Set off of business loss from unexplained cash credits u/s 68 not permissible in view of combined reading of sections 71 , 72 and 32(2).

In a latest judgment, ITAT Chennai has upheld that allowing set off of business loss from the unexplained cash credits u/s 68 not permissible in view of harmonious and combined reading of  sections 71 , 72 and 32(2).

Case Law Details:
I.T.A.No.325/Mds./2015 vs. Assessment Year :2006-07
Deputy Commissioner of Income Tax Corporate Circle vs. M/s.Shree Karthik Papers Ltd
Date of Order/Judgment: 06/04/2016

Brief Facts of the Case:
Tthe assessee company had claimed set off of income offered u/s.68 of the Income Tax Act, 1961  against the loss incurred by the assessee. However, the Assessing Officer did not allow the set off of the income offered u/s.68 against the loss incurred in all the regular heads of income instead allwoed only set off of brought forward unabsorbed depreciation to the extent of profit available. Against this, the assessee agitated appeal before CIT(A) who placed reliance on the judgement of the Madras High Court in the case of CIT Vs. Chensing Ventures wherein it was held that the income tax was only one tax and levied on the sum total of the income classified and chargeable under the various heads. Hence, the CIT(A) directed the AO to allow set off of carried forward depreciation loss in accordance with section 72 & section 32.

ITAT observed that in the case of M/s.Erode Annai Spinning Mills Pvt Ltd.,in ITA No.1389/Mds./2015 it was held that section 72 did not permit set off of accumulated losses and unabsorbed depreciation against any other head of income other than the income from “profits and gains of business or profession” 

Excerpt from ITAT Judgment:

Further, we place reliance in the case of Chandrakumar Vs. ACIT reported in [2010] 129 TTJ 0489(Chennai Trib.) wherein held that:-

7. A reading of the sections 71, 72 and 32(2) would show that s. 71 deals with inter-head adjustments within a given year. Sec. 72 provides for carry forward and set off of loss, whereas s. 32(2) deals with carry forward of unabsorbed depreciation. The last of these above referred sections clearly mentions that unabsorbed depreciation has to be added to the depreciation allowance of the subsequent year and to be considered as part of the current depreciation. This position is clear from the decision of the Hon’ble apex Court in the case of Virmani Industries (supra). Of course, the order of the Hon’ble apex Court does bring out the difference between unabsorbed loss and unabsorbed depreciation. Nevertheless unabsorbed depreciation was never considered as something that was not falling under the head ‘Profits and gains of business or profession’. Sec. 72 stipulates conditions regarding carry forward and set off of business loss year to year, but this would not in any way hamper the working of s. 71 which deals with inter-head set off. Sub-s. (2) of s. 32 has stipulated a special treatment to be given to unabsorbed depreciation where it is not absorbed in any given year. Such a special treatment, in our opinion, would never take it out of the head ‘Profits and gains of business or profession’. Each of the above sections deals with different aspects regarding set off and carried forward, and have to be harmoniously interpreted, so that application of one of such sections would not negate the other. If we look at sub-s. (2) of s. 71 of the Act again, it clearly specifies that if the net result of computation of the income under the head ‘Profits and gains of business or profession’ is a loss, then a set off of such loss cannot be made against income assessable under the head salaries. So what is to be seen is the net result of computation under the head ‘Profits and gains of business or profession’. Once unabsorbed depreciation is considered as part of current depreciation, no doubt, the net result of computation under the head ‘Profits and gains of business or profession’ for any given year would be inclusive of such unabsorbed depreciation. Needless to say that any loss as a result of such computation whether on account of unabsorbed depreciation or not would not be susceptible to a set off against income under the head salaries on account of specific Bar contained in sub-s. (2A) of s. 71 of the Act. Neither s. 72 nor s. 32(2) of the Act would in any way affect the inter-head adjustments specified under s. 71 of the Act nor the application of specific bar contained in sub-s. (2A) thereof. This being the case, we are of the opinion that the AO as well as the learned