CIT v. Haryana Hotels Ltd.

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The Tax Publishers2005 TaxPub(DT) 1403 (P&H-HC) : (2006) 007 (I) ITCL 0128 : (2005) 276 ITR 0521 : (2005) 197 CTR 0449 : (2005) 148 TAXMAN 0373 CIT v. Haryana Hotels Ltd. () INCOME TAX --Loss----Carry forward and set-offWhether filing of valid return and order of AO notifying amount of business loss essential--*Held:* Since no valid return for the assessment year 1986-87 had been made by assessee and accordingly no assessment could be made and business losses could not be notified to the assessee, the assessee could not be allowed to carry forward and set-off business loss during the assessment year 1987-88. Income Tax Act, 1961 s.72, 73, 74, 74A, 80 & 139. INCOME TAX --Depreciation----Unabsorbed depreciationCarry forward and set-off--For the assessment year 1987-88, the assessee filed original return on 31-7-1987 declaring nil income which was treated as invalid return as it was not accompanied by audited accounts and tax audit report. Revised return, accompanied by audited accounts and tax audit report, was submitted on 24-4-1992 declaring loss of Rs. 24,66,432 for the previous year relevant to assessment year 1987-88. The delay was condoned under section 119(2B). Another revised return was furnished on 31-3-1994 declaring loss of Rs. 26,50,915. The AO allowed carry forward of unabsorbed depreciation to the extent of Rs. 24,17,869 but disallowed the brought forward losses and unabsorbed depreciation for earlier assessment years and their set-off on the ground that no valid assessment had been made for the assessment year 1986-87. The Tribunal while allowing the appeal of the assessee directed the AO to allow the claim of carry forward of unabsorbed depreciation as well as unabsorbed losses subject to the period of limitation. *Held:* The Tribunal was right in holding that the assessee was entitled to get unabsorbed depreciation of earlier years 1984-85 and 1985-86 set off in 1987-88 even if no valid return for the assessment year 1986-87 had been filed by the assessee. Income Tax Act, 1961 s.32 CIT v. Haryana Hotels Ltd. In the Punjab & Haryana High Court G.S. Singhvi & A.K. Mittal, JJ. I.T.A. No. 145 of 2002 17 February 2005 Counsel: Rajesh Bindal, for the Revenue H.N. Mehtani, for the Assessee. JUDGMENT Ajay Kumar Mittal, J. The judgment of the court was delivered by The revenue feeling aggrieved by order dated 9-10-2001, passed by the ITAT, Delhi Bench 'E', New Delhi (hereinafter referred to as 'the Tribunal'), has filed this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as, 'the Act'), which was admitted on 7-12-2004, for determination of the following substantial questions of law by this court : '(i) Whether, on the facts and in the circumstances of the case, the ITAT was right in law in giving the relief on a ground (carry forward of unabsorbed losses) which was never taken by the assessee before the learned Commissioner (Appeal) and which accordingly does not emerge out of the order of the learned Commissioner (Appeal)? (ii) Without prejudice of the above, whether, on the facts and in the circumstances of the case, the ITAT was right in law in allowing the carry forward of business losses and depreciation when neither any valid return for the assessment year 1986-87 was filed nor any business loss and depreciation was determined for the assessment year 1986-87 to be carried forward in the succeeding year, i.e., the assessment year 1987-88? (iii) Whether, on the facts and in the circumstances of the case, the ITAT was right in law in allowing carry forward of business losses when in view of section 80 of the Income Tax Act losses which have not been determined cannot be allowed to be carried forward and when in view of section 139(3) the assessee should file a valid return as per the provisions of section 139(1) to claim carry forward of losses?' Briefly, the facts are that for the assessment year 1987-88, the assessee filed original return on 31-7-1987, declaring its income as nil. The same was treated as an invalid return as it was not accompanied by audited accounts and the assessee was informed accordingly. The assessee filed its revised return accompanied by audited accounts and tax audit report on 24-4-1992. The assessee had declared the loss of Rs. 24,66,432 for the previous year relevant to the assessment year 1987-88. The delay was condoned under section 119(2B) of the Act by the competent authority and the assessing officer was directed to complete the assessment in relation to time-limit prescribed under the Act and another revised return was filed by the assessee on 31-3-1994, declaring loss at Rs. 26,50,915. The assessing officer, while passing the assessment order under section 143(3) of the Act, allowed unabsorbed depreciation to be carried forward to the extent of Rs. 24,17,869. However, he disallowed the brought forward losses and unbsorbed depreciation of earlier assessment years and their set off on the ground that no valid assessment had been made for the assessment year 1986-87. The assessee, feeling aggrieved, preferred an appeal before the Commissioner(A) (in short, 'the Commissioner(A)'), wherein in ground No. 7, it had challenged the action of the assessing officer in not allowing set off of unabsorbed depreciation during the assessment year 1987-88 on the ground that the same is not allowed as the assessment for the year 1986-87 had not been completed. The Commissioner(A), however, partly allowed the appeal and directed the assessing officer to recalculate the depreciation by taking written down value determined as on 31-3-1985, and thereafter to calculate and allow the same for the assessment year in question and written down value should accordingly be re-determined for being carried forward to the succeeding year. The assessee preferred further appeal to the Tribunal assailing the order of the Commissioner(A) regarding the carry forward of unabsorbed losses and disallowance of unabsorbed depreciation for the assessment years 1984-85 and 1985-86 during the assessment year 1987-88. The Tribunal, vide order dated 9-10-2001 allowed the appeal of the assessee and directed the assessing officer to allow the claim of carry forward of unabsorbed depreciation as well as unabsorbed losses subject to the period of limitation in respect of the unabsorbed losses. The revenue had also filed an application under section 254(2) of the Act before the Tribunal on the ground that the issue regarding carry forward of business losses was not taken up by the assessee before the Commissioner(A) and, therefore, the issue decided by it did not emerge from the order of the Commissioner(A). The Tribunal, vide order dated 3-9-2003, rejected the application and observed