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Facts
The assessee challenged the CIT(A)'s order upholding the set-off of income against unabsorbed depreciation instead of brought forward business losses. The CIT(A) had also invoked Section 79 of the Act to deny set-off of losses, which the assessee contended was done suo motu without a proper notice. The assessee also contested additions made under Section 41(1) of the Act concerning written-back liabilities.
Held
The Tribunal held that brought forward business losses must be set off against business income before unabsorbed depreciation, as per Sections 32(2) and 72 of the Act. It also found that the CIT(A)'s invocation of Section 79 was invalid due to lack of notice and without any grounds raised by the assessee. Furthermore, the additions under Section 41(1) were not sustainable as the amounts written back were either previously disallowed or related to capital creditors for which no deduction was claimed.
Key Issues
Whether brought forward business losses should be set off before unabsorbed depreciation, and the validity of the CIT(A)'s action under Section 79. Also, whether additions under Section 41(1) were justified for written-back liabilities.
Sections Cited
Sec 154 of the Income-tax Act, 1961, Sec 79 of the Act, Sec 32(2) of the Act, Sec 72 of the Act, Sec 41(1) of the Act, Sec 251(2) of the Act, Sec 37 of the Act, Sec 40(a)(ia) of the Act
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: SHRI MAHAVIR SINGH & SHRI M. BALAGANESH
O R D E R
PER M. BALAGANESH, AM AY 2021-22, arises out of the order of the ld ADDL/ JCIT(A)-2, Vadodara [hereinafter referred to as ‘ld. JCIT(A)’, in short] dated 06.03.2025 against the order of assessment passed u/s 154 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 01.06.2023 by the Assessing Officer, AO, CPC (hereinafter referred to as ‘ld. AO’).
The Ground No. 1 raised by the assessee was stated to be not pressed by the ld AR for which necessary endorsement has been duly made in our file. Accordingly, ground No. 1 is hereby dismissed as not pressed.
The Grounds No. 2, 3 and 3.1 raised by the assessee are challenging the action of the ld CIT(A) in upholding set off of assessee’s income against unabsorbed depreciation as against brought forward business losses and whether the same would be covered by Section 79 of the Act.
We have heard the rival submissions and perused the materials available on record. The assessee is a subsidiary of Indraprastha Energy and Waste Management Companies Ltd. Subsequently its shares were acquired by Delhi International Airport Pvt. Ltd (DIAL) and GMR Energy Ltd (GEL) and it became a subsidiary of DIAL. During the FY 2012-13, IL & FS Renewable Energy Ltd (IREL) had acquired 49% equity shares from GMR Energy Ltd and the balance equity was held by DIAL and Selco International Ltd. Subsequently, IL&FS Environmental Infrastructure and Services Ltd (IEISL) acquired 49% equity shares from IREL. The assessee has had set up 12MW Municipal Solid Waste to energy plant at Gazipur, Delhi to generate electricity and produce Refuse Derived Fuel (RDF) and organic manure. The company started its commercial operations w.e.f. 31.03.2017. In terms of NCLT Mumbai Bench order, EverEnviro Resource Management Pvt. Ltd (ERMPL) had presently acquired shareholding of the holding company-IEISL on 16.04.2021 and accordingly ERMPL is the ultimate holding company w.e.f. 06.04.2021. The Union of India (through Ministry of Corporate Affairs) had filed a petition on 01-10-2018 before the NCLT Mumbai Bench under Section 241(2) read with Section 242(2) of the Companies Act, 2013, among others, praying that the then existing directors of Infrastructure Leasing and Financial Services Limited (IL&FS) be superseded by new directors on the grounds including, precarious and critical financial condition of IL&FS and its group companies and that affairs of IL&FS were being conducted in a manner contrary to public interest. Subsequently, the Resolution Process of IL&FS and its East Delhi Waste Processing Company Pvt. Ltd Group Companies were taken up by the NCLT. Further, it was submitted that post NCLT orders, the assessee has been taken over by new management. The new investor is a venture of Government of India through National Investments and Infrastructure Fund (NIIF) and the UK Government's Department for International Development. The new investor, being funded by Government of India and Government of UK, had performed all the financial and other due diligence and thereafter had acquired the assessee company. It was submitted that even during this process, no financial irregularities have been found. Further, as per NCLT order, in the larger interest of the nation, all claims (whether disclosed or undisclosed, and whether existing at or relating to a period prior to 15-10-2018) of all creditors (including, the Central Government, any State Government, statutory, local, tax or regulatory authorities) and all liabilities of or in respect of assessee stood unconditionally and fully extinguished upon contingent, and whether existing at or relating to a period prior to 15th October payment of the bid amount by the current ultimate holding company of the assessee, i.e; EverEnviro Resource Management Private Limited. Thus, in accordance with the Resolution Framework as approved by the NCLAT and the NCLT Order, upon payment of the bid amount, which was paid by EverEnviro Resource on the assessee including statutory, as stated above were fully extinguished. Basis this, since the above demand order pertains to a period occurring prior to 15-10-2018 (the cut-off date), as explained above, in accordance with the Resolution Framework as approved by the NCLAT and the NCLT Order, the same stands unconditionally and fully extinguished.
