ORRA FINE JEWELLERY PVT. LTD. (FORMERLY KNOWN AS M/S. INTER GOLD GEMS PVT. LTD.),MUMBAI vs. DCIT CC-8(3), (ESRTWHILE ACIT CENT. CIR. 46), MUMBAI

The common issue in both these appeals is regarding the Ld.CIT(A) confirming the action of the Assessing Officer in denying set off of unabsorbed business loss on the ground that carry forward of losses was denied by the Assessing Officer in A.Y.2006-07 invoking the provisions of section 79 of the Act.

Briefly stated the facts are that, during the A.Y. 2006-07 assessee incurred business loss as per the return of income filed. Assessee also incurred business loss in earlier assessment years aggregating to ₹.18.96 Crores and had sought to carry forward the said losses to be set off against business income of subsequent assessment years. However, the claim for carry forward of losses was denied by the Assessing Officer by invoking the provisions of section 79 of the Act, which was sustained by the Ld.CIT(A) and also by the Tribunal in ITA.No. 5760/Mum/2009 dated 05.06.2013. Assessee carried the matter before the Hon'ble High

As the things stood thus, during the assessment year under consideration i.e. A.Y. 2012-13 the assessee in the return of income claimed set off of losses relating to the Assessment Years prior to A.Y.2006-07. However, the Assessing Officer while completing the assessment u/s. 143(3) r.w.s. 153(A) of the Act ignored the claim of the assessee for set off of losses against income for A.Y. 2012-13.

The assessee carried the matter before the Ld.CIT(A) and contended that during the A.Y. 2006-07 the Assessing Officer denied carry forward of brought forward losses by invoking provisions of section 79 of the Act. It was contended that the share holding pattern of the assessee company up to 31.03.2015 was as under: - No. of Equity Name of the Shareholder Percentage Shares Inter Gold India Pvt. Ltd. 10,99,850 54.99 Soignee Kothari 50 00.00 Rosy Blue (India) Pvt. Ltd. 5,99,900 30.00

It was contended that on 10.03.2006 i.e., during the A.Y. 2006-07 Inter Gold India Pvt Ltd which was holding 10,99,850 shares comprising 54.99% of the shareholding transferred 10,95,850 shares i.e. 54.79% of the shares held by Inter Gold India Pvt. Ltd. to Rosy Blue (India) Pvt. Ltd. Consequent thereto Inter Gold India Pvt Ltd. continued to hold the balance 4000 shares (10,99,850 - 10,95,850) earlier held by Inter Gold India Pvt. Ltd. i.e. 0.20% of the share capital of the assessee. After the purchase of the assessee’s shares from Inter Gold India Pvt. Ltd., Rosy Blue (India) Pvt. Ltd which earlier held 5,99,900 shares i.e., 30% of the assessee’s share capital came to hold 16,95,850 shares (5,99,900 + 100+ 10,95,850) thereby holding 84.79% of the share capital of the assessee company.

It was contended that the share holding pattern of the assessee as on 31.03.2006 was as under: -

It was contended that the assessment for the A.Y. 2006-07 was made on the assumption that Inter Gold India Pvt. Ltd. has transferred its entire shareholding to Rosy Blue (India) Pvt. Ltd. However, the factual position was that the said Inter Gold India Pvt. Ltd. had retained 4,000 shares of assessee which it continues to be held by it till date. It was contended that this fact was also confirmed by the annual returns filed by the assessee with the Registrar of Companies as well the audited accounts of Inter Gold India Pvt. Ltd. Therefore, it was contended that based on the mistaken information submitted by the assessee during assessment proceedings for A.Y. 2006-07 it was held that in F. Y 2005-06 there was a change in shareholding of the assessee Company and as a result of which shares carrying more than 51% of the voting power are not beneficially held by the persons who beneficially held shares carrying not less than 51% of the voting power in the year in which such loss was incurred. Accordingly, the Assessing Officer by invoking the provisions of 6 & 2926/MUM/2018 (A.Ys: 2012-13 & 2013-14) M/s. Orra Fine Jewellery Pvt. Ltd., Section 79 of the Act, did not allow the loss of ₹.18.96 Crores assessed up to A.Y. 2005-06 to be carried forward to A.Y. 2006-07 and onwards.

Assessee contended before the Ld.CIT(A) that the provisions of section 79 of the Act can be attracted only in the year in which the loss is set off and since the assessee claimed set off of loss only during the A.Y.2012-13 and subsequent years the applicability of provisions of section 79 of the Act is to be examined only during the A.Y. 2012-13 and the decision of the Assessing Officer not to carry forward the loss prior to A.Y. 2005-06 invoking provisions of section 79 of the Act has no relevance. However, Ld.CIT(A) sustained the action of the Assessing Officer in not allowing the set off of losses during the Assessment Year under consideration by observing that the losses incurred up to A.Y. 2005-06 have already been denied in earlier Assessment Year i.e., 2006-07 by invoking provisions of section 79 of the Act and the matter is now pending before the Hon'ble High Court.

