CARRYFORWARD OF LOSS VIS A VIS OTHER DEDUCTIONS- relevant provisions are to be applied and not general Rules of filing of return of loss. An analysis in view of SC Ruling.

[C.A. DEV KUMAR KOTHARI]

 Section 80 governs carry forward of losses only:

Section 80 of the Income-tax Act is in relation to submission of return of losses when benefit of  carry forward of losses is claimed. This covers losses to be carried forward in accordance with S. 72(1), S.73(2), S.74 (1) and 74(3) S. 74A(3).  The condition mentioned therein is that the return of loss should have been filed within time allowed under section 139 (3).

Application of this rule is wrongly applied to other deductions:

The revenue authorities apply the condition of filing return u/s 139 (3) to other deductions, allowances etc. which are amortized over a period of more than one year. Generally in case of such amortization provisions, there is no such requirement. One more important provision is in relation to depreciation allowance. Unabsorbed depreciation is carried forward as per provisions of s. 32 wherein there is no requirement of filing return within time u/s 139 (3). Several high Courts have decided this issue, still in many cases the A.O.  do not allow set off or carry forward of unabsorbed depreciation if return of loss was  not filed u/s 139 (3).

Other amortization:

In case of many other provisions relating to amortization we find provisions for spread over of relevant cost or expenditure over a period of time consisting several years.  For example S.35A, 35AB, 35ABB, 35D, 35DD, 35DDA, 35E, etc. in all such cases, the conditions for allowability is governed by relevant provisions. These deductions are not considered as loss referred to in S.80. Therefore, allowability of second years deduction is not dependent on first years deduction. It is also not necessary that to claim deduction the return should be filed timely. However, if the loss consists of such deductions and form part of ascertained  business loss, then to that extent S. 80 may  come into play. However, failure of compliance of S. 80 will not result into denial of deduction in subsequent year as per relevant provisions.

Film production expenses:

Amortization  of expenses relating to  production of feature films is governed by relevant Rules like Rule 9A of the I.T. Rules which has been considered by the Supreme Court.

In the case before the Supreme Court  the AO originally allowed the benefit of carry forward of Rs.39,43,830/-  but later on  withdrawn the benefit on fresh assessment after receiving direction from the commissioner under section 263 since the provisions of section 80 was not complied with.  Ultimately the Supreme Court laid down law that Carrying forward of the business loss, u/s 80, and carrying forward of the expenditure u/r 9A(3) are different provisions. Spread over or amortization of expenses was governed by Rule 9A (3) and not by S.80. There was no condition attached that the assessee should have filed return within time allowed u/s 139(3) to claim such spreadover of expenses. Therefore, the Supreme Court held that the assessee was entitled to carry forward the deduction, by way of amortization even if  return of income or return of loss was not filed timely u/s 139 (3). The case is reported as CIT  V. Joseph Valakuzhy 2008 -TMI - 3879 - Supreme court

In this case the Supreme Court considered Rule 9A, part relevant to our subject is  reproduced below:

"9A. Deduction in respect of expenditure on production of feature films.

(1)  In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4), Explanation : In this rule,--

xxxx

(2)  Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year,--

(a)  the film producer sells all rights of exhibition of the film, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year; or

(b)  the film producer—

(i)   himself exhibits the film on a commercial basis in all or some of the areas; or

(ii)  sells the rights of exhibition of the film in respect of some of the areas; or

(iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is released for exhibition on a commercial basis at least one hundred and eighty days before the end of such previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year.

(3)  Where a  feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer

(a)  himself exhibits the film on a commercial basis in all or some of the areas; or

(b)  sells the rights of exhibition of the film in respect of some of the areas; or

(c)  himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is not released for exhibition on a commercial basis at least one hundred and eighty days before the end of such previous year, the cost of production of the film in so far as it does not exceed the amount realised by the film producer by exhibiting the film on a commercial basis or the amount for which the rights of exhibition are sold or, as the case may be, the aggregate of the amounts realised by the film producer by exhibiting the film and by the sale of the rights of exhibition, shall be allowed as a deduction in computing the profits and gains of such previous year; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year.

