2022 (8) TMI 681 - AT - Income Tax

Claim of set off of brought forward losses - Whether provisions of section 72A will override the applicability of the provisions of section 79? - Whether business loss becomes eligible for the set off ? - AO held that the business loss incurred prior to the previous year 2005-06 is not eligible for carry forward due to the applicability of provisions of section 79 and therefore, no such loss was available to the assessee for set off against its profits in AY 2007-08 - HELD THAT - Once the AO in the case of Kovalam Hotels Ltd for assessment year 2006-07 has already rejected claim of carry forward of the said business loss in terms of section 79 of the Act, then same cannot be available to the assessee for set off u/s 72A of the Act until and unless said finding of the AO is reversed by the higher appellate authorities. Assessee intimated that appeal against the order of the AO in the case of Kovalam Hotels Ltd. for AY 2006-07 is pending before the Ld. First Appellate Authority. In our considered view, the said business loss becomes eligible for the set off in the year under consideration only subsequent to decision of the allowability of carry-forward in the case of Kovalam Hotel Ltd. under section 79 of the Act in the favour of assessee. As on date, the assessment order in the case of Kovalam Hotels Ltd. for AY 2006-07 is in operation and which has not been reversed by the CIT(A) or ITAT, thus, said business loss has not been carry forwarded to assessment year 2007-08 and therefore same is not available for set off against different heads of the income of the assessee as per the provisions of section 72A the Act for the assessment year under consideration. The issue of set off of business loss in AY 2007-08 u/s 72A of the Act is consequent to the issue of carry forward of loss in AY 2006-07 in Kovalam Hotels Ltd. in terms of section 79 - CIT(A) in the year under consideration is not justified in deciding the question of carryforward of loss in the case of Kovalam Hotels Ltd. for assessment year 2006-07 invoking section 72A of the Act as that issue has to be adjudicated by the appellate authorities having jurisdiction over the case of Kovalam Hotels Ltd. for AY 2006-07. Therefore, we are also not adjudicating on the issue whether carry-forward of the said business loss in the case of Kovalam Hotels Ltd. for AY 2006-07 is permitted under the law. Accordingly, we set aside the finding of the Ld. CIT(A) on the issue in dispute. The Assessing Officer is directed to give effect of set off of business loss in the case of the assessee, consequent to the finding of appellate authorities in the case of Kovalam Hotels Ltd. on the issue of carry forward of business loss under reference. The ground of the appeal of the Revenue is accordingly allowed.

Issues Involved:
1. Set off of brought forward losses of Rs. 13,43,71,999/- pertaining to M/s. Kovalam Hotels Ltd.
2. Applicability of Section 72A versus Section 79 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Set off of Brought Forward Losses of Rs. 13,43,71,999/- Pertaining to M/s. Kovalam Hotels Ltd.:

The Revenue appealed against the order of the Commissioner of Income-tax (Appeals) [CIT(A)] that upheld the assessee's claim of setting off brought forward losses of Rs. 13,43,71,999/- from M/s. Kovalam Hotels Ltd. The assessee had revised its taxable income by claiming set off of these losses and unabsorbed depreciation after M/s. Kovalam Hotels Ltd. amalgamated with the assessee company effective from 01/04/2006.

The Assessing Officer (AO) rejected the claim, stating that the business loss of Rs. 13,43,71,999/- incurred prior to the previous year 2005-06 was not eligible for carry forward due to the applicability of Section 79 of the Income Tax Act. The AO noted that there was a change in the shareholding pattern of Kovalam Hotels Ltd. during the financial year 2005-06, making the provisions of Section 79 applicable, which disallowed the carry forward of losses.

2. Applicability of Section 72A versus Section 79 of the Income Tax Act, 1961:

The CIT(A) held that Section 72A, being a specific provision related to the amalgamation of companies, overrides the general provisions of Section 79. The CIT(A) referenced various case laws, including a decision by the Hon'ble ITAT in the case of Tata Autocomp System Ltd vs. ACIT, which emphasized that specific provisions prevail over general ones. The CIT(A) concluded that since the scheme of amalgamation was approved by the Hon'ble High Court of Bombay, Section 72A should apply, allowing the assessee to carry forward the losses of Kovalam Hotels Ltd.

The Revenue argued that the AO of Kovalam Hotels Ltd. had correctly declined the carry forward of losses for AY 2006-07 due to a change in shareholding. The Ld. Counsel for the assessee contended that Section 79 did not apply and relied on multiple Tribunal decisions to support the claim for set off of losses.

The Tribunal noted two key events:
1. In AY 2006-07, M/s. Hotel Leela Venture Ltd. acquired more than 51% shareholding in M/s. Kovalam Hotels Ltd., making Section 79 applicable.
2. In AY 2007-08, M/s. Kovalam Hotels Ltd. amalgamated with the assessee company, invoking Section 72A.

The Tribunal concluded that since the AO of Kovalam Hotels Ltd. had already rejected the carry forward of losses for AY 2006-07, the same losses could not be set off by the assessee for AY 2007-08 unless the higher appellate authorities reversed the AO's decision. The Tribunal emphasized that the issue of set off under Section 72A is contingent upon the resolution of the carry forward issue under Section 79 in the case of Kovalam Hotels Ltd.

Conclusion:

The Tribunal set aside the CIT(A)'s order, directing the AO to give effect to the set off of business losses based on the appellate authorities' decision in the case of Kovalam Hotels Ltd. regarding the carry forward of losses under Section 79. The appeal filed by the Revenue was allowed, and the order pronounced on 10/08/2022.

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