Capital Losses Expire After Eight Years and Cannot Be Set Off Beyond the Statutory Limit.

Facts

The Claim: For AY 2016-17, the assessee sought to set off a carried-forward capital loss against current year capital gains.
The Origin: The capital loss in question pertained to Assessment Year 2007-08.
The Dispute: The Revenue argued that the loss was too old to be eligible for set-off.

Decision

The ruling was in favour of the Revenue based on the following legal reasoning:

Statutory Limitation: Section 74 of the Income-tax Act explicitly prescribes a maximum period of eight assessment years for which a capital loss (short-term or long-term) can be carried forward and set off against subsequent capital gains.
Timeline Analysis: For a loss originating in AY 2007-08, the eight-year window expired in AY 2015-16.
Final Verdict: Since AY 2016-17 was the ninth year, the carry-forward benefit had legally lapsed. The set-off was rightly denied.

50% Flat Deduction is Mandatory for Interest on Enhanced Land Compensation.

Facts

The Transaction: The assessee received interest on additional/enhanced compensation for the compulsory acquisition of land.
The Filing: The assessee initially disclosed the full interest under “Income from Other Sources” but later claimed a 50% deduction under Section 57(iv) via a revised return/submission during assessment.
The Dispute: The AO denied the deduction, claiming the revised return was filed beyond the prescribed time limit and was therefore invalid.

Decision

The ruling was in favour of the Assessee based on the following legal reasoning:

Characterization of Income: Interest received on compensation or enhanced compensation is specifically taxable under Section 56(2)(viii) (formerly 56(2)(vii)) under the head “Income from Other Sources.”
Mandatory Statutory Deduction: Section 57(iv) provides for a flat deduction of 50% of such interest income. This is a substantive right provided by the Act to compensate for the delayed nature of such receipts.
Substance Over Form: The Court held that even if a formal revised return was not filed or was delayed, the AO is duty-bound to assess the “correct” income. A clear statutory deduction cannot be denied merely on procedural grounds if the nature of the receipt is undisputed.
Final Verdict: The AO was directed to allow the 50% deduction.

Key Takeaways

Watch the Clock: Always maintain a “Loss Register” to track the age of carried-forward losses. Once you hit the 8-year mark, the loss is a “dead asset” for tax purposes.
50% Netting: For landowners receiving delayed compensation interest, remember that only half the interest is actually taxable. This is a “standard deduction” and does not require proof of actual expenses incurred to earn that interest.
AO’s Duty: If you missed a deduction in your ITR, you can still claim it during assessment by citing that the AO must only tax “real income” as per the law.

IN THE ITAT PANAJI BENCH

Comunidade of Chicalim

ACIT^*

Pavan Kumar Gadale, Judicial Member
and G D PADMAHSHALI, Accountant Member

IT APPEAL No. 207 (PAN) OF 2024
[Assessment year 2016-17]

MARCH 17, 2026

Elson Sequeira, AR for the Appellant. Shashi Saklani, CIT DR for the Respondent.

ORDER

Pavan Kumar Gadale, Judicial Member.- The appeal is filed by the assesse against the order of the NFAC Delhi/CIT (A) passed u/sec 143(3) and u/sec 250 of the Act. The assesse has raised the grounds of appeal challenging the order of the CIT(A) sustaining (i) the denial of setoff of carry forward losses and (ii) disallowance of claim of deduction u/sec57(iv) of the Act pertaining to the interest income earned on receipt of enhanced compensation made by the Assessing Officer.

2. The brief facts of the case are that, the assesse is a body of individuals age old institution governed by the code of comunidades under the state government. The assessee had filed the return of income for A.Y.2016-17 on 31.03.2017 disclosing a total income of Rs.2,38,96,960/. Subsequently the case was selected for scrutiny under CASS for the fallowing reasons (i) Large refund claimed out of self assessment tax (ii)High ratio of refund to TDS and (iii) Delayed payment of tax and return of income filed after due date. Further the Assessing Officer (A.O) has issued notice u/sec143(2) and u/sec142(1) of the Act calling for the details in support of return of income filed. In compliance, the assessee has filed the detailed submissions along with requisite information and documents. The Assessing officer find that the assessee had claimed setoff of carried forward capital loss pertaining to A.Y.2007-08 ofRs.1,39,99,426/- and of A.Y.2009-10 of Rs.9,06,334/- both aggregating to Rs.1,49,05,760/- against the capital gains of Rs.1,65,74,350/-. The A.O find that the assessee could not carried forward the loss for eight assessment years immediately succeeding the A.Y.2007-08, and such loss can be set off till A.Y.2015-16.

