2024 (6) TMI 1354 - AT - Income Tax

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

M/s. Sunshine Granites Private Limited Versus Deputy Commissioner of Income Tax, Central Circle-1 (2), Hyderabad

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, ... Set off of the carried forward losses against current year profit in view of the change in the shareholding pattern of the assessee - Applicability of section 79 - HELD THAT:- It could be seen from the impugned order that the assessee had taken the plea that section 79 of the Act has no application to the facts of this case and it had taken a specific plea by way of additional grounds that section 79 of the Act refers to business loss only and it has nothing to do with the giving the credit for set off of carry forward unabsorbed depreciation loss. Whether or not section 79 of the Act applies to the carry forward of unabsorbed depreciation loss is only a question of law, and would have been decided by the learned CIT(A) even in the absence of the assessee, because the decision of the higher forum equally binds the learned CIT(A) as it binds all the authorities before that forum. The Hon’ble Apex Court in Subhulaxmi Mills Ltd.[1995 (9) TMI 2 - SUPREME COURT] is clear on this aspect and in the case of Shri Subhlaxmi Mills Ltd. [1976 (1) TMI 2 - GUJARAT HIGH COURT] expressly approved the view taken by the Hon’ble Gujarat High Court that when section 79 of the Act speaks of loss, it does not include unabsorbed depreciation or unabsorbed development rebate. Since it is neither a pure nor mixed question of fact, it does not admit of any further factual findings of the learned CIT(A), but involves only interpretation of the provision by the learned CIT(A). When the Hon’ble Supreme Court speaks on the non-applicability of section 79 of the Act to the unabsorbed depreciation loss, any opinion of learned CIT(A) on this aspect is immaterial, and suffice it to cause verification whether the carry forward losses of assessment year 2012-13 sought to be set off against the future losses by the assessee including the assessment year 2013-14, include any unabsorbed depreciation. If it is so, it is eligible for set off against the profits of the future years. We direct the Assessing Officer to verify whether the carry forward losses of assessment year 2012-13 sought to be set off against the future losses by the assessee including the assessment year 2013 -14, include any unabsorbed depreciation, and if it is so allowed, it to be set off against the profits of the future years. Subject to this observation, appeal is allowed. 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 ActDelay 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.