2014 (1) TMI 814 - HC - Income Tax

Tax effect of appeal - Held that - None of the circulars presented before us intended to bar the tax appeals even where potential tax effect would be enormous, simply because in the year in question, the assessee had earned negative income - In the circular dated 15.5.2008 it is provided that in the case of loss, notional tax effect should be taken into account - This clarification contained in circular dated 15.5.2008 and absence of any such clarification in the previous circulars, is of no consequence - Such a clause can, at the best, be seen as clarificatory declaration by the Board to put the controversy beyond any shadow of doubt or debate - It cannot be stated that only on and from 15.5.2008 the Board desired that on the basis of notional tax effect in cases of loss the appeals should be filed Only because clarification came in the subsequent circular dated 15.5.2008, would not mean that previously the Board desired that such appeals should be filtered out - The notional tax effect would have to be above the limits prescribed by the Board from time to time for presentation of such appeals - In all these cases since it is stated that the notional tax effect would be higher than the limits prescribed by the Board in different circulars - The Tribunal committed an error in dismissing the Revenue s appeals as being not maintainable - Decided in favour of Revenue.

Summary

Issues:
1. Appeal against the order passed by the CIT(A).
2. Dismissal of appeal by the ITAT based on the tax effect being nil.
3. Interpretation of Board's circulars regarding the filing of appeals in cases of loss.
4. Consideration of notional tax effect in cases of loss for filing appeals.
5. Competency of the Revenue's appeal before the Tribunal based on monetary limits specified in circulars.

Analysis:

1. The appellant challenged the order of the CIT(A) before the ITAT for the assessment year 1997-98. The ITAT dismissed the appeal due to the tax effect being nil, which led to the present Tax Appeal before the High Court.

2. The substantial question of law framed by the Division Bench was whether the ITAT was correct in deciding the revenue's appeal without considering the merits, solely based on the tax effect being nil, despite Board's instruction No. 5/08 stating that in loss cases, the notional tax effect should be taken into account.

3. The controversy arose from the ITAT's decision to dismiss the revenue's appeal on the grounds that the assessee had suffered a loss, rendering the appeal not maintainable based on CBDT circulars specifying monetary limits for filing further appeals.

4. The High Court analyzed previous circulars and observed that none of them intended to bar tax appeals, even in cases of potential significant tax effects, solely because the assessee declared a loss. The Court emphasized that notional tax effect should be considered in cases of loss for determining the appeal's maintainability.

5. Referring to a previous judgment, the High Court held that the Revenue's appeal should not be barred merely because the assessee's income was negative as per the Assessing Officer's order. The Court clarified that the notional tax effect must exceed the limits prescribed by the Board for filing such appeals. Consequently, the High Court allowed the present Tax Appeal, quashed the ITAT's order, and remanded the proceedings for consideration on merits.

By thoroughly examining the interpretation of Board circulars, the High Court clarified the criteria for filing appeals in cases of loss, emphasizing the consideration of notional tax effect and monetary limits for appeal maintainability, ultimately allowing the Revenue's appeal and remanding the case for further consideration on merits.