Cambridge Construction (Delhi) Ltd vs ITO, Ward-5(3) – Disallowance of Capital Gain and Set Off of Brought Forward Losses

Case Overview: Cambridge Construction (Delhi) Ltd vs ITO, Ward-5(3), Assessment Year 2013-14

This case involves Cambridge Construction (Delhi) Ltd, a New Delhi-based company, which filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] related to the assessment year 2013-14. The primary issues contested were the disallowance of capital gains and the set-off of brought forward losses from previous years.

Background

Cambridge Construction (Delhi) Ltd, the appellant, had undergone a merger process as per an order passed by the Hon’ble Delhi High Court on 06.08.2012 under Section 391 read with Section 394 of the Companies Act, 1956. The property division of M/s Nourish Organic Foods Pvt Ltd (NOFPL) merged with Cambridge Construction, effective from 01.04.2011. This merger transferred several properties to the appellant at their book values.

Key Issues Raised

The appellant challenged the CIT(A)’s order on several grounds, including:

• Disallowance of Cost of Improvement: The CIT(A) confirmed the disallowance of Rs. 4,96,548/- as cost of improvement for calculating Long Term Capital Gain (LTCG) on account of non-availability of bills. The appellant argued that these expenses were incurred in earlier financial years (FY 2006-07 and FY 2007-08) and were duly reflected in audited balance sheets.
• Set Off of Brought Forward Losses: The appellant contested the disallowance of brought forward long-term capital loss of Rs. 10,95,43,214/- from AY 2007-08, which was not allowed by the CIT(A) despite being claimed in the return filed on time under Section 139(1) of the Income Tax Act, 1961.
• Business Loss Disallowance: The CIT(A) disallowed Rs. 7,00,343/- claimed as business loss, alleging that the appellant did not carry on any business during the year under consideration.

Tribunal’s Observations and Findings

Disallowance of Cost of Improvement

The Tribunal noted that the expenses incurred by the previous owner were already reflected in the book value of the assets at the time of merger. Therefore, the disallowance confirmed by the CIT(A) was deemed appropriate. The Tribunal dismissed the grounds related to the disallowance of the cost of improvement.

Set Off of Brought Forward Losses

The appellant argued that the brought forward losses from AY 2007-08 were claimed in the return of income, and since the assessment order for that year did not explicitly disallow the loss, it should be considered allowed. However, the Tribunal held that since the assessment order for AY 2007-08 was silent on the carried forward losses, and the appellant did not invoke Section 154 to rectify this, the claim for set-off of losses was rightly disallowed. The Tribunal dismissed the grounds related to the set-off of brought forward losses.

Business Loss Disallowance

Regarding the disallowance of business loss, the Tribunal observed that the expenses claimed by the appellant were necessary to maintain its corporate status, regardless of whether any business activities were conducted during the year. Therefore, the Tribunal directed the Assessing Officer to delete the disallowance of Rs. 7,00,343/- related to business loss. This ground was allowed in favor of the appellant.

Conclusion

The appeal by Cambridge Construction (Delhi) Ltd was partly allowed. The Tribunal upheld the disallowance related to the cost of improvement and set-off of brought forward losses but allowed the appellant’s claim for business loss. The final order was pronounced on 14th July 2023.

The judgment highlights the importance of proper documentation and the necessity for timely actions, such as filing rectification applications under Section 154, to protect the taxpayer’s interests.

Cambridge Construction (Delhi) Ltd vs ITO, Ward-5(3) – Disallowance of Capital Gain and Set Off of Brought Forward Losses