3. The A.O dealt on the provisions of section 74 of the Act and the code of comunidades, and considered the details of carried forwarded for A.Y.2007-08 & A.Y 2009-10 and find that in the absence of any basis of cost of acquisition claimed, the A.O is of the opinion that the assessee has not incurred any cost for acquisition and therefore such losses are not admissible and the claim of setoff was denied. On the second issue, in the assessment proceedings, the assessee filed revised return on 21.11.2018 after issuance of notice u/sec142(1) of the Act, were the assessee has claimed deduction of Rs.93,58,825/- as per the provisions of section57(iv) of the Act and also submitted a letter for allow ability of deduction, of interest received along with enhanced compulsory acquisition of land for the delay. The A.O dealt on the provisions of section 139(5) of the Act and observes that in the absence of filing a revised return within the time allowed, the claim cannot be accepted and deduction u/sec57(iv) of the Act is denied and is rejected. Finally the A.O. disallowed the carry forward of losses setoff of Rs.1,49,05,760/- and assessed the total income of Rs.3,88,02,720/- and passed the order u/sec143(3) of the Act dated27.12.2018.

4. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) has considered the grounds of appeal, statement of facts, submissions and findings of the AO but (i) sustained the disallowance of carry forward of loss setoff pertaining to A.Y.2007-08 and (ii) The CIT(A) has admitted the additional claim of deduction u/sec57(iv) of the Act in the appellate stage , which was rejected by the A.O subject to such claim qualifies on its merits and further CIT(A) sustained the denial of claim of deduction, of interest received along with enhanced compulsory acquisition of land for the delay u/sec57(iv) of the Act. The CIT(A) find that the additional compensation received is on account of enhancement in compensation and not on account of interest paid on delayed payment of any such compensation.Further, the CIT(A) granted relief in other grounds of appeal pertaining to loss carried forward for A.Y.2009-10 and partly allowed the assesse appeal. Aggrieved by the order of the CIT(A), on the two disputed issues , the assesse has filed an appeal before the Hon’ble Tribunal.

5. At the time of hearing, the Ld.AR submitted that the CIT(A) has erred in partly confirming the action of the Assessing Officer overlooking the facts and submissions of the assesse in the proceedings. The Ld.AR also submitted that the CIT(A) having admitted the claim of deduction u/sec57(iv) of the Act in the appellate stage, but has erred in not accepting that the interest is paid on delayed payment of enhanced compensation and is eligible for deduction u/sec57(iv) of the Act. The Ld.AR mentioned that the carry forward loss pertaining to A.Y.2007-08 could not be set off against income from capital gains within eight years, because of enhanced compensation claim dispute is pending in the courts of law. Further the Ld.AR substantiated the submissions with the factual paper book and judicial decisions and prayed for allowing the appeal. Per Contra, the Ld.DR supported the order of the CIT(A).

6. We heard the rival submissions and perused the material on record. The sole crux of the disputed issues that the CIT(A) has erred in partially sustaining the action of the A.O on the denial of setoff of carry forward losses and(ii) denial of claim of deduction u/sec57(iv) of the Act pertaining to the interest income earned on enhanced compensation. The Ld.AR emphasized that the assessee has submitted the details as called for by the authorities. On the first disputed issue, of setoff of carry forward capital gains loss of A.Y2007-08, the Ld.AR contentions are that, such carry forward loss pertaining to A.Y.2007-08 could not be set off against income from capital gains within eight years, because of enhanced compensation claim dispute is pending in the courts of law and the Ld.DR vehemently submitted that such loss is not permitted to carry forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed as per section74(2) of the Income Tax Act, The Ld.AR could not controvert the revenues submissions with any material evidence or judicial decisions. Accordingly, we do not find merits in this ground of appeal and is dismissed.

7. On the second disputed issue of claim of deduction u/sec57(iv) of the Act pertaining to the interest income earned on enhanced compensation. The Ld.AR contentions are that the assessee has disclosed the interest income earned on the additional/enhanced compensation received under the head “Income from other sources” and in the assessment proceedings, the assessee has filed the revised return in response to notice u/sec142(1) of the Act, were the assesse has claimed 50% deduction of interest income u/sec57(iv) of the Act and the A.O observes that in the absence of filing a revised return within the time allowed, as per the provisions of the Act, the claim cannot be accepted and such claim of deduction u/sec57(iv) of the Act is denied and was rejected. Whereas, in the appellate proceedings, CIT(A) having admitted the claim of deduction u/sec57(iv) of the Act in the appellate stage, has erred in not accepting that the interest is paid on delayed payment of enhanced compensation awarded by the Honble High Court and is eligible for deduction u/sec57(iv) of the Act. The Ld.AR emphasized that the assessing officer has accepted the interest income declared under income from other sources but denied the claim of deduction u/sec57(iv) of the Act. The Ld.AR substantiated the submissions that interest income received on compensation or on enhanced compensation is taxable u/sec56(2)(vii) of the act under “income from other sources” and further deduction of sum equal to 50% of the interest income is allowed under section57(iv) of the Act and the Ld.AR relied on the judicial decision of Honble High Court of Punjab&Haryana (2019) Tax Crop (DT)75333(HC-P&H)- in case of Puneet Singh v. CIT (Punjab & Haryana)/[2019] 415 ITR 215 (Punjab & Haryana). Whereas the revenue could not distinguish the decision with any other judicial decision.Accordingly, we considering the facts, circumstances, submissions and the ratio of the judicial decision set aside order of the CIT(A) on this disputed issue and direct the assessing officer to allow deduction u/sec 57(iv) of the Act. And this ground of appeal is allowed in favour of the Assessee.

8. In the result, the appeal filed by the assesse is partly allowed.