2025 (5) TMI 1420 - HC - Income Tax

Tax Appeal Rejected: Revenue Challenge Falls Short of Rs. 2 Crores Threshold in Brought-Forward Losses Computation

HC dismissed Revenue's appeal regarding tax effect computation. The court held that tax effect was Rs. 1.71 crores, below the Rs. 2 crores threshold ... Maintainability of appeal on low tax effect - appeal before High Court - calculating the tax effect - determination of quantum by which the returned loss is reduced - HELD THAT:- In the present case, the entire returned loss of Rs. 2,80,50,853/- has been wiped out by the additions made by the AO and further the AO has assessed the income at Rs. 1,00,11,906/-. Thus, the total tax effect is to be determined on an amount of Rs. 3,80,62,759/- [Rs. 2,80,50,853/- + Rs. 1,00,11,906/-]. Concededly, the tax effect on the said amount is less than the stipulated limit of Rs. 2 crores. The contention that the losses assessed in the previous assessment years must also be taken into account as the carry forward of the same has been disallowed is unmerited. We do not find the machinery to compute the tax effect as stated in paragraph 5.1 of the aforementioned Circular contemplates taking into account the observations made by the AO in regard to the losses assessed in the previous years, which have been carried forward. Thus, although the AO in the present case has noted that the business losses of prior years amounting to Rs. 30,73,03,525/- are also required to be disallowed; the same does not require to be included for the purposes of computing the tax effect in CBDT’s Circular. The application is accordingly allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:Whether the tax effect of the disputed additions and assessments in the present appeal exceeds the threshold limit of Rs. 2 crores as stipulated by the Central Board of Direct Taxes (CBDT) Circulars No. 05/2024 dated 15.03.2024 and No. 09/2024 dated 17.09.2024, thereby justifying the continuation of the appeal before the High Court.Whether, in computing the tax effect as per paragraph 5.1 of the CBDT Circular No. 05/2024, the tax impact of disallowance of brought forward losses from earlier assessment years, which have attained finality, should be included.Whether the Revenue's contention that the tax effect must include the tax on losses disallowed in prior years is legally tenable.Whether the appeal filed by the Revenue should be dismissed on the ground of low tax effect as per the CBDT Circulars.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Determination of Tax Effect Threshold under CBDT Circulars for Entertaining AppealsRelevant legal framework and precedents: The CBDT Circular No. 05/2024 dated 15.03.2024, as modified by Circular No. 09/2024 dated 17.09.2024, prescribes a threshold tax effect of Rs. 2 crores for entertaining appeals before the High Court. Paragraph 5.1 of Circular No. 05/2024 defines 'tax effect' as the difference between the tax on total income assessed and the tax that would have been chargeable had the disputed income been excluded, inclusive of surcharge and cess but excluding interest unless interest chargeability itself is disputed.Court's interpretation and reasoning: The Court examined the computation of tax effect submitted by the Assessee, which calculated the notional addition of Rs. 5,45,15,468 (loss converted into profit plus profit assessed) and the resulting tax effect of Rs. 1,71,19,532. The Court found no dispute regarding the correctness of this calculation. It further analyzed the assessment order which showed the returned loss wiped out and income assessed at Rs. 1,00,11,906, thereby confirming that the total amount on which tax effect is to be calculated is Rs. 3,80,62,759 (returned loss plus assessed income).Key evidence and findings: The tabular computation presented by the Assessee and the assessment order's paragraph 23 formed the basis of the tax effect calculation. The Court noted that the tax effect on Rs. 3.8 crores is below the Rs. 2 crores threshold.Application of law to facts: Applying paragraph 5.1 of the Circular, the Court held that the tax effect is to be computed solely based on the disputed income in the current assessment year and not on prior years' losses. Since the calculated tax effect was below Rs. 2 crores, the threshold for entertaining the appeal was not met.Treatment of competing arguments: The Revenue contended that the tax effect should include the tax on losses disallowed from prior years, which were carried forward but disallowed in the current assessment. The Court rejected this, stating that the machinery for computing tax effect does not contemplate inclusion of prior years' losses, especially where those assessments have attained finality.Conclusions: The tax effect in the present case is below the stipulated threshold, and the appeal should not be entertained on this ground.Issue 2: Inclusion of Tax Effect of Disallowed Brought Forward Losses from Prior YearsRelevant legal framework and