ale of thee aet ha been rightly et off againt the carried forward buine lo from the earlier year. According to him, the long term capital gain on tranfer of buine aet had the character of buine income and therefore, buine lo brought forward from earlier year can be et off againt uch income though, it wa not computed under the head profit and gain of buine or profeion. In upport of hi contention, he placed reliance upon the following deciion; 1. United Commercial Bank Ltd., 32 ITR Chuganda & Co., 55 ITR Cocanada Radhawami Bank Ltd., 57 ITR He alo drew our attention to the rationale laid down by the Hon ble Apex Court deciion to the effect that though the income wa

6 6 computed under the different head of income, but when it ha the character of buine income, the brought forward buine lo can be et of againt uch income. He ubmitted that the deciion of the Hon ble Supreme Court in the cae of CIT V Expre Newpaper Ltd., cited upra, wa conidered by the ubequent bench of the Supreme Court in the cae of CIT V Cocanada Radhawami Bank Ltd., cited upra and after taking into conideration of the ame, it ha been held that the break up of income under different head i only for the purpoe of computation of total income and it doe not ceae to be income from the buine. 7. Another argument put forth by the learned counel for the aeee i that Sec.72 of the Act permit the carry forward of unaborbed lo and claue-(i) thereof permit et off of uch lo from the income, if any, of any buine of the aeee. Therefore, according to him, it i enough, if uch profit and gain have a nexu with buine. He alo ubmitted that whenever legilature wanted to refer to a particular head, it pecifically tated o. He drew our attention to the reference to the head profit and gain of buine or profeion in the explanation (baa) to ec.80hhc, wherein while defining the profit of buine it i provided that it mean the profit of buine a computed under the head profit and gain of buine or profeion. He ubmitted that the imilar expreion i ued in claue- (d) of the Explanation to ec.80hhe. Thu, according to him, ince ec.72 doe not tate that the lo can be et off only from income

7 7 computed under the head profit and gain of buine or profeion, it can be et off againt the profit and gain of buine or profeion even if it i computed under any other head of income. 8. The other argument raied by the aeee i that the lower authoritie have rejected the claim of the aeee mainly on the ground that the aeee ha not carried on the buine during the previou year ending and therefore, the deciion of the Hon ble Supreme Court in the cae of United Commercial Bank and Cocanada Radhawami Bank Ltd (cited upra) and that of Bangalore Bench in the cae of M/ Steelcon cae are not applicable. He ubmitted that thi finding of the lower authoritie i incorrect becaue, the AO himelf ha determined the lo of R.9,67,922/- under the head profit and gain from buine or profeion and thi i a pointer to the fact that the aeeee had carried on the buine during the year ending He thereafter, drew our attention to the detail of turnover effected by the aeeee during variou financial year till to demontrate that during the financial year the turnover wa R.33,09,862/- for the aement year it wa R.8,02,775/- for aement year it wa R.86,40,160/-. He ubmitted that there wa no turnover during the financial year : , and and that thi only how that there wa a temporary lull in the buine of the aeeee and it doe not amount to cloure of the buine. For thi propoition, the aeee placed reliance upon the following deciion;

8 8 1. CEPT V Srilakhmi Mill Ltd., 20 ITR 451 (SC) 2. CIT V Vikram Cotton Mill Ltd.,(1988) 169 ITR 597(SC) 3. M/ Lakhmi Narayan Board Mill Pvt.Ltd., V CIT (1994) 205 ITR 88(Cal.) 4. M/ Karonda Ranchhodda V CIT (1972) 83 ITR 1(Bom) 5. L.VE Vairavan Chettiar V CIT (1969) 72 ITR 114(Mad.) 6. M/ Emdee Export V Eleventh Income Tax Officer (1985) 13 ITD 8(Bang.) 8.1. The learned counel for the aeee therefore, prayed that the ground of the appeal of the aeee before the Special Bench may be allowed. 9. The learned DR on the other hand, upported the order of the authoritie below and ubmitted that the aet old by the aeee are in fact capital aet and therefore, the aeee by itelf offered the income from the ale of thee aet under the head capital gain and ha alo paid taxe at the rate at which capital gain are taxed. He ubmitted that any gain or lo on the ale of a capital aet cannot be referred to a buine income and it cannot be et off againt the brought forward lo of earlier year. He drew our attention to the proviion of Sec.72 of IT Act to demontrate that it i only buine income againt which the brought forward lo can be et off. He trongly relied upon the judgment of the Hon ble Supreme Court in the cae of M/ Expre Newpaper Ltd., (cited upra) and ubmitted that the finding of the Hon ble Supreme Court hould be conidered in the light of the fact and circumtance before the Hon ble Court. He alo

