Under section 71 assessee have option to set off losses against capital gains and it is not mandatory

Under section 71 assessee have option to set off losses against capital gains and the set off is not mandatory as revealed by legislative history – ITAT 

ABCAUS Case Law Citation:
ABCAUS 2592 (2018) (10) ITAT

Important Case Laws Cited/relied upon:
Coated Fabrics (P) Ltd. vs JCIT’ [2006] 285 ITR (AT) 148

The present appeal was preferred by the appellant assessee against the order of the Commissioner of Income Tax(Appeals).

The sole issue involved in this appeal was as to whether under the provisions of section 71 of the Income-tax Act, 1961 (the Act) there is an option to the assessee to set off the business losses against the capital gains or is it mandatory to do so.  

During the relevant year, the assessee had business loss but had also earned short term capital gains. The assessee in the return of income did not set off the business loss against the short term capital gain. The assessee adjusted the said capital gains against the brought forward short term capital loss and returned the taxable income at ‘nil’ with carry forward business loss under section 80 of the Act.

However, the Assessing Officer (AO) adjusted the current year’s capital gains against the current year business loss and accordingly computed the income of the assessee.

The CIT(A) upheld the course adopted by the AO.

Aggrieved by the orders of the lower authorities, the asssesee agitated the issue before the Tribunal and relied upon the provisions related to set off of loss from one head against income from another as per section 71 of the Act.

It was also submitted that to arrive at the correct conclusion, provisions of section 71 as introduced vide 1961 Act and further substituted by Finance Act 1961 w.e.f. 1.4.1962 and further substituted by Finance Act 1967 w.e.f. 1.4.1968 (as above) and further substituted by Finance Act 1987 are also relevant.  

On a combined reading of the history of provisions of section 71 as above and section 72 related to carry forward and set off of business loss, the Tribunal opined that the Legislative history reveals that the assessee has always been given an option to set off his losses against the income from capital gains. However, as per the provisions of sub section (3) of section 71, the assessee is not allowed to set off capital loss against income under any other head.

The Tribunal opined that there was no justification on the part of the lower authorities in making the impugned adjustments and, therefore, the same was set aside. The Assessing officer was directed to accept the returned income /computation of the assessee, as such.

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