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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: SRI RAJPAL YADAV, VICE- & SRI SANJAY AWASTHI
order
: July 8th, 2024 ORDER
Per Sanjay Awasthi, Accountant Member:
In this case it is seen that the assessee filed a return of income for AY 2019-20 on 06.12.2019 at ‘NIL’ income. The said return was processed u/s 143(1) of the Income Tax Act, 1961 (in short the 'Act') on 25.02.2020 on the returned income itself. It is observed that in the instant case a search was carried out on 03.01.2019 and assessment order for the instant assessment year was passed u/s 143(3) of the Act on 22.04.2021, accepting the returned income. It is observed that subsequently a notice u/s 263 of the Act was issued by the Pr. Commissioner of Income Tax (Central), Kolkata-2 I.T.A. No.: 929/KOL/2024 Assessment Year: 2019-20 Metsil Exports Pvt. Ltd. [hereinafter referred to Ld. 'Pr. CIT'] on 01.08.2023 proposing to reopen the assessment order passed u/s 143(3) of the Act dated 22.3.4.2021. Aggrieved with this action of ld. Pr. CIT the appellant is before us with as many as five grounds of appeal which are as under:
“1. That on the facts and in the circumstances of the case and law, the order passed by the Ld. Pr. CIT under section 263 of the Income-tax Act, 1961 ('IT Act') is illegal, invalid and not sustainable in law.
2. For that on the facts and in the circumstances of the case and in law the Ld. PCIT erred in holding that the assessment order passed u/s 143(3) dated 22.04.2021 as erroneous and prejudicial to the interest of the revenue and setting aside the order with direction to the AO to make necessary verification / enquiry.
3. On the facts and in the circumstances of the case and in law the Ld. PCIT erred not considering to submissions of the assessee that the provision of Sec. 79 is applicable to unabsorbed brought forward business loss and not to unabsorbed brought forward depreciation and after considering the unabsorbed brought forward depreciation of Rs. 8,42,47,107/- there is no income remaining on which tax is payable by the assessee.
On the facts and in the circumstances of the case and in law the order of the PCIT u/s 263 of the Act is passed in violation of the principle of natural justice in as much as no reason has been given in the said order for not accepting the submissions of the assessee and hence liable to be quashed.
The Appellant craves leave to add, alter, amend and/or withdraw any of the grounds or grounds of appeal either before or at the time of the appeal hearing.” 1.1. The main issue revolves around a change in shareholding of more than 51% in the assessee company during the period under consideration. The ld. Pr.CIT found that some brought forward losses of earlier years (AY 2014-15 to AY 2018-19) amounting to Rs. 13,98,48,103/- were visible in the balance sheet of the assessee. It was contended that such losses were not eligible for the setting off with the income of the assessment year in question considering the provisions of sec 79 of the Act. The notice was issued by the ld. Pr. CIT to this effect, alleging that the excess adjustment of brought forward loss of Rs. 1,70,69,680/- was required to be denied as per the extant provisions of the Act.
I.T.A. No.: 929/KOL/2024 Assessment Year: 2019-20 Metsil Exports Pvt. Ltd. 1.2. The appellant filed detailed responses to the show cause notice but it is seen that ld. Pr. CIT proceeded to issue an order u/s 263 of the Act to the Assessing Officer (hereinafter referred to as ld. 'AO') for verifying the allowability of carry forward losses and depreciation. It is pertinent to mention that ld. Pr. CIT has emphasized on Explanation-2 to Section 263(1) of the Act throughout this exercise as under: “Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 3[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) ………………………………………; (c) ………………………………………; or (d) ………………………………………]” The above amendment was inserted by the Finance Act, 2015 w.e.f. 1-6- 2015”
