2020 (10) TMI 748 - AT - Income Tax

Set off of unabsorbed business loss - Addition on the ground that carry forward of losses was denied by the AO in A.Y.2006-07 invoking the provisions of section 79 - whether the provisions of section 79 of the Act can be invoked and examined in the assessment year in which the assessee claimed for carry forward of losses or in the assessment year in which the assessee actually claimed set off of carry forward losses against the profits of that year? - Assessee contended since the assessee claimed set off of loss only during the A.Y.2012-13 and subsequent years the applicability of provisions of section 79 is to be examined only during the A.Y. 2012-13 - HELD THAT - Respectfully following the decision of the Hon'ble Supreme Court in the case of CIT v. Manmohan Das 1965 (11) TMI 33 - SUPREME COURT we hold that the claim for set off of carry forward of losses prior to assessment years 2006-07 against the profits of the current assessment year i.e. A.Y.2012-13 vis- -vis the provisions of section 79 of the Act has to be examined by the Assessing Officer only in the assessment year in which the assessee claimed such set off of losses in the return of income. In the present case since the assessee has claimed set off of carry forward of losses against the income of the current assessment year i.e. A.Y. 2012-13 and also in the subsequent assessment years this claim of the assessee has to be examined only during the assessment year 2012-13 and subsequent assessment years. Thus, the grounds raised in this regard are restored to the file of the Assessing Officer who shall decide the implication of section 79 of the Act in the light of our above said findings and observations. The grounds raised are disposed off accordingly. Addition on account of discrepancies in stocks - discrepancies found during the course of search - HELD THAT - Considering the volume of gold jewellery and diamonds handled by the assessee in the instant case during the year under consideration, the unreconciled stock contributed a very meagre percentage of the total material handled by the assessee, we hold that assessee had given plausible explanation in the facts of the instant case on which no addition is required to be made. We also find that the explanation given by the assessee was not found to be false or in-genuine before the revenue authorities. Hence we have no hesitation in directing AO to delete the addition made on account of discrepancies in stocks - grounds raised in this regard are allowed.

Summary

Issues Involved:
1. Denial of set-off of unabsorbed business loss due to the application of Section 79 of the Income Tax Act.
2. Discrepancies in stocks leading to additions in the income.

Issue-wise Detailed Analysis:

1. Denial of Set-off of Unabsorbed Business Loss:

The primary issue in both appeals is the confirmation by the Ld. CIT(A) of the Assessing Officer's decision to deny the set-off of unabsorbed business loss, invoking Section 79 of the Income Tax Act. The background involves the assessee incurring business losses in earlier assessment years, aggregating to ?18.96 Crores, which were denied carry forward by the Assessing Officer in A.Y. 2006-07. This denial was based on the change in shareholding, which allegedly did not meet the conditions of Section 79.

The assessee contended that the shareholding pattern as of 31.03.2005 and 31.03.2013 remained substantially the same, with more than 51% of the shares held by the same group of shareholders. The key argument was that Section 79 should be examined in the year the loss is set off, not when it is carried forward. The Tribunal referenced the Supreme Court's decision in CIT v. Manmohan Das, which established that the applicability of Section 79 should be determined by the Assessing Officer in the year the set-off is claimed, not when the loss is carried forward.

The Tribunal observed that the decision of the Tribunal in A.Y. 2006-07 did not consider this Supreme Court ruling. Thus, the Tribunal held that the claim for set-off of carry forward losses should be examined in the assessment year 2012-13 and subsequent years, restoring the matter to the Assessing Officer for re-examination in light of these findings.

2. Discrepancies in Stocks:

The second issue relates to additions made by the Assessing Officer due to discrepancies in stocks found during a search. The search revealed minor discrepancies in the stock of diamonds and gold, which the assessee attributed to weighing errors and incidental normal loss. The Assessing Officer made an addition of ?10,64,880/- based on these discrepancies.

The Tribunal found that the unreconciled stock constituted a very minor percentage of the total material handled by the assessee. Given the plausible explanations provided by the assessee and the lack of any false or in-genuine findings by the revenue authorities, the Tribunal directed the deletion of the addition made on account of stock discrepancies.

Separate Judgments:

For A.Y. 2012-13, the Tribunal partly allowed the appeal, directing the Assessing Officer to re-examine the set-off of losses in light of the Supreme Court's decision. For A.Y. 2013-14, the Tribunal allowed the appeal for statistical purposes, applying the same reasoning as for A.Y. 2012-13, and restored the matter to the Assessing Officer for re-examination.

Conclusion:

The Tribunal's judgment emphasizes the need to consider the applicability of Section 79 in the year the set-off is claimed, aligning with the Supreme Court's ruling in CIT v. Manmohan Das. Additionally, it underscores the importance of considering the materiality and plausibility of discrepancies before making additions to the income.