2024 (7) TMI 1129 - AT - Income Tax

Revision u/s 263 - allowability of carry forward losses and depreciation - HELD THAT - Appellant s contention that for the AY 2019-20 assessee company has a profit which is required to be set off against the business loss of AY 2018-19 and also the remaining quantum of profits from business deserves to be set off against brought forward unabsorbed depreciation from AY 2013-14 to AY 2018-19. It has been averred that once this setting off is carried out, then there remains no taxable income for AY 2019-20. As mentioned earlier, the CIT(A) has laid considerable emphasis on the part of Section 263(1), explanation thereof whereby under Clause (a), it is mentioned that the reopening can be attracted in case an order has been passed without making inquiries or verification which should have been done. On a careful consideration of this issue, it is evident that once the issue of carry forward of depreciation is no longer a debatable matter with the law laid down by the Hon'ble Apex Court 1995 (9) TMI 2 - SUPREME COURT , then there would be a considerable quantum of carried forward unabsorbed depreciation to merit a comfortable setting off of the income under consideration. It is felt that the Pr. CIT giving directions for revision u/s 263 of the Act merely for the sake of carrying out inquiries is an exercise in futility which deserves to be avoided. Considering this the order u/s 263 of the Act is hereby quashed. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Legality and validity of the order passed under section 263 of the Income-tax Act, 1961.
2. Determination of whether the assessment order dated 22.04.2021 was erroneous and prejudicial to the interest of the revenue.
3. Applicability of Section 79 of the Income-tax Act regarding the set-off of unabsorbed brought forward business loss and depreciation.
4. Violation of the principle of natural justice in the order passed under section 263.

Detailed Analysis:

1. Legality and Validity of the Order Passed Under Section 263 of the Income-tax Act, 1961:
The assessee argued that the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under section 263 of the Income-tax Act was illegal, invalid, and not sustainable in law. The Pr. CIT had issued a notice under section 263 proposing to reopen the assessment order passed under section 143(3) of the Act. The appellant contended that the Pr. CIT's order lacked legal basis and should be quashed.

2. Determination of Whether the Assessment Order Dated 22.04.2021 Was Erroneous and Prejudicial to the Interest of the Revenue:
The Pr. CIT found that the assessee had brought forward losses from earlier years amounting to Rs. 13,98,48,103/-. It was contended that these losses were not eligible for set-off with the income of the assessment year in question considering the provisions of section 79 of the Act. The Pr. CIT issued an order under section 263 directing the Assessing Officer (AO) to verify the allowability of carry forward losses and depreciation, emphasizing Explanation-2 to Section 263(1) of the Act, which deems an order erroneous if it is passed without making necessary inquiries or verification.

3. Applicability of Section 79 of the Income-tax Act Regarding the Set-off of Unabsorbed Brought Forward Business Loss and Depreciation:
The assessee argued that section 79, which restricts the set-off of business loss brought forward from earlier years in the event of a change in shareholding of more than 50%, does not apply to unabsorbed brought forward depreciation. The assessee relied on the judgment of the Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Shri Subhulaxmi Mills Ltd, which held that section 79 does not apply to unabsorbed depreciation and unabsorbed development rebate. This position was further supported by the ITAT Kolkata in the case of DCIT Vs. P.N. Memorial Neuro Centre & Research Ltd.

4. Violation of the Principle of Natural Justice in the Order Passed Under Section 263:
The assessee contended that the order passed by the Pr. CIT under section 263 violated the principle of natural justice as no reasons were provided for not accepting the submissions of the assessee. The appellant argued that the Pr. CIT's order was liable to be quashed on this ground.

Conclusion:
The Tribunal considered the submissions of the assessee and the department. It noted that the issue of carry forward of depreciation was no longer debatable, as settled by the Hon'ble Supreme Court. The Tribunal found that the Pr. CIT's directions for revision under section 263, merely for the sake of carrying out inquiries, were unnecessary and an exercise in futility. Consequently, the Tribunal quashed the order passed under section 263 of the Act, allowing the appeal filed by the assessee.

Order:
The appeal filed by the assessee is allowed, and the order under section 263 of the Income-tax Act is quashed. The order was pronounced in the open Court on 8th July 2024.