The document discusses two court cases regarding whether business losses can be set off against income assessed under sections 68-69D of the Income Tax Act, which deal with unexplained investments and expenditures. The Chensing Ventures case allowed set off of losses, while the Kerala Sponge Iron Ltd case did not. The Finance Act of 2016 amended the law to explicitly disallow set off of losses against such incomes. This amendment applies prospectively from assessment year 2017-18. The conclusion is that while clarificatory amendments are usually retrospective, this one specified prospective application due to the changed legal position.

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Possibility of set-off of business loss
against cash credit/ unexplained
investment
V. K. Subramani
Section 115BBE of the Income-tax Act, meant for levy of
flat rate of tax on incomes such as cash credit (section
68), unexplained investment (section 69), unexplained
money (section 69A), amount of investments not fully
disclosed in the books of account (section 69B), and
unexplained expenditure (section 69C), was subjected to
an amendment by the Finance Act, 2016. These additions
made in tax assessments are liable to a flat rate of tax at
30% without considering any basic exemption limit. Sub-
section (2) to section 115BBE also gives a protective cover to say that no
deduction ‘in respect of any expenditure or allowance shall be allowed
to the assessee under any provisions’ of the Act.
In the Finance Act, 2016, in the sub-section (2), the words “or set off of any
loss” has been added as a clarificatory amendment applicable prospectively
from the assessment year 2017-18 onwards.
This write-up discusses whether the amendment brought in being
clarificatory will apply retrospectively and also two contrary decisions of the
High Courts which hold the fort prior to the amendment.
Chensing Ventures case (291 ITR 358 (Mad))
The assessee, in this case a partnership firm, was engaged in the business
of purchase and sale of steels scrap both locally and in mid-sea. For the
assessment year 2002-03, consequent to a survey, the assessee offered Rs
28.50 lakh as income from undisclosed sources. Since the assessee had
admitted in the return business loss of Rs 11.95 lakh before survey, it
claimed set off against the offer of Rs 28.50 lakh.
The Assessing Officer in assessment denied the set off of business loss
against the income admitted under the head „other sources‟ of Rs 28.50 lakh
which led to litigation. The Court held that section 71 deals with set off of
loss against income under any other head. After setting off of losses against
the income under the same head, if the net result is still a loss, the assessee
can set off the said loss under section 71 of the Act against income of the

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same year under any other head except losses with arise under the head
„capital gains‟.
The Court held that the income tax is only one tax and levied on the sum
total of the income classified and chargeable under the various heads.
Section 14 has classified the difference heads of income and income under
each head is computed separately. Income which is computed in accordance
with law is one income and it is not a collection of distinct tax levied
separately on each head of income and it is not an aggregate of various
taxes computed with reference to each of the different sources separately.
There is only one assessment and the same is made after the total income
has been ascertained. The assessee is subjected to income tax on his total
income though his income under each head may be well below the taxable
limit. Hence, the loss sustained in any year under any heads of income will
have to be set off against income under any other head.
In this case, the Assessing Officer made addition of Rs 28.50 lakh as
undisclosed income under section 69 of the Act. Once the loss is
determined, the same should be set off against the income determined
under any other head of income. In the assessment, no reasons were given
by the Assessing Officer for denial of benefit of section 71 of the Act. The
benefit provided under section 71 cannot be denied when the assessee is
eligible for the same. Thus the court decided the case in favour of the
assessee.
Kerala Sponge Iron Ltd’s case (379 ITR 330 (Ker)
The assessee in this case was assessed additionally of Rs 513.55 lakh found
credited in the books of account as income from commodity trading profit
which was found to be a sham or bogus one and was assessed under
section 68. This income was adjusted/ set off against business loss of the
assessee relating to the assessment year 2010-11. The claim of the assessee
for set off was disallowed by the Assessing Officer.
The tribunal accepted the contention of the assessee-company that it has no
other source of income than business income and such contention was not
controverted by the tax authorities. As the assessee could not explain to the
satisfaction of the Assessing Officer about the nature and source of the
amounts credited, the Assessing Officer has treated them as deemed
income, i.e. as unexplained cash credit under section 68 of the Act. It held
that the assessee is entitled to claim set off of current year’s loss and also
brought forward loss/ unabsorbed depreciation against the same in
accordance with the relevant provisions of the Act.

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The High Court however held that once the income has been treated as
unexplained cash credit under section 68, such unexplained income cannot
be treated as business income or under any one of the heads provided
under section 14A of the Act and therefore the question of set off does not
arise. It accordingly set aside the order of the tribunal and upheld the order
of the Assessing Officer.
Distinction
In Chensing Ventures case (Supra) the assessee was a partnership firm who
derived income from business and the income admitted was attributed to
the same business income and the set off was allowed.
In Kerala Sponge Iron Ltd (Supra) the assessee a limited company governed/
moderated by Registrar of Companies and who admitted the income from
commodity derivatives was denied the benefit of set off of loss against such
deemed income. Only point of distinction in this case is that the
transactions were viewed as sham or bogus but being a company the
income nevertheless cannot fall outside the domain of business income or
income from other sources.
Both the cases relate to assessment year before the insertion of section
115BBE which was inserted by the Finance Act, 2012 applicable from the
assessment year 2013-14 onwards.
Chensing Ventures case (Supra) was decided in April, 2007, the Kerala
Sponge Iron Ltd’s case (Supra) was decided in August, 2015 after the
insertion of section 115BBE but not applicable for the assessment year in
question which related to assessment year 2010-11.
The Kerala High Court decision might have been influenced by a legal
provision in the statute book though not applicable for the case before it.
With respect, the decision of the Kerala High Court requires reconsideration
since the law does not distinguish the explained sources of income or
unexplained sources of income subjected to tax under the law at that point
The Kerala Sponge Iron Ltd‟s case (Supra) was decided in
August, 2015 after the insertion of section 115BBE but not
applicable for the assessment year in question which related
to assessment year 2010-11.

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of time, i.e. assessment year 2010-11.
Recent amendment
The Finance Act, 2016 has amended section 115BBE to explicitly state that
the income assessed under sections 68 to 69D will be subjected to tax at flat
rate of 30% and no set off of loss would be allowed against such income.
Already, no expenditure or allowance could be deducted against such
income.
In the memorandum explaining the amendment, it has been clearly stated
that the amendment would take effect prospectively from the assessment
year 2017-18 onwards.
Conclusion
The amendment made by the Finance Act, 2016 upholds the view of Kerala
High Court discussed above but it is to be noted, though it is stated as
clarificatory amendment to be applicable prospectively.
Normally, a clarificatory amendment would be taken as retrospectively
applicable but since it has been stated that it would apply on prospective
basis, there is no room for confusion.
In the recent a decade or so, the income-tax rates are becoming multiple by
prescribing differential rates for different types of income falling under same
head.
The observation of the Madras High Court in Chensing Ventures (Supra) that
income-tax law does not prescribe different rates for different sources of
income may become out of date by frequently prescribing so many tax rates
for different types of income.
This kind of approach would make the tax law not only complicated to
administer but also difficult to understand for the taxpayers.
(V. K. Subramani is Chartered Accountant, Erode.)
In the recent a decade or so, the income-tax rates are
becoming multiple by prescribing differential rates for
different types of income falling under same head.