Before us, the ld. A/R has by and large reiterated the contentions raised before the ld. Pr. CIT through oral arguments as also written submissions, from which relevant extracts may be mentioned as under: “In response to the 263 notice it is submitted before the PCIT that in the impugned assessment year, the assessee company has brought forward business loss as well as unabsorbed brought forward depreciation for the A.Y. 2012-13 to 2018-19 is available for set off with the income of the subsequent years, the details of which are given below. A. Y. s. Business Loss Unabsorbed Depreciation Total Return Amount in Rs. Amount in Rs. Loss Amount No in Rs. 1. 2012-13 - 74,63,316 - 2. 2013-14 - 1,06,93,739 - 3. 2014-15 5,81,48,184 1,71,49,460 7,52,97,644 4. 2015-16 2,95,86,640 1,50,36,520 4,46,23,160 5. 2016-17 4,93,38,813 1,29,38,416 6,22,77,229 6. 2017-18 6,58,026 1,12,20,575 1,18,78,601 7. 2018-19 27,84,126 97,45,081 1,25,29,207 Total 14,05,15,789 8,42,47,107 20,66,05,841 I.T.A. No.: 929/KOL/2024 Assessment Year: 2019-20 Metsil Exports Pvt. Ltd. The same is verifiable from the Return of Income and Tax Audit Report of A.Y.2013-14, 2014-15 & 2015-16 as well as from Tax Audit Report of A.Y.2019-20. (Copy enclosed) It was submitted that section 79 provides that set off of business loss brought forward from earlier years is not allowable in the year of change in shareholding of more than 50%, but the same is not applicable for set off against brought forward unabsorbed depreciation. For the contention, the assessee company relies on the judgment of the Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Shri Subhulaxmi Mills Ltd reported in [2001] 249 ITR 795 (SC) where the Court observed to quote as under: “Section 79 of the Income-tax Act, 1961, which provides that loss will not be allowed to be carried forward and set off in the case of companies in which the public is not substantially interested if change in 51 per cent of the voting power has taken place, does not apply to unabsorbed depreciation and un- absorbed development rebate.” (Copy of order enclosed) The Hon’ble Supreme Court approved the finding of Hon’ble Gujarat High Court in the case of CIT Vs Shri Subhulaxmi Mills Ltd [1983] 143 ITR 863 where the Court held to quote as under: “As regards the next contention of Mr., Kaji regarding whether development rebate and depreciation allowance which have been carried forward from a year prior to the previous year in which the change in the shareholding took place or whether only the business losses are covered by s. 79, in our opinion, s. 79 itself gives the answer. Section 79 contemplates that no loss incurred in any year prior to the previous year can be carried forward if the other conditions of s. 79 are satisfied. This s. 79 forms part of Chap. VI and it is connected with the carry forward and set off of losses which are provided for in s. 72 onwards. Moreover, s. 32(2) which deals with depreciation allowances and carrying forward of unabsorbed depreciation allowance and s. 33(2) which deals with the carrying forward of development rebate which, has not been absorbed in the preceding assessment year, deal with certain allowances being made while computing the total income from profits and gains from business. These are allowances which are being permitted to the assessee and it is very difficult to say that a depreciation allowance is incurred or development rebate is incurred in view of the language of s. 32 and s.
It must be held that depreciation is allowed and development rebate is allowed if the conditions of the relevant sections are satisfied but they are not incurred by the assessee. Therefore, by the use of the words " loss incurred " and the reference to the chapter in which s. 79 occurs, it is obvious that the contention urged on behalf of the Revenue that the provisions of s. 79 apply to unabsorbed depreciation allowance which has been carried forward or to unabsorbed development rebate which has been carried forward from the immediately preceding I.T.A. No.: 929/KOL/2024 Assessment Year: 2019-20 Metsil Exports Pvt. Ltd. assessment year, must be rejected. In our opinion, on a pure grammatical construction, in view of the reference to the chapter, incurring of losses and in view of the fact that s. 79 forms part of the whole scheme adumbrated from s. 72 onwards, this contention urged on behalf of the Revenue must be rejected.” (Copy of order enclosed) The above-cited judgment was followed by the Kolkata Bench of the ITAT in the case of DCIT, Cir-12(2), Kolkata Vs. P.N. Memorial Neuro Centre & Research Ltd in Order dated 13.09.2019 reported in 2019 (9) TMI 684. (Copy of Order enclosed).” 2.1. To summarise the contentions of the ld. A/R it deserves to be mentioned that he has relied on the authority of a Coordinate Bench order in the case of P.N. Memorial Neuro Centre & Research Ltd. (supra) in ITA No. 1383/KOL/2015 order dated 13.09.2019. More importantly he has relied on the case of CIT vs. Shri Subhulaxmi Mills Ltd. Reported in [2001] 249 ITR 795 (SC) to canvas the point that brought forward depreciation cannot be treated at par with brought forward business losses and hence, such brought forward depreciation will be set off against income from business in a particular year. 2.2. The ld. D/R was content to rely on the order passed u/s 263 of the Act by ld. Pr. CIT.
