2015 (6) TMI 634 - AT - Income Tax

Revision u/s 263 - CIT(A) directed AO to recompute the short term capital gain after ascertaining the correct cost of acquisition of the wind mill and correct amount of depreciation - Due to huge business losses, the depreciation u/s. 32(1) was not claimed in Assessment Year 1997-98 when this wind mill was acquired by the assessee even not in subsequent year up to 2001-02. and was claimed in Assessment Year 2002-03 when it was made obligatory for the assessee to claim deprecation - depreciation claimed by the assesssee at ₹ 1,14,80,000/- was treated as a capital gain u/s. 50 - Reopening of assessment - Assessing Officer has disallowed the setting off of capital gain against brought forward depreciation losses - Held that - According to the first proposition of the assessee, the Assessing Officer has re-opened the assessment proceeding in order to find out, whether short term capital gain computed by the assesse can be adjusted against the deprecation losses brought forward from earlier? No doubt, assessment has been re-opened on a little different reason but before considering any issue, whether set off to be allowed or not?, it is but natural that ld. Assessing Officer would first verify the amounts which can be set of with each other. The computation of short term capital gain is one of the components for verifying this factor, therefore, it suggests that ld. Assessing Officer has applied his mind on the figure of the short term capital gain computed by the assesee. He has examined this and only thereafter disallowed this set off against brought forward losses. The Assessing Officer has applied his mind and taken a possible view after going through returns of the assessee for earlier years. Therefore, ld. Commissioner is not justified in taking action against assessment order, where Ld. Assessing Officer had taken a possible view in law The computation of capital gain is linked with the ultimate set off, it is same source of income to be determined in the hands of assessee, therefore, he could have considered the ultimate amount required to be computed as a short term capital gain. The source and the issue related to that source were subject matter of an appeal and therefore to our mind the interdiction available in explanation C appended with section 263 sub-section 1 would come in the way of Ld. Commissioner for taking action u/s. 263 against the assessee. The impugned order is not sustainable in view of the second proposition also. Asessee has worked out brought forward deprecation losses of ₹ 1,82,62,722/-. This amount will be increased by addition of Rs. of the depreciation which is to be thrust upon the assessee by a sum of ₹ 1,14,80,000/-. The net result will be again zero. (Rs. 1,82,62,722/- ₹ 1,14,80,000 depreciation not claimed earlier 2,97,42,722/-). This amount will be available to the assessee as a brought forward losses. It is more than the sale proceed of wind mill computed at ₹ 2,29,60,000/-. The net result will be zero. The case in hand, even if for the sake of argument, we also assume that ld. Assessing Officer has committed an error by not computing the true capital gain with the application u/s. 50(1) then also ultimately no prejudice has been caused to the revenue. Therefore, the impugned order is not sustainable in law. - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of the Commissioner's action under Section 263 of the Income Tax Act, 1961.
2. Computation of short-term capital gain and its adjustability against brought forward depreciation losses.
3. Jurisdiction of the Commissioner under Section 263 when the issue was already subject to appeal.
4. Impact of the assessment order on the revenue.

Detailed Analysis:

1. Legitimacy of the Commissioner's Action under Section 263:

The appeal was filed by the assessee against the order of the Commissioner dated 31st March 2011, passed under Section 263 of the Income Tax Act, 1961, for the Assessment Year 2005-06. The Commissioner had taken cognizance under Section 263 and set aside the order of the Assessing Officer (AO) on the grounds that it was erroneous and prejudicial to the interest of the revenue. The Commissioner found that the AO had incorrectly allowed the adjustment of carried forward depreciation losses against short-term capital gains, which was not permissible under the Act.

2. Computation of Short-Term Capital Gain and its Adjustability Against Brought Forward Depreciation Losses:

The assessee had purchased a windmill for Rs. 2,29,60,000 in Assessment Year 1997-98 and sold it in Assessment Year 2005-06 for the same amount. The assessee had claimed depreciation of Rs. 1,14,80,000 in Assessment Year 2002-03. The AO disallowed the setting off of capital gain against brought forward depreciation losses, stating that there is no provision under the Act to absorb carried forward depreciation from the current year's capital gain. The Commissioner found that the AO had committed an error by accepting the assessee's computation of capital gain at Rs. 1,14,80,000, which was not in accordance with Section 50(1) of the Act.

3. Jurisdiction of the Commissioner under Section 263 When the Issue Was Already Subject to Appeal:

The assessee argued that the issue of computation of short-term capital gain and its adjustability against brought forward depreciation losses was already examined by the AO and was subject to appeal before the Commissioner of Income Tax (Appeals). Therefore, the Commissioner could not take action under Section 263 on this issue. The Tribunal agreed with the assessee, stating that for setting off or telescoping of any amounts, the AO would first verify the amounts which can be set off with each other. Since the computation of short-term capital gain was one of the components for verifying this factor, the AO had applied his mind and taken a possible view after examining the returns of the assessee for earlier years.

4. Impact of the Assessment Order on the Revenue:

The assessee contended that even if the Commissioner's view was accepted, the net result would be no addition and no tax liability, as the depreciation thrust upon the assessee would only swell the losses in those years, and the assessee would have a higher figure of losses to be carried forward. The Tribunal noted that the total brought forward losses would be more than the sale proceeds of the windmill, resulting in a net zero effect. Therefore, even if the AO's order was erroneous, it was not prejudicial to the interest of the revenue. The Tribunal cited the Karnataka High Court's decision in Commissioner of Income Tax vs. D.G. Gopala Godwa, which held that the revisional authority must demonstrate how the erroneous order is prejudicial to the revenue.

Conclusion:
The Tribunal concluded that the Commissioner was not justified in taking action under Section 263, as the AO had taken a possible view in law and the issue was already subject to appeal. Additionally, the assessment order did not cause any prejudice to the revenue. Therefore, the Tribunal quashed the order of the Commissioner and allowed the appeal of the assessee. The order was pronounced in the open court on 10-06-2015.

← Previous Next →