Before us, Ld. Counsel for the assessee Shri Nitesh Joshi submitted that in the return of income for A.Y. 2012-13 assessee claimed set off of brought forward loss aggregating to ₹.9,40,14,695/-. Learned Counsel for the assessee submitted that the provisions of section 79 of the Act

Learned Counsel for the assessee submitted that assessee’s case is covered by exception provided in section 79 of the Act as more than 51% of its shares were held by the same group of shareholders as on 31st March 2005 and 31st March 2013. Learned Counsel for the assessee submitted that the denial of carry forward of losses in the assessment order for 2006-07, though the matter is pending for that year before the Hon'ble High Court, is without jurisdiction and cannot be applied in the year under consideration, the provisions of section 79 of the Act are not applicable. The Assessment Order denying the set off of losses incurred prior to A.Y. 2006-07 is bad in law and ought to be cancelled.

Learned Counsel for the assessee further submitted that the correct year for consideration of the issue of eligibility of set off of brought

Ld. Counsel for the assessee further submits that the fact relating to Inter Gold India Pvt. Ltd. continuing to hold 4,000 shares of the assessee company is part of the record for the year under consideration. Based on a plain reading of section 79 of the Act, it shall have no application to the present case which would be covered by the exception. Reliance was placed on Judgment of the Hon'ble Apex Court in the case of Sri Agasthyar Trust v. CIT [236 ITR 23]. Ld. Counsel for the assessee submits that in the said case, the Court has upheld the Tribunal's order granting exemption as a charitable trust, despite an earlier decision of the Apex Court holding the same assessee to be non-charitable upon consideration of further material. It is submitted that in the present case the further fact which is also fundamental to the issue is that Inter Gold

Ld. Counsel for the assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Italindia Cotton Co. Pvt. Ltd. [174 ITR 160] and submitted that as per clause (a) of section 79, as it stood for the year under consideration, the said provision would not apply where shares carrying more than 51% of the voting power were beneficially held by the same group of shareholders on the last day of the year in which the loss was incurred and the year in which the loss is sought to be set off. Ld. Counsel for the assessee therefore submits that in the present case more than 99% of the shares of the assessee company was held by Inter Gold India Pvt. Ltd., Soignee Kothari, Rosy Blue (India) Pvt. Ltd., Vijay Jain and Kajal Jain, both at the time when the loss was incurred and also when it was sought to be set off. Therefore, it was submitted by the Ld. Counsel for the assessee that the disabling provision of section 11 & 2926/MUM/2018 (A.Ys: 2012-13 & 2013-14) M/s. Orra Fine Jewellery Pvt. Ltd., 79 of the Act should not apply to the present case. It was submitted that the provisions of section 79 of the Act does not apply to those cases where there is a interse change in shareholding, provided the transferor of shares continues as a shareholder.

Ld. DR strongly placed reliance on the order of the Ld.CIT(A). Ld. DR submitted that the matter of carry forward of losses was already dealt in the A.Y. 2006-07 and the claim was denied by the Assessing Officer invoking provisions of section 79 of the Act and the matter was carried to the Tribunal, Tribunal confirmed it and now the matter is pending before the Hon'ble High Court. He strongly supported the orders of the Authorities below.

We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. The substantial issue for consideration now before us for the A.Y. 2012-13 is whether the provisions of section 79 of the Act can be invoked and examined in the assessment year in which the assessee claimed for carry forward of losses or in the assessment year in which the assessee actually claimed set off of carry forward losses against the profits of that year. The assessee contends that the Assessing Officer can examine the applicability of the 12 & 2926/MUM/2018 (A.Ys: 2012-13 & 2013-14) M/s. Orra Fine Jewellery Pvt. Ltd., provisions of section 79 of the Act only in the year in which the loss is set off and not in the year in which the assessee claims the loss to be carried forward. In the present case during the A.Y. 2006-07 the Assessing Officer invoking the provisions of section 79 of the Act denied carry forward of losses prior to the A.Y. 2006-07. Assessee carried the matter unsuccessfully before the appellate authorities and the matter is now pending before the Hon'ble High Court.

In the case of CIT v. Manmohan Das [59 ITR 699] the following question which came up before the Hon'ble Allahabad High Court has been examined by the Hon'ble Supreme Court in the appeal preferred by the revenue. “Whether the assessee could claim a set off of the loss suffered by him in the preceding year 1950-51 against his profits in the year under consideration, i.e., 1951-52, having failed to prefer an appeal against the refusal by the Income-tax Officer making the assessment for the year 1950-51 to allow the assessee to carry forward the loss under section 24(2) of the Act ?"

The Hon'ble Supreme Court held as under: - “3. The second question presents little difficulty. In making his order of assessment for the year 1950-51, the Income-tax Officer declared that the loss computed in that year could not be carried forward to the next year under section 24(2) of the Income-tax Act, as it was not a business loss. The Income-tax officer has under section 24(3) to notify to the assessee the amount of loss as computed by him, if it is established in the course of assessment of 13 & 2926/MUM/2018 (A.Ys: 2012-13 & 2013-14) M/s. Orra Fine Jewellery Pvt. Ltd., the total income that the assessee has suffered loss of profits. Section 24(2) confers a statutory right (subject to certain conditions which are not material) upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward the loss as is not set off under sub-section (1) to the following year, and to set off against his profits and gains, if any, from the same business, profession or vocation for that year. Whether the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and against the same business, profession or vocation under s. 24(2) has to be determined by the Income-tax Officer who deals with, the assessment of the subsequent year. It is for the Income-tax Officer dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the Income-tax Officer who computes the loss in the previous year under s. 24(3) that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.”