We have considered the submissions of the ld. A/R and also carefully gone through the order of Hon'ble ITAT in the case of P.N. Memorial Neuro Centre & Research Ltd. (supra) relied upon by him, as also the case of Shri Subhulaxmi Mills Ltd. (supra) passed by the Hon'ble Apex Court, which itself forms a detailed analysis done by the Hon'ble Gujarat High Court in the case of this very same assessee, reported in [1983] 143 ITR 863 (Gujarat). In fact, while adjudicating on the issue of brought forward losses the Hon'ble ITAT has given a finding as under: “7. The Revenue's latter substantive grievance is that CIT(A) has erred in allowing assessee's brought forward losses set off claim of Rs.5,36,66,368/- vide the following detailed reasoning:- The appellant claimed set off of brought forward losses of Rs.5,36,66,368/- . As narrated in the assessment order, the AO found that there was change in the pattern of shareholders having more than 51 % of the voting power on the last day of previous year in which the loss was incurred in which the appellant wanted set off of he brought forward loss. As observed by the AO, Page 5 of 8 I.T.A. No.: 929/KOL/2024 Assessment Year: 2019-20 Metsil Exports Pvt. Ltd. as per provisions of Sec.79 of the Act: the brought forward loss could not be set off. The brought forward loss was denied for set off accordingly. 5.1. At the appellate stage, the AR of the appellant discussed the issue and also filed written submission. It was submitted that that the AO did not properly appreciate the provisions of sec.
The AR drew my attention to section 79 which is as under: "Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless - (a) On the last day of the previous year the shares of the company carrying not less than fifty one percent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty one percent of the voting power on the last day of the year or years in which the loss was incurred: Provided that nothing contained in this voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift. Provided further that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that fifty one percent shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company." It was submitted that if 51 % of the shareholder continues to be the same in the year in which the loss was incurred and in the year of set off then the loss is be allowed set off. It was submitted that the loss being depreciation loss was for the assessment year 2009-10 when more than 51% of the shares of the company were held by XL Enterprises (27.34% and Neon Health Care (47.73%) and that in the assessment year 2010- 11 these two shareholders held 26.02% and 53.87% of the shares leaving aside other shareholder who also continued to be shareholders in the company. Therefore both in the year of loss and in the assessment year in question same shareholder held more than 51 % of the shares. It was submitted that this fact was brought to the notice of the AO vide letter filed on 19.3.2013. It was therefore submitted that the action of the AO was not in accordance with law. 5.2. On a careful consideration of the rival contentions in the backdrop of the material on record, my findings and decision thereon consequentially I.T.A. No.: 929/KOL/2024 Assessment Year: 2019-20 Metsil Exports Pvt. Ltd. are as follows. It is apparent that more than 51 % of the shareholders continued to be the same both in AYs 2009-10 and 2010- 11. The requirement of law is that 51% of the voting powers should be held by the same persons. There is no deviation in the same. Even otherwise, provision of section 79 is not applicable on the loss brought forward on account of depreciation as has been held by the Hon'ble A.Y 2010-11 M/s. P.N. Memorial Neuro Centre & Research Ltd. Supreme Court in the case of Shri Subhulaxmi Mills Ltd. 249 ITR 795 (SC). In view of this, the AO is directed to allow the set off after due verification in this regard based on material facts. This ground is allowed statistically."
We notice herein as well that assessee's shareholders to the extent of 51% of its stake i.e M/s. XL Enterprises and M/s. Neon Health Care had admittedly held 27.34% and 47.73% of its stake in preceding assessment year and 26.02% and 53.87% in the impugned assessment year; respectively. Coupled with this, the CIT(A) has also held that hon'ble apex court's decision (supra) settled the law long back that section 79 of the Act does not apply on brought forward losses on account of depreciation. We therefore affirm the CIT(A)'s findings for this latter issue as well.” 3.1. There is considerable merit in the appellant’s contention that for the AY 2019-20 assessee company has a profit of 2,01,53,806/- which is required to be set off against the business loss of AY 2018-19 of Rs. 27,84,126/- and also the remaining quantum of profits from business to the tune of Rs. 1,73,69,680/- deserves to be set off against brought forward unabsorbed depreciation from AY 2013-14 to AY 2018-19, aggregating to Rs. 8,42,47,107/-. It has been averred that once this setting off is carried out, then there remains no taxable income for AY 2019-20. As mentioned earlier, the ld. CIT(A) has laid considerable emphasis on the part of Section 263(1) of the Act, explanation thereof whereby under Clause (a), it is mentioned that the reopening can be attracted in case an order has been passed without making inquiries or verification which should have been done. On a careful consideration of this issue, it is evident that once the issue of carry forward of depreciation is no longer a debatable matter with the law laid down by the Hon'ble Apex Court (supra), then there would be a considerable quantum of carried forward unabsorbed depreciation to merit a comfortable setting off of the income under consideration. Considering this fact, it is felt that the ld. Pr. CIT giving directions for revision u/s 263 of the Act merely for the sake of