2023 (1) TMI 467 - AT - Income Tax

Revision u/s 263 - as per CIT AO has allowed brought forward losses without inquiring into such claim - whether the AO should have taken into consideration Carry-forward and set-off of losses on basis of returned income or on the basis of assessed income (after taking into consideration additions made in the assessment for Assessment Year 2015-16)? - if CIT-A disallows assessee s appeal, then in terms of Section 153(5) of the Act, AO can give appeal effect of the order and create demand/disallow the benefit of carry-forward losses within a period of 3 months from the end of the month in which the order of CIT(A) is received - HELD THAT - As looking into the language of Section 153(5) of the Act, the AO is within its powers to re-compute the income in order to give appeal effect to the order passed by Ld. CIT(Appeals), in the event the appeal is decided against the assessee, within the time-frame provided under Section 153(5) of the Act. AO has taken a view which is legally plausible, and at the same time, the order passed by the Ld. Assessing Officer is not prejudicial to the interests of the Revenue. The interest of the Revenue, in our view, is adequately safeguarded by the provisions of Section 153(5) of the Act in the appeal effect proceedings, in case the challenge of the assessee before Ld. CIT(Appeals) does not succeed wholly or in part. In the appeal effect proceedings under Section 153(5) of the Act, the AO can deny benefit of carry-forward and set-off of losses depending upon the outcome of the appeal before Ld. CIT(Appeals) for Assessment Year 2015-16. In the event the assessee succeeds before Ld. CIT(Appeals) for Assessment Year 2015-16, there would be no occasion to disturb the benefit of carry forward and set-off claimed by the assessee in the Return of Income - order passed by the AO is neither erroneous nor prejudicial to the interests of the Revenue. Accordingly, we set-aside the order passed by the Principal CIT under Section 263 of the Act. Assessee appeal allowed.

Summary

Issues:
1. Validity of the order passed by the Ld. Pr. CIT-1, Rajkot
2. Treatment of carry-forward losses in Assessment Year 2017-18
3. Invocation of Section 263 of the Income Tax Act

Analysis:

Issue 1: Validity of the order passed by the Ld. Pr. CIT-1, Rajkot
The appeal was filed by the Assessee against the order passed by the Ld. Pr. CIT-1, Rajkot for Assessment Year 2017-18. The Assessee contended that the order passed by the Principal CIT was bad in law and invalid. The Principal CIT set aside the assessment order under Section 263 of the Act, citing that the AO had not considered the assessed income of the previous year while allowing the set-off of carried forward losses. The Principal CIT held that the AO's order was erroneous and prejudicial to the interests of the Revenue. However, the Tribunal observed that the AO had correctly interpreted the provisions of the Act and had not disturbed the carried forward losses based on the pending appeal for the previous year. The Tribunal found that there was no incorrect application of law and ruled that the order passed by the AO was not prejudicial to the interests of the Revenue.

Issue 2: Treatment of carry-forward losses in Assessment Year 2017-18
The main issue was whether the AO should have considered the carry-forward and set-off of losses based on the "returned income" or "assessed income" of the Assessee for the previous year. The Assessee argued that the outcome of the appeal for the previous year was awaited and if successful, the losses could be carried forward based on the returned income. The Tribunal noted that Section 153(5) of the Act allows the AO to re-compute the income to give effect to the appellate order within a specified time frame. The Tribunal held that the AO's decision to wait for the appeal outcome before disallowing the carry-forward losses was legally plausible and not prejudicial to the Revenue's interests.

Issue 3: Invocation of Section 263 of the Income Tax Act
The Principal CIT invoked Section 263 of the Act, setting aside the original assessment order, claiming it was erroneous and prejudicial to the Revenue. The Assessee argued that the order was not erroneous as incorrect views were not taken during the assessment. The Tribunal agreed with the Assessee, stating that the AO's decision was not erroneous, and there was no scope for invoking Section 263. The Tribunal emphasized that the AO had the authority to re-compute the income post the appeal outcome, as per Section 153(5) of the Act, ensuring the Revenue's interests were safeguarded.

In conclusion, the Tribunal allowed the Assessee's appeal, setting aside the Principal CIT's order under Section 263 of the Act, as the original assessment order was deemed neither erroneous nor prejudicial to the interests of the Revenue.