Assessee allowed business loss carry forward from AY 2016-17 for 8 years, subject to affidavit under Section 72

ITAT Indore set aside the impugned order concerning carry forward of business losses for AY 2017-18. The assessee and Revenue agreed that, as there were losses in both AY 2016-17 and AY 2017-18, the assessee would restrict its claim to an 8-year carry forward period reckoned from AY 2016-17 only. ITAT directed the assessee to file an affidavit-cum-declaration to this effect before the AO and ensure it is uploaded on the CPC portal within 30 days to avoid future distortion in tax computation. Upon such compliance, ITAT directed the AO to delete the addition/disallowance and proceed in accordance with the Act.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether expenditure on contractor payments, actually incurred and subjected to tax deduction at source in the previous year relevant to an earlier assessment year, can be allowed as deduction in the subsequent assessment year under the mercantile system of accounting, when debited to the profit and loss account only in that subsequent year.

1.2 Whether the existence of losses in both the relevant assessment years and the consequential question of the period for carry forward of loss justify interference with the disallowance and permit conditional relief to avoid distortion of future tax computation.

1.3 Whether, in the facts of the case, the appellate authority was justified in upholding the disallowance of the contractor expenditure on the basis of the "matching principle" and prohibition on shifting of expenses between assessment years.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability in A.Y. 2017-18 of contractor expenditure incurred and TDS-deducted in earlier year

Interpretation and reasoning

2.1 The Assessing Officer disallowed Rs. 7,61,540/- debited to the trading and profit and loss account for the financial year 2016-17 on the ground that the amount had in fact been paid to contractors in financial year 2015-16, and that under the mercantile method, the expenditure had to be recognised in the year of accrual and was, therefore, a prior period expense not allowable in the year under consideration.

2.2 The first appellate authority upheld the disallowance holding that: (i) the principle of matching income and expenditure requires booking expenditure in the year to which it pertains; (ii) the payment and corresponding obligation related to the earlier assessment year and was not claimed there, though that assessment had been completed and attained finality; and (iii) the Income-tax Act does not permit shifting of expenditure from one assessment year to another based on convenience or error.

2.3 Before the Tribunal, it was shown from the paper book and Form 16A that the amount of Rs. 7,61,500/- had been subjected to TDS in the earlier assessment year and appeared in the balance sheet under "contractor" in that year, but was not debited to the profit and loss account then and was instead debited in the year under consideration. The assessee contended that this was a bona fide omission in the earlier year.

2.4 The Tribunal noted that both the assessment year in which the expenditure was actually incurred and the assessment year under appeal reflected a loss and that the overall exercise was revenue neutral in quantum terms, subject only to the period for carry forward of loss.

2.5 During hearing, both sides accepted that the dispute could be resolved by ensuring that the expenditure, though allowed in the year under appeal for practical purposes, would not result in an impermissible extension of the statutory period for carry forward of loss.

Conclusions

2.6 In view of the admitted factual position of loss in both years and the revenue-neutral impact in substance, the Tribunal set aside the appellate order and directed that the disallowance of Rs. 7,61,540/- be deleted by the Assessing Officer, subject to compliance with the conditions specified regarding the period of carry forward of loss.

Issue 2: Effect of losses in both years and restriction of period of carry forward of loss

Legal framework (as discussed)

2.7 The Tribunal adverted to the general position that business loss is ordinarily eligible for carry forward for eight assessment years from the year of origin, and that allowing the expenditure in the subsequent year could, in absence of safeguards, give the assessee an unintended additional year for set-off.

Interpretation and reasoning

2.8 The assessee argued that since both relevant assessment years resulted in losses, there was no immediate tax effect whether the expenditure was allowed in the earlier or later year; however, it was also recognised in the hearing that carry forward mechanics could be affected, potentially giving an extra year of set-off if the loss effectively shifted forward by one year.

2.9 The Tribunal considered that while strict application of the "matching" principle and yearly self-contained computation could support the disallowance, the presence of loss in both years and the revenue-neutral character justified a pragmatic solution, provided future tax computations were not distorted.

2.10 During the hearing, it was discussed and agreed that the assessee would furnish an undertaking that the loss arising in A.Y. 2016-17 (including the amount of Rs. 7,61,500/- not debited then but debited in A.Y. 2017-18) would be claimed only up to the statutorily permissible eight assessment years counted from A.Y. 2016-17 and not beyond. The assessee accordingly filed an undertaking to that effect before the Tribunal.

2.11 To further safeguard the revenue and ensure transparency of future computations, the Tribunal directed that an affidavit-cum-declaration to the same effect be filed by the assessee before the Assessing Officer, and that the Central Processing Centre keep the portal open for this limited purpose for 30 days from the date of receipt of the order so that the declaration is reflected in the system.

Conclusions

2.12 The Tribunal held that, conditional upon the assessee reckoning the period of eight years for carry forward of the relevant loss with reference to A.Y. 2016-17 only and not thereafter, and upon filing the directed affidavit-cum-declaration, the addition of Rs. 7,61,540/- should be deleted.

2.13 The Tribunal thus set aside the appellate order, directed deletion of the impugned disallowance after the assessee's compliance with the undertaking and affidavit requirements, and allowed the appeal for statistical purposes.

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