9 9 ubmitted that in both the cae i.e M/ United Commercial Bank Ltd., and M/ Cocanada Radhawami Bank Ltd., the capital gain were on account of ale of ecuritie and the Hon ble Supreme Court ha taken note of the fact that thee ecuritie were in fact trading aet of the aeee therein and therefore, though the income wa to be taxed under the head Income from ecuritie it doe not loe the character of buine income and therefore, brought forward lo of earlier year can be et off againt uch income. He ubmitted that in the cae before u, aet were fixed aet a hown in the balance heet of the aeee and were undoubtedly capital aet. He ubmitted that the aeee even claimed depreciation on the building and bore well in the earlier year. He ubmitted that merely becaue, there i a nexu between the buine carried on by the aeee and the aet old, the gain on the ale of uch aet cannot get the character of buine income. Thu, according to him, the finding of lower authoritie are to be upheld. 10. Having heard both the partie and having conidered the rival contention and the material on record, we find that the only quetion before u for conideration i whether the brought forward lo from the earlier year can be et off againt the income from capital gain u/ 72 of the IT Act. For the purpoe of ready reference, the relevant portion of ec.72 i reproduced here under;

10 10 72 (1) Where for any aement year, the net reult of the computation under the head Profit and gain of buine or profeion i lo to the aeee, not being lo utained in a peculation buine, and uch lo cannot be or i not wholly et off againt income under any head of income in accordance with the proviion of ec.71, o much of the lo a ha not been o et off or.. where he ha no income under any other head, the whole lo hall, ubject to the other proviion of thi Chapter, be carried forward to the following aement year, and (i) it hall be et off againt the profit and gain, if any, of any buine or profeion carried on by him and aeable for that aement year;. Much tre ha been laid by both the partie on the term profit and gain if any, of any buine or profeion mentioned in ubclaue (i) of ub-ec.(1) of ec.72 of the IT Act. What are the profit and gain of buine or profeion?. Whether it hould be the income earned out of the buine carried on by the aeee or it may be the income in any way connected to the buine or profeion carried on by the aeee?. The anwer to thi quetion entirely depend on the interpretation to be given to the term of any buine or profeion carried on by the aeee and aeable for that aement year for determination of the iue. It i not in dipute that the land, building

11 11 and bore well old by the aeee were ued by the aeee for it buine purpoe. It i alo not diputed that thee aet were fixed aet of the aeee. The only argument of the aeee ha been that they have direct nexu with the buine carried on by the aeee and therefore, are buine aet and any gain from the ale of uch aet would alo have the character of buine income. We are unable to agree with thi contention of the aeee that the aet old by the aeee were buine aet. Undiputedly, they were capital aet and the capital receipt are not taxable nor are the capital payment deductible from the income of the aeee. The capital i to be ued for the purpoe of carrying on the buine of the aeee and it hall remain in the buine of the aeee till it i either converted into tock-in-trade or i dipoed off. The income earned by the aeee by carrying on the buine by ue of the tock in trade only i the buine income of the aeee. Likewie, any expenditure incurred by the aeee for carrying on of buine and for earning the income from uch buine or profeion i only allowable a deduction. After taking into account the receipt and payment for carrying on the buine of the aeee only the profit or gain or lo from the buine i computed. If the profit or lo relate to the ame aement year from one ource then it can be et off from another ource under the ame head of income u/ 70 Act, and it can be et off againt the income from any other head of income u/ 71 of the Act. Sec.72 of the Act however, permit the carry forward buine lo to ubequent

12 12 aement year and allow it to be et off againt profit & gain, if any, of any buine or profeion carried on by the aeee and aeable for the relevant aement year. Thu, it i clear that it i only the buine lo that can be carried forward u/ 72 of the Act and it can alo be et off only againt the buine income of the aeee, be it from the ame buine or from any other buine. In the cae relied upon by the learned counel for the aeee, the Hon ble Supreme Court wa dealing with the cae of the aeee whoe buine wa dealing in ecuritie alo and it wa thu held that thee ecuritie were trading aet and therefore, the income therefrom though to be computed under the head income from ecuritie doe not loe the character of buine income. But in the cae of M/ Expre Newpaper Ltd., cited upra, the fact of the cae are little different and after taking into conideration the fact of the cae therein, the Hon ble Supreme Court ha held that the capital gain on ale of capital aet i not to be et off againt the brought forward lo of earlier year. In our opinion, the deciion of the Hon ble Supreme Court in the cae of M/ Expre Newpaper Ltd., i fairly applicable to the fact of the cae before u. The Coordinate Bench of the Tribunal in the cae of M/ Steelcon Indutrie Pvt.Ltd., cited upra, ha miplaced it reliance upon the deciion of the Apex Court in the cae of M/ United Commercial Bank Ltd., and M/ Cocanada Radhawami Bank Ltd., In view of the ame, we are inclined to reject the ground of

13 13 appeal no.5 & 6 raied by the aeee. Thu, the reference i anwered in favour of revenue. 11. The cae i now to be poted before the Diviion Bench to give effect to the order of the pecial Bench and alo to give effect to the order of the Diviion Bench on the ground of appeal no. 1 to 4 decided by it while making the reference to the Hon ble Preident for the Contitution of a Special Bench. (N.BARATHVAJA SANKAR) (G.C.GUPTA) (SMT. P. MADHAVI DEVI) VICE PRESIDENT VICE PRESIDENT JUDICIAL MEMBER Place: Bangalore Dated: am* Copy to : 1. The Aeee 2. The Revenue 3. CIT(A) 4. CIT 5. DR 6. GF(B lore) By Order AR, ITAT, BANGALORE