Dehors the above facts, we find that the return of income for AY 2021-22 was filed by the assessee on 15.03.2022 declaring total income of Rs. 6,90,58,415/- u/s 139(1) of the Act. The assessee had claimed brought forward East Delhi Waste Processing Company Pvt. Ltd losses of Rs. 140,62,57,568/- and unabsorbed depreciation of Rs. 3,40,57,47,157/-. The brought forward losses and unabsorbed depreciation was claimed at the time of filing of tax return which was filed within the due date. The details of same are as under:-
SI Assessment Date of filing of 1TM Business. Unabsorbed Year Depreciation no Loss 2013-14 27-5ep-13 6,309,261 26,392 1 2014-15 29-Sep-14 995,661 71,208 2 3 2015-16 30-Sep-15 1,151,656 75,967 4 2016-17 29-Sep-16 1,610,493 81382 5 2017-1S 31-Oct-17 495,387,103 1,658,369,391 2018-13 30-Octr-18 531,911,355 1,132,871,982 6 7 2019-20- 31-Oct-19 413,890,636 377,483,502 2020-21 15-Feb-21 24,059,818 236,766,733 8
The return filed by the assessee was duly processed u/s 143(1) of the Act wherein, the income of the current year was set off against the unabsorbed depreciation instead of brought forward business losses. The assessee filed rectification application u/s 154 of the Act pointing out the mistake apparent from the record stating that the brought forward business losses should first be adjusted against the business income of the year instead of unabsorbed depreciation. An order u/s 154 of the Act stood passed on 11.12.2023 rejecting the contentions of the assessee by setting off the unabsorbed depreciation against the addition of Rs. 32,71,64,900/- instead of brought forward business losses. The assessee had set off the income of Rs. 6,90,58,415/- against brought forward business losses and claimed the remaining business loss of Rs.
1. East Delhi Waste Processing Company Pvt. Ltd 1,40,62,57,568/- to be carried over to subsequent years along with unabsorbed depreciation of Rs. 3,40,57,47,157/-. In other words, the plea of the assessee could be explained better by way of following table:-
The assessee claimed that if the set off of brought forward business loss in the above mentioned manner is allowed , the following loss would be eligible to be carried forward in subsequent years:-
It was also pointed out that the return of income for AYs 2013-14 to 2020- 21 were filed by the assessee in time. However, the contentions of the assessee were not appreciated by the ld AO while passing the order u/s 154 of the Act dated 11.12.2023 which stood upheld by the ld CIT(A).
The provisions of Section 32(2) of the Act specify that the unabsorbed depreciation of earlier years would be treated as current year depreciation on a deeming fiction. The provisions of Section 72 of the Act deal with the manner of set off of brought forward business losses against the business income and the unabsorbed portion thereon to be carried forward to subsequent years. A combined reading of provisions of Section 32(2) of the Act and Section 72(2) of the Act make it very clear that first brought forward business losses would have to be adjusted with the business income of the year and after that unabsorbed depreciation would be set off. Hence, we are in complete agreement with the East Delhi Waste Processing Company Pvt. Ltd contentions of the assessee herein and direct the ld AO to first allow set off of the business income with brought forward business loss of earlier years.
