2022 (3) TMI 299 - AT - Income Tax

Set off of brought forward loss against Long Term Capital Gain (LTCG) - AO was of the view that since the LTCL no longer exist in books of account, it cannot be set off consequent to the scheme of arrangement whereby accumulated losses were set off against share premium amount reflected in the books of account - HELD THAT - As right held by the CIT(A), the corporate restructuring and the consequent reduction in the accumulated losses by setting it off against share premium account reflected in the books of account will have no effect whatsoever in so far as the claim for set off of brought forward loss under the Act made by assessee. Moreover the finding of the AO that the assessee adopted colourable devise has also been rightly held to be without any basis by the CIT(A). It has not been brought out on record that by reason of the restructuring the books and the order of the Hon ble Kerala High Court, the assessee is precluded from utilizing the carryforward LTCL against set off of LTCG in future years as contemplated by section 74 of the Act. In such a scenario, we are of the view that the set off was rightly directed to be allowed by the CIT(A). - Decided against revenue. Addition u/s 41(1) - AO was of the view that the aforesaid liability no longer existed and by virtue of the provisions of section 41(1) - HELD THAT - Though the Revenue has contended in ground No.6 that it had requested the filing of additional evidence in the form of letter of M/s. Anushka Business Consulting, wherein they have informed the AO that they have written off the liability of the assessee in their books of accounts, there is no such discussion in the order of the CIT(A) nor was any evidence filed before the Tribunal. In the given circumstances, we are of the view that the conclusions of the CIT(A) are just and proper and call for no interference. As rightly held by the CIT(A), the fact that the debt is outstanding for a long time without any payment cannot be the basis to come to a conclusion that the said debt ceased to exist. We, therefore, confirm the order of the CIT(A). - Decided against revenue.

Summary

Issues:
1. Set off of brought forward losses against current year's income.
2. Addition of amount on account of cessation of liabilities under section 41(1) of IT Act, 1961.

Issue 1: Set off of Brought Forward Losses
The Revenue challenged the CIT(A)'s order regarding the set off of brought forward business loss and long term capital loss against the current year's income. The assessee, a listed entity in the electronics industry, had incurred losses for several years and underwent corporate debt restructuring. The High Court approved a scheme where accumulated losses were set off against share premium. The assessee claimed set off of long term capital loss against long term capital gain for Assessment Year 2016-17. The AO argued that since the long term capital loss no longer existed in the books due to the scheme of arrangement, it cannot be set off. However, the CIT(A) upheld the claim, stating that the LTCL determined in previous years would remain available for set off, irrespective of the scheme's impact. The Tribunal agreed with the CIT(A), dismissing the Revenue's appeal on this issue.

Issue 2: Cessation of Liabilities under Section 41(1)
The Revenue contended that certain outstanding liabilities in the assessee's books had ceased to exist, invoking section 41(1) of the IT Act, 1961. The CIT(A) disagreed, stating that the liabilities were still valid as the creditors were present in the books, and there was no evidence of unilateral or bilateral discharge of the liabilities. The CIT(A) also referred to a High Court decision emphasizing that the mere absence of a creditor during verification does not imply cessation of liability. The Tribunal upheld the CIT(A)'s decision, emphasizing that the outstanding debts, even if long-standing, did not automatically imply cessation. The Revenue's appeal on this issue was dismissed.

In conclusion, the Tribunal upheld the CIT(A)'s decision on both issues, affirming the set off of brought forward losses against current year's income and rejecting the addition of liabilities under section 41(1) of the IT Act, 1961.