Taxpublishers.in - Monday Corner Answer to the Quiz for the week (09 Jun 2025)

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Quiz for the week (09 Jun 2025): New India (P) Ltd is engaged in multiple activities. It established an undertaking for production of fertilizers in the financial year 2012-13 and availed deduction of Rs.6 crores under section 35AD. In the previous year ended 31st March, 2024 it has accumulated losses aggregating to Rs.12 crores. It was decided that the plant and machineries of the fertilizer division be sold for Rs. 10 crores, which would fetch capital gain of Rs.4 crores under section 50 of the Act. The total income of the assessee of the FY 2024-25 was Rs.4.50 crores before considering the capital gain referred above and before set off of brought forward losses. The tax counsel of the assessee-company suggested that the capital gain could be adjusted against brought forward losses. Best Answer : Section 35AD of the Income-tax Act says that an assessee may opt a deduction in respect of the whole of capital expenditure incurred wholly and exclusively for the purposes of the specified business carried on by him during the previous year. The specified businesses are listed in section 35AD(5). The expenditure so incurred even prior to commencement of business and even if such expenditure is capitalized in the books of account of the assessee on the date of commencement of business, are eligible for deduction under section 35AD. Sub-section (5) of section 35AD in clause (ae) permits new plant installed in an existing plant for production of fertilizer. Since the assessee New India (P) Ltd has availed section 35AD deduction it is reasonable to presume that it is eligible for such deduction and was allowed in the assessment year 2013-14. Now when the asset used for specified business is sold after 8 years after the date of acquisition, section 35AD(7A) will not apply and the sale of such depreciable asset would be chargeable to tax under section 50. Section 50 of the Income-tax Act provides for computation of capital gain in the case of sale of depreciable assets. Since the assets were held beyond 8 years after the minimum stipulated time of 8 years under section 35AD(7A), it would be included in the block of assets at zero value. It is given in the query, that the sale of asset would result in capital gain of Rs.4 crores to the assessee. Therefore, the correctness of the computation of the short-term capital gain is not analysed. The assessee wants to claim the brought forward business loss to be set off against deemed short-term capital gain from sale of depreciable asset so that there is reduction in tax outgo on sale of those assets previously used for specified business. There is no specific provision contained in the Income-tax Act either to allow or to deny the claim of set off. In Pr.CIT v. Alcon Developers (2021) 432 ITR 277 (Bom) the assessee had carry forward business loss and wanted set off against the deemed capital gains on sale of depreciable assets. It was held that it is not the requirement of section 72 such that the gain or profit eligible for set off must be taxable only under the head ‘Profits and gains of business or profession’. The brought forward business loss therefore would be eligible for set off against short-term capital gain on the sale of building, plant and machinery. The counsel for the assessee in this case had argued that the capital gain had arisen because of the allowance of depreciation previously and such depreciation was allowed while computing the income under the head ‘Profits and gains of business or profession’. Accordingly, the capital gain to the extent of the original cost must be allowed set off against income from business. Taking the rationale of the decision discussed above, the assessee can claim deemed capital gain arising on sale of depreciable assets to be set off against the brought forward business losses. The current year business income of Rs.4 crores could be adjusted against brought forward business loss. The balance of brought forward business loss of Rs.2 crores could be adjusted against deemed short-term capital gain on sale of depreciable assets of fertilizer division. Only the balance of deemed short-term capital gain would be subjected to tax. A few more precedents for such reasoning could be found in CIT v. Hickson and Dadajee (P) Ltd (2020) 122 taxmann.com 94 (SC); and Digital Electronics v. Addl. CIT (2011) 135 TTJ (Mumbai) 419.

Quiz for the week (09 Jun 2025):

New India (P) Ltd is engaged in multiple activities. It established an undertaking for production of fertilizers in the financial year 2012-13 and availed deduction of Rs.6 crores under section 35AD. In the previous year ended 31st March, 2024 it has accumulated losses aggregating to Rs.12 crores. It was decided that the plant and machineries of the fertilizer division be sold for Rs. 10 crores, which would fetch capital gain of Rs.4 crores under section 50 of the Act. The total income of the assessee of the FY 2024-25 was Rs.4.50 crores before considering the capital gain referred above and before set off of brought forward losses. The tax counsel of the assessee-company suggested that the capital gain could be adjusted against brought forward losses.

Best Answer :

Section 35AD of the Income-tax Act says that an assessee may opt a deduction in respect of the whole of capital expenditure incurred wholly and exclusively for the purposes of the specified business carried on by him during the previous year. The specified businesses are listed in section 35AD(5). The expenditure so incurred even prior to commencement of business and even if such expenditure is capitalized in the books of account of the assessee on the date of commencement of business, are eligible for deduction under section 35AD.

Sub-section (5) of section 35AD in clause (ae) permits new plant installed in an existing plant for production of fertilizer. Since the assessee New India (P) Ltd has availed section 35AD deduction it is reasonable to presume that it is eligible for such deduction and was allowed in the assessment year 2013-14. Now when the asset used for specified business is sold after 8 years after the date of acquisition, section 35AD(7A) will not apply and the sale of such depreciable asset would be chargeable to tax under section 50.

Section 50 of the Income-tax Act provides for computation of capital gain in the case of sale of depreciable assets. Since the assets were held beyond 8 years after the minimum stipulated time of 8 years under section 35AD(7A), it would be included in the block of assets at zero value.

It is given in the query, that the sale of asset would result in capital gain of Rs.4 crores to the assessee. Therefore, the correctness of the computation of the short-term capital gain is not analysed. The assessee wants to claim the brought forward business loss to be set off against deemed short-term capital gain from sale of depreciable asset so that there is reduction in tax outgo on sale of those assets previously used for specified business.

There is no specific provision contained in the Income-tax Act either to allow or to deny the claim of set off. In Pr.CIT v. Alcon Developers (2021) 432 ITR 277 (Bom) the assessee had carry forward business loss and wanted set off against the deemed capital gains on sale of depreciable assets. It was held that it is not the requirement of section 72 such that the gain or profit eligible for set off must be taxable only under the head ‘Profits and gains of business or profession’. The brought forward business loss therefore would be eligible for set off against short-term capital gain on the sale of building, plant and machinery. The counsel for the assessee in this case had argued that the capital gain had arisen because of the allowance of depreciation previously and such depreciation was allowed while computing the income under the head ‘Profits and gains of business or profession’. Accordingly, the capital gain to the extent of the original cost must be allowed set off against income from business.

Taking the rationale of the decision discussed above, the assessee can claim deemed capital gain arising on sale of depreciable assets to be set off against the brought forward business losses. The current year business income of Rs.4 crores could be adjusted against brought forward business loss. The balance of brought forward business loss of Rs.2 crores could be adjusted against deemed short-term capital gain on sale of depreciable assets of fertilizer division. Only the balance of deemed short-term capital gain would be subjected to tax.

A few more precedents for such reasoning could be found in CIT v. Hickson and Dadajee (P) Ltd (2020) 122 taxmann.com 94 (SC); and Digital Electronics v. Addl. CIT (2011) 135 TTJ (Mumbai) 419.