As could be seen form the above, the Hon'ble Apex Court held that the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and against the same business, profession or vocation under section 24(2) has to be determined by the Assessing Officer who deals with, the assessment of the subsequent year. It was held by the Hon'ble Supreme Court that it is for the Assessing Officer dealing with the assessment in the subsequent year who has to determine whether the loss of the previous year may be set off against the profits of that assessment year. The Hon'ble Supreme Court further held that a decision recorded by the Assessing Officer who

Following this decision of the Hon'ble Supreme Court, the Chandigarh Bench of the Tribunal in the case of Rajiv Gupta v. ITO [114 ITD 346] held that, the Assessing Officer was justified in refusing set off of the long-term capital loss suffered in A.Y. 1996-97, in A.Y. 1997-98 as well as in A.Y. 1999-2000. It was observed by the Tribunal that there was a glaring and patent mistake committed by the Assessing Officer originally while making the assessments for the said assessment years under section 143(3) of the Act which was rightly modified, the assessment orders by rectifying the mistake of law by denying set off of long term capital loss claimed by the assessee. The facts in this case were that the assessee claimed carry forward of long term capital loss of A.Y.1996-97 in its return of income filed belatedly. This loss was set off during the A.Y. 1997-98 and A.Y. 1999-2000 by the assessee in the return of income filed. The Assessing Officer originally while completing the assessments u/s. 143(3) of the Act allowed the claim for set off. However, subsequently by passing rectification order u/s. 154 of the Act Assessing Officer denied the claim for set off which was upheld by the Tribunal,

The ratio of the decision of the Hon'ble Supreme Court in the case of CIT v. Manmohan Das (supra) applies squarely to the facts of the assessee’s case. On a reading of the Tribunal order in ITA.No.5760/Mum/2009 dated 05.06.2013 passed for the A.Y. 2006-07 wherein the claim for carry forward of losses were denied invoking provisions of section 79 of the Act, we observed that the decision of the Hon'ble Supreme Court in CIT v. Manmohan Das (supra) was not brought to the notice of the Tribunal and the Tribunal had no occasion to examine the effect of this decision. Therefore, we are of the considered view that in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Manmohan Das (supra) the decision of the Tribunal for the A.Y.2006-07 sustaining the action of the Assessing Officer in not carrying forward the loss to be set off against the profits of the subsequent years

Ground No. 2 relates to discrepancies in stocks. Assessee has raised following ground in its appeal: -

We have heard rival submissions. We find that pursuant to the search carried u/s. 132 of the Act in the case of the assessee company on 25.08.2011, search party found certain discrepancies in the stock of coated and polished diamonds. Assessee indeed filed reconciliation explaining the discrepancies and ultimately the search party found that 5.16 carats of diamond and 361.94 grams of gold stood not reconciled. During the course of assessment proceedings, the assessee had explained that assessee engaged in the business of manufacture and trading of Diamonds, Precious and semi-precious stone studded jewellery and also gold jewellery, the assessee had totally handled 14,103.06 carats of diamond, out of which only 5.16 carats of diamond could not be explained.

During the course of assessment proceedings, the assessee had explained that 3,42,130 grams of gold that were handled by the assessee during the year in the regular course of its business, only 361.94 grams of gold could not be reconciled which contribute to 0.105% of the total material handled. The assessee had also given a plausible explanation that this minor difference had arouse on account of recovery from dust from repair centre etc. The Ld. Assessing Officer however did not heed to these contentions of the assessee and proceeded to value the stock of gold at the rate of ₹.2804/- per gram and made an addition of ₹.10,14,880/- in the assessment which was upheld by the Ld.CIT(A).

Considering the volume of gold jewellery and diamonds handled by the assessee in the instant case during the year under consideration, the unreconciled stock contributed a very meagre percentage of the total

Assessee has raised following grounds in its appeal: -

In the result, appeal of the assessee for the A.Y. 2012-13 is partly allowed and appeal for the A.Y. 2013-14 is allowed for statistical purpose.

Before parting, we noticed that these appeals were heard on 05.02.2020 and the pronouncement is delayed due to lockdown in view of COVID-19 pandemic. The pronouncement is as per Rule 34(5) of Income Tax Appellate Tribunal Rules, 1963 and Hon'ble Bombay High Court decision vide orders dated 15.04.2020 and 15.06.2020 extending the time bound periods specified by Hon'ble High Court by removing the period under lockdown. This aspect was also dealt with in detail by the 21 & 2926/MUM/2018 (A.Ys: 2012-13 & 2013-14) M/s. Orra Fine Jewellery Pvt. Ltd., Mumbai Bench of the Tribunal in case of DCIT v. JSW Steel Vide order dated 14.05.2020 in ITA.No. 6264/Mum/2018.