ITAT Rules in Favour of Assessee on Set-Off of House Property Loss Against Capital Gains

The assessee claimed a set-off of house property loss of Rs. 1.62 lakhs against short-term capital gains of Rs. 1.70 lakhs for the assessment year 2022-23 under Section 71(2) of the Income Tax Act. However, the Centralized Processing Centre (CPC) adjusted the loss against business income instead, resulting in a demand and denial of a refund. Thereafter, the assessee filed a rectification application under Section 154, which was also rejected. The assessee argued that the CPC misapplied Section 71, and the loss should have been adjusted first against capital gains. In the appeal before CIT (A), it upheld the rejection, holding that the house property loss should first be adjusted against other heads like business income before applying it to capital gains.

Issue Raised: Whether the deductions of home property loss first from business income rather than from capital gains under Section 71(2) of the Income Tax Act is a mistake apparent from the record and warrants correction under Section 154.

Tribunal’s Decision: The Tribunal held that Section 71(2) clearly allows an assessee to set off losses from other heads of income, like house property or business, against capital gains in the same assessment year, subject to certain conditions. The Tribunal further observed that both the AO and the CIT(A) failed to correctly interpret and apply this provision, despite its plain language. The ITAT highlighted that the decision to adjust income under different heads should be in accordance with statutory provisions. The tribunal seeing merits in the assessee’s claim and therefore ordered the AO to calculate the loss appropriately and approve the rectification application based on the reasoning that the language of the Act is clear and unambiguous. Thus, the assessee’s appeal was granted.

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