Supreme Court's ruling analyzed:

a.       Film is a capital asset in the hands of a film producer and the subsidy given by the State Government to a film producer is a capital receipt.

b.        Section 80 falls under Chapter VI, which deals with aggregation of income and set off or carry forward of loss.

c.        Rule 9A provides for deduction of expenditure incurred on production of feature films.  Rule 9A would appropriately be applicable to the present case, as the respondent is doing the business of producing feature films.  The deduction for expenditure incurred on production of feature films is appropriately governed by rule 9A of the Rules.

d.       The rule, as it now stands, provides that in such cases, deduction of the cost of production of the film is to be allowed to the extent of the amount realized during the number of days of commercial exhibition in that year and the balance has to be allowed in the next year.

e.         Rule 9A(2) provides that where a feature film is certified by the Board of Film   Censors for release in any previous year, and in that previous year the film is released for exhibition for at least 180 days, before the end of that previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year.

f.         Rule 9A(3) provides that where the film is not released for exhibition for 180 days in the previous year, deduction of the cost of production is to be allowed to the extent of the amount realized during the period of commercial exhibition in that year and the balance shall be allowed in the next year.

g.        In this case  the second film namely, "Santhwanam" had not been exhibited for more than 180 days in the previous year.  While computing the income or loss for the relevant assessment year 1992-93, the assessing officer had to take into account the number of days on which the film was commercially exhibited and then allow the deduction for cost of production of the film to the extent of the collections made during the period of exhibition only.  The balance cost of production will be amortized under Rule 9A(2) and then that will be allowed  as deduction for the next year.  It is not a business loss.   That if a film is not released for exhibition on a commercial basis at least 180 days before the end of such previous year, the cost of production of the film insofar as it does not exceed the amount realized by the film producer by exhibiting the film on a commercial basis, is to be allowed as a deduction in computing the profits and gains of such previous year and the balance, if any, is to be carried forward to the next following previous year and allowed as a deduction in that year.  Admittedly, in the present case, as stated above, second film "Santhwanam" was not exhibited for a period of 180 days in the previous year, and, had not covered the cost of production of the film, the assessee was entitled to carry forward the balance of the cost of production to the next following previous year and claim deduction of the same in that year. 

h.        For above reasons,  Supreme Court  did  not find any merit in the present appeal and dismiss the same.  

Crucial words considered by the Supreme Court so far relevant to this write-up are:

In the above Rule we find the following words are crucial words which are also relevant for the purpose of study on our subject of carry forward or spread over of cost or expenses:

           "… and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year."

Thus, we find that in some situations only a part of expenditure is allowed in the first year and then balance is allowed in next year. There is no condition that the return of income or loss should have been filed at all or should have been filed  u/s 139(3) read with S. 80 to claim the balance amount in next year.

Other amortizations and spread over of expenses:

Similarly in case of other deductions we find that expenses are spread over a period of time and conditions provided in relevant section are to be complied with.  In case of depreciation allowance the scheme of carry forward is governed by S. 32 and not section 80.

The Supreme Court's Ruling in relation to Rule 9A apply to such provisions also:

  Now it can be said that the  rule laid down by the Supreme court is applicable to other similar deductions and allowances also. On more logic is that these deductions or carry forward of deductions  or spread over of deductions are part and parcel of computation provisions and they do not fall in the category of carry forward of loss. If a deduction is part of loss, and then it is carried forward as business or other loss, then the provision will apply relating to carry forward of loss.

Depreciation is allowed only to the extent of income, and balance form part of subsequent years depreciation in the present scheme. Even during A.Y. 1997-98 to  2001-02 when year wise carry forward of depreciation was allowed, the carry forward was governed by S.32 and not S. 80.  Therefore, unabsorbed  depreciation is governed by S.32 and not section 80. Therefore, even if return was not filed in time or was not filed, will not make difference. We find several judgments of High Courts and Tribunals holding that unabsorbed depreciation will be carried forward  in accordance with S. 32 (2) even if it is not determined , or return has not been filed or had not been filed timely within time allowed u/s 139(3).

We also find that conditions of S. 79 relating to share holding in case of closely held companies is also not applicable in relation to depreciation allowance as it is governed by S.32(2) and not S. 80. For example reference can be made to 119 ITR 458 (Mad.) 143 ITR 863 (Guj.), 157 ITR 658 (Ker.), 215 ITR 709 (Mad.)

It appears that so far there is no judgment of the Supreme Court in relation to  applicability of section  80 to unabsorbed depreciation under S. 32 (2), however, in view of the judgment in relation to Rule 9A, which is similar to S. 32 (2), it can be said that the ruling in relation to Rule 9A will support these contentions in relation to unabsorbed depreciation also.