2010 (5) TMI 657 - HC - Income Tax

Brought forward and set off of losses - Rectification of order u/s 154 - held that - When original assessment is completed without reference to the statutory provision and in clear violation of the same, such assessment happens to be a mistake, that could be rectified under section 154 of the Act. when business loss carried forward is set off against profit for the year 1995-96, the asses- see is not entitled to limit set off of loss brought forward up to 1993-94. It is pertinent to note that even if profit was set off only against brought forward depreciation, then under the head of unabsorbed depreciation, there would have been nothing left entitling the assessee for deduction in terms of clause (b) of Explanation (iii) of section 115JA(2) of the Act. Since nothing is left after setting off brought forward business loss up to 1994-95 against profit, the assessee is not entitled to any relief under clause (b) of Explanation (iii) to section 115JA of the Act. - Decided in favor of revenue.

Issues:
1. Rectification order under section 154 by Assessing Officer.
2. Eligibility for deduction under clause (b) of Explanation (iii) of section 115JA.
3. Interpretation of FIFO method for setting off business loss and depreciation.
4. Simultaneous set off of brought forward business loss and unabsorbed depreciation.

Analysis:

1. The appeal pertains to a rectification order passed under section 154 by the Assessing Officer, which was reversed by the Tribunal. The issue revolves around the eligibility for deduction under clause (b) of Explanation (iii) of section 115JA of the Income-tax Act. The Assessing Officer proposed an assessment based on 30% of the book profit, but later realized that the deduction claimed by the assessee was in violation of the statutory provision requiring the availability of brought forward business loss and depreciation. The Tribunal held that the eligibility for deduction is a debatable issue, leading to the reversal of the rectification order. However, the High Court held that the original assessment made without considering the mandatory requirement of the provision was a mistake rectifiable under section 154, thereby ruling in favor of the Revenue.

2. The next issue concerns the interpretation of the FIFO method for setting off business loss and depreciation. The Tribunal allowed the claim based on the assessee's contention regarding the application of the FIFO method. However, the High Court noted that the FIFO method does not authorize the bifurcation of brought forward business loss as done by the assessee. The Court emphasized that the provision requires setting off the profit against brought forward business loss first, followed by brought forward depreciation. As the profit for the relevant year was sufficient to absorb the entire business loss, the Court rejected the application of the FIFO method and ruled in favor of the Revenue.

3. Lastly, the question of simultaneous set off of brought forward business loss and unabsorbed depreciation was raised. The Court held that the assessee cannot limit the set off of loss brought forward to a specific year and must follow the statutory provisions. Since setting off the business loss against profit left no balance for the next year, the assessee was not entitled to any relief under the relevant provision. Consequently, the High Court reversed the Tribunal's order and restored the assessment confirmed in the first appeal, ruling in favor of the Revenue.

In conclusion, the High Court allowed the appeal, upholding the rectification order under section 154 and ruling in favor of the Revenue on the issues of eligibility for deduction under clause (b) of Explanation (iii), interpretation of the FIFO method, and simultaneous set off of brought forward business loss and unabsorbed depreciation.

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