Section 79 restrictions on carried forward losses don't apply to unabsorbed depreciation following Subhulaxmi Mills precedent

The ITAT Hyderabad held that section 79 of the Income Tax Act, which restricts set-off of carried forward losses due to changes in shareholding pattern, does not apply to unabsorbed depreciation. Following the SC precedent in Subhulaxmi Mills Ltd., the tribunal clarified that section 79 applies only to business losses and not to unabsorbed depreciation or development rebate. The matter was remanded to the Assessing Officer to verify whether the carried forward losses from AY 2012-13 included unabsorbed depreciation, which if present, would be eligible for set-off against future profits regardless of shareholding changes.

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Issues: Delay in filing appeal due to pandemic, Set off of carried forward losses against current year profit, Application of section 79 of the Income Tax Act

Delay in filing appeal due to pandemic:
The appeal was filed with a delay of 148 days, attributed to the pandemic situation causing a standstill in business operations. The company's remote location and lack of staff at the office in Karimnagar District further contributed to the delay. The Appellate Tribunal acknowledged the impact of the pandemic on limitation periods, citing a Supreme Court decision allowing an extended period for filing appeals affected by the pandemic. Consequently, the appeal was treated as filed within the period of limitation, enabling the Tribunal to proceed with hearing the appeal on its merits.

Set off of carried forward losses against current year profit:
The main issue in the appeal was whether the assessee could set off the carried forward losses of the assessment year 2012-13 against the profit of the company for the assessment year 2013-14, considering a change in the shareholding pattern. Initially, the Assessing Officer allowed the set off, but the Principal Commissioner of Income Tax revised this decision under section 263 of the Income Tax Act, citing a substantial change in shareholding. This change triggered the application of section 79 of the Act, disallowing the set off of carried forward losses against profits in subsequent years. The subsequent order disallowed the brought forward losses and added them to the total income before setting off, leading to the appeal.

Application of section 79 of the Income Tax Act:
The appeal challenged the application of section 79 of the Income Tax Act, arguing that it did not apply to unabsorbed depreciation or development rebate losses. The Appellate Tribunal referred to a Supreme Court decision supporting the exclusion of unabsorbed depreciation from the scope of section 79. The Tribunal emphasized that the question of whether section 79 applied to unabsorbed depreciation was a legal matter, not requiring further factual findings. The Tribunal directed the Assessing Officer to verify if the carried forward losses included unabsorbed depreciation, allowing their set off against future profits if applicable. The appeal was allowed with this observation, emphasizing the legal interpretation of the provision over factual considerations.

In conclusion, the judgment addressed the delay in filing the appeal due to the pandemic, the set off of carried forward losses against current year profit, and the application of section 79 of the Income Tax Act to unabsorbed depreciation losses. The Tribunal's decision focused on legal interpretations and directed the Assessing Officer to verify the inclusion of unabsorbed depreciation in the carried forward losses for appropriate set off against future profits.

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