precedents: The CBDT Circular's paragraph 5.1 confines the tax effect computation to the disputed income in the assessment year under appeal. The principle that brought forward losses cannot be disallowed without reopening prior years' assessments, which have attained finality, is well established.Court's interpretation and reasoning: The Court noted that although the Assessing Officer observed that business losses of prior years amounting to Rs. 30,73,03,525/- were disallowed, these prior years' assessments had attained finality. Therefore, the disallowance of brought forward losses cannot be considered without reopening those assessments.Key evidence and findings: The assessment order's reference to prior years' losses and the finality of those assessments were critical. The Court emphasized that the CBDT Circular does not require inclusion of such prior years' losses in tax effect computation.Application of law to facts: The Court applied the principle that only disputed issues in the current assessment year are relevant for tax effect calculation. The prior years' losses disallowed without reopening assessments cannot be factored into the tax effect.Treatment of competing arguments: The Revenue's argument to include prior years' losses was dismissed as contrary to the statutory scheme and the Circular's clear mandate.Conclusions: Tax effect computation excludes disallowed brought forward losses from prior years where assessments have attained finality.Issue 3: Finality of Assessments and Its Impact on Tax Effect ComputationRelevant legal framework and precedents: The principle that assessments once finalized cannot be reopened arbitrarily is a settled legal norm. The CBDT Circular's methodology for tax effect calculation implicitly respects this principle.Court's interpretation and reasoning: The Court held that since prior years' assessments are final, the disallowance of losses from those years cannot be treated as a disputed issue in the current assessment for the purpose of tax effect computation.Key evidence and findings: The assessment order's mention of prior year losses and the absence of any reopening of prior assessments confirmed the finality.Application of law to facts: The Court applied the principle of finality to exclude prior years' losses from tax effect consideration.Treatment of competing arguments: Revenue's contention was rejected as inconsistent with the finality doctrine.Conclusions: Finality of prior assessments precludes inclusion of prior years' losses in tax effect calculation.Issue 4: Dismissal of Appeal on Ground of Low Tax EffectRelevant legal framework and precedents: The CBDT Circulars provide that appeals with tax effect below Rs. 2 crores should not be entertained by the High Court.Court's interpretation and reasoning: Given the tax effect in the present case is Rs. 1.71 crores, below the threshold, the Court held that the appeal must be dismissed.Key evidence and findings: The undisputed tax effect computation and the assessment order supported this conclusion.Application of law to facts: The Court applied the Circular's threshold rule strictly.Treatment of competing arguments: Revenue's arguments to expand tax effect were rejected.Conclusions: The appeal is dismissed on the ground of low tax effect.3. SIGNIFICANT HOLDINGSThe Court's crucial legal reasoning is encapsulated in the following verbatim excerpt from paragraph 7 of the judgment:'...we do not find the machinery to compute the tax effect as stated in paragraph 5.1 of the aforementioned Circular contemplates taking into account the observations made by the AO in regard to the losses assessed in the previous years, which have been carried forward. Thus, although the AO in the present case has noted that the business losses of prior years amounting to Rs. 30,73,03,525/- are also required to be disallowed; the same does not require to be included for the purposes of computing the tax effect under paragraph 5.1 of the aforementioned CBDT's Circular.'Core principles established by the Court include:The tax effect for entertaining appeals under the CBDT Circulars must be computed strictly as the difference in tax on total income assessed and tax on income excluding the disputed issues in the current assessment year only.Disallowed brought forward losses from prior years, where assessments have attained finality, cannot be included in tax effect computation.The threshold limit of Rs. 2 crores prescribed by CBDT Circulars is mandatory and non-negotiable for admission of appeals before the High Court.Finality of assessments precludes reopening issues from prior years for the purpose of tax effect calculation in the current year.Final determinations on each issue:The tax effect in the present case is Rs. 1.71 crores, below the Rs. 2 crores threshold.The tax effect computation excludes prior years' disallowed losses as they pertain to finalized assessments.The appeal filed by the Revenue is dismissed on the ground of low tax effect.