Tribunal allows revised return, recognizes business loss, permits carry forward of losses

The tribunal allowed the appellant's revised return under section 139(5) of the Income Tax Act, recognizing the claimed business loss due to FDRs written off with a cooperative bank. The tribunal upheld the genuineness of the loss, allowing it as a deduction under the head of business and profession. Additionally, the tribunal permitted the carry forward of losses from previous assessment years, disagreeing with the AO's disallowance based on non-taxable income sources. The tribunal directed the AO to reconsider the issues in accordance with its decisions.

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Issues Involved:
1. Acceptance of revised return filed by the appellant.
2. Disallowance of the claim of loss due to irrecoverable deposits with Madhavpura Mercantile Co-operative Bank Ltd.
3. Validity of the explanation for claiming the loss in the relevant assessment year.
4. Allowance to carry forward and set off of losses from previous assessment years.

Detailed Analysis:

1. Acceptance of Revised Return:
The appellant, a cooperative society engaged in banking, filed its original return on 31 August 2012, declaring an income of Rs. 65,74,118, which was set off against brought forward losses. Subsequently, the appellant revised its return on 20 March 2014 under section 139(4) of the Income Tax Act, claiming a business loss of Rs. 1,56,71,108 due to FDRs written off with MMCBL. The revised return resulted in a loss of Rs. 90,96,990 for the current year, which was carried forward. The AO rejected the revised return on technical grounds, citing that losses must be determined in a return filed under section 139(3) to be carried forward. The CIT(A) upheld this view, stating that the revised return was invalid as it was not filed within the time specified under section 139(1).

The tribunal, however, concluded that a return filed under section 139(3) is considered a return under section 139(1) and can be revised under section 139(5). The tribunal referenced judgments from the Gujarat High Court and the Madras High Court, which supported the view that revised returns are permissible under the Act.

2. Disallowance of Loss Claim:
The AO disallowed the loss claim of Rs. 1,56,71,108, arguing that the loss was already accounted for in the investment depreciation reserve fund and bad and doubtful debt fund, leading to potential double deduction. The AO also noted that the loss was not recorded in the books of accounts, and the loss was known to the appellant for years. The CIT(A) concurred, stating that the RBI's letter was advisory and not binding, and the appellant had already claimed statutory deductions under section 36(1)(viia).

The tribunal found that the loss was genuine and arose in the course of business, with the interest income from FDRs previously taxed. The tribunal cited a previous ITAT decision allowing similar losses and a Supreme Court judgment affirming that funds laid out as deposits remain part of the circulating capital of a bank. Therefore, the tribunal allowed the loss as a deduction under the head business and profession.

3. Validity of Explanation for Claiming Loss:
The appellant claimed the loss in the year under consideration based on an RBI advisory letter. The CIT(A) rejected this, arguing that the loss should have been claimed when the appellant became aware of the FDRs' status. The tribunal, however, accepted the appellant's explanation, emphasizing that the loss was claimed following the RBI's advisory and was a legitimate business loss.

4. Carry Forward and Set Off of Losses:
The AO disallowed the carry forward of losses from AY 2005-06 and 2006-07, stating that the income was deductible under section 80P and not taxable. The CIT(A) upheld this, referencing a Supreme Court decision that losses from non-taxable sources cannot be carried forward. The tribunal disagreed, noting that the losses were allowed to be carried forward in previous assessments and the issue had reached finality. Thus, the tribunal allowed the carry forward of the losses.

Conclusion:
The tribunal allowed both appeals, permitting the revised return, recognizing the loss claim, and allowing the carry forward of previous losses. The tribunal directed the AO to adjudicate the issues in light of its findings.

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