The ld CIT(A) had considered the shareholding pattern as on 06.04.2021 instead of considering shareholding pattern as at the end of the earlier year thereby invoking provisions of Section 79 of the Act to deny the set off of brought forward losses. It is pertinent to note that there was absolutely no ground raised by the assessee before the ld CIT(A) on the issue of applicability/ non applicability of Section 79 of the Act. This aspect was suo moto taken cognizance by the ld CIT(A) which amounts to enhancement of income but the ld CIT(A) had not issued any enhancement notice in terms of Section 251(2) of the Act in the instant case. Hence, the enhancement proposed by the ld CIT(A) by wrongly invoking the provisions of Section 79 of the Act to deny the set off of brought forward business loss first with the business income of the year would make the entire action of the ld CIT(A) qua this aspect, invalid and illegal.
In view of the aforesaid observations, the Ground Nos. 2, 3 and 3.1 raised by the assessee are hereby allowed.
Ground Nos. 4 and 5 raised by the assessee are challenging the addition made u/s 41(1) of the Act.
We have heard the rival submissions and perused the materials available on record. The Tax Auditor has reported a sum of Rs. 64,91,90,697/- as deemed income u/s 41 of the Act in the tax audit report and whereas as per income tax return the same was mentioned at Rs. 32,20,93,475/-. The break-up of the same is as under:-
1. TDS on interest 2,92,82,639 The appellant has written back certain liabilities. 2 TDS Professional 42,06,177 These liabilities were debited to P&L account in (corporate) earlier year and in absence of TDS deduction same were disallowed u/s 40(a)(ia) of the Act. However, immediately such expense were written back, therefore the TDS which was payable on such expense has been written back during the year under consideration. In view of the above both Sr. no 1 amounting to 2,92,82,639 and Sr. no 2 amounting to Rs. 42,06,177 are pertaining to such TDS expense written back. In this regard we wish to state that, the Appellant had already disallowed the said amount in the year in which the liability was charged to Profit and Loss account. Accordingly, upon reversal of the said liability during the captioned AY the same has not been offered to tax under Section 41 of the Act. (Refer case law mentioned in para 7 of this submission) 3. Interest payable on 1,06,04,954 As per the provisions of section 37 of the Act any statutory dues interest paid being penal in nature is to be disallowed while computing the total income. The appellant had already disallowed the said interest payable on statutory dues in the year in which the same were incurred. Accordingly, upon reversal of the said liability during the captioned AY the same has not been offered to tax under Section 41 of the Act.
4. Payable for 21,33,79,000 The Appellant had incurred certain capital expense property, plant and and there are capital creditors in the books of the equipment Appellant. The amount was capitalized in the extinguishment books of account. In the subject AY, the company related to related had written back such capital creditors. parties 5. IL & FS 6,91,19,702 Given that the above expense was capital expense, the same was never claimed as Environmental deduction in the year of expense. Accordingly, Infrastructure & Services Ltd upon write-back of such capital creditors, the same shall not be offered to tax under Section 41 of the Act while computing the taxable income. (Refer case law mentioned in para 8 to 15 of this submission) Total 32,70,97,222 14. From the above table, it is very clear that items mentioned at Sl Nos. 1, 2 and 3 are not liable to be taxed u/s 41(1) of the Act as the very same sums were voluntarily disallowed by the assessee in earlier years in the return in the years in which said provisions were made. In respect of items mentioned at Sl. No. 4 and 5 above in the table, the same represent capital creditors for which no deduction has been claimed by the assessee in the earlier years. Hence, the provisions of Section 41(1) of the Act per se could not be made applicable for the same. Hence, no addition could be made u/s 41(1) of the Act at all in the instant case. Since, relief is granted to the assessee on first principle, the other arguments advanced by the ld AR, on without prejudice basis, with regard to the brought forward business losses vis-a-vis unabsorbed depreciation to be set off with the income determined u/s 41(1) of the Act need not be gone into and they are left open. Ground Nos. 4 and 5 raised by the assessee are allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 16/02/2026.