that the point of unabsorbed business losses was raised by the assessee before the Commissioner(A) and the same was rejected by him and, thus, such issue arose from the order of the Commissioner(A) and it was justified in adjudicating the issue. The copy of the application filed before the Tribunal, the reply filed by the assessee and the order dated 3-9-2003, passed by it were allowed to be placed on record vide order dated 23-11-2004, passed in Civil Miscellaneous No. 22284-CII of 2004. Shri Rajesh Bindal, learned counsel for the appellant, drew our attention to the provisions of sections 72, 80, 139(3) and 157 of the Act and contended that in the event of failure on the part of the assessee to file a valid return, no business loss can be carried forward and the Tribunal has, thus, erred in granting relief to the assessee. He submitted that the claim regarding business loss was never claimed before the Commissioner(A) and, therefore, the Tribunal was not justified in granting relief to the assessee regarding carry forward of business losses. Learned counsel further submitted that on the same analogy, even unabsorbed depreciation under section 32(2) of the Act could not be allowed to be carried forward and the Commissioner(A) and the Tribunal have wrongly allowed the same. He placed reliance on Sri Rajarathinam Transports (P) Ltd. v. CIT (1993) 199 ITR 203 (Mad) to augment his submission. Shri H.N. Mehtani, learned counsel for the assessee, controverting the submissions of learned counsel for the appellant supported the orders of the Commissioner(A) and the Tribunal and submitted that in view of the decision of the Apex Court in CIT v. Virmani Industries (P) Ltd. (1995) 216 ITR 607 (SC), the Tribunal had rightly allowed set off and carry forward of unabsorbed depreciation and business losses. We have thoughtfully considered the arguments of learned counsel for the parties and with their assistance have carefully perused the record and seen the case law. The controversy raised in this appeal can be divided into two parts : Firstly, whether in the facts and circumstances, the assessee who had not filed any valid return for the assessment year 1986-87 and the business loss, thus, had not been determined for the said assessment year, the assessee still would be held entitled to carry forward the same in the assessment year 1987-88. The second limb/aspect of the question is could the Tribunal grant relief on a ground regarding carry forward of unabsorbed business losses which was never taken by the assessee before the Commissioner(A). Secondly, the question would be whether in the facts and circumstances, the unabsorbed depreciation could be allowed to be set off when no valid return for the assessment year 1986-87 was filed and, thus, there was no unabsorbed depreciation determined for carrying forward to assessment year 1987-88. Now, adverting to the first issue, the relevant provisions need to be noticed : '72. (1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year : Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on : Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and (a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year ; and (b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding. (2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section. (3) No loss (other than the loss referred to in the proviso to subsection (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. 80. Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed within the time allowed under sub-section (1) of section 139 or within such further time as may be allowed by the Income Tax Officer, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A. 139. (3) If any person who has not been served with a notice under sub-section (2) has sustained a loss in any previous year under the head 'Profits and gains of business or profession' or under the head 'Capital gains' and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1) or by the thirty-first day of July of the assessment year relevant to the previous year during which the loss was sustained, a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1). 157. When, in the course of the assessment of the total income of any assessee, it is established that a loss has taken place which the assessee is entitled to have carried forward and set off under the provisions of sub-section (1) of section 72, sub-section (2) of section 73, sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A, the assessing officer shall notify to the assessee by an order in writing the amount of the loss as computed by him for the purposes of sub-section (1) of section 72, sub-section (2) of section 73, sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.' Section 72 of the Act deals with carry forward and set off of business loss. It provides that where the net result of the computation under the head 'Profits and gains' of business or profession is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year subject to other provisions of Chapter VI. In sub-section (2) effect is to be given to the provisions of section 72 over any allowance or part thereof under sections 32(2) and 35(4) to be carried forward. Under sub-section (3), the period for which loss can be carried forward is eight years. The mandate under section 80 is that the losses under sections 72(1), 73(2), 74(1), 74(3) and 74A(3), if not determined in pursuance of a return filed, shall not be carried forward and set off. Section 139(3) enacts that if the assessee who has sustained a loss under the head 'Profits and gains of business' or 'Capital gains' and claims to carry forward a loss, return can be filed in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and that all the provisions of the Act shall apply as if it were a return under sub-section (1). Section 157 casts a duty upon the assessing, officer to notify to the assessee the amount of loss as computed by him when in the course of the assessment of the total income of the assessee, it is established that a loss has taken place which the assessee is entitled to have carried forward and set off under the provisions of sections 72(1), 73(2), 74(1) or 74(3) or 74A(3). In CIT v. Khushal Chand Daga (1961) 42 ITR 177 (SC), the Apex Court ruled that where the loss determined has not been notified to the assessee, the assessee can have it redetermined in a subsequent year. An irresistible conclusion on the conjoint reading of the aforesaid provisions would be that a business loss cannot be carried forward unless it has been determined in pursuance of a return filed under section 139 of the Act. In order to be entitled to carry forward a business loss, the assessee must submit a return under section 139(3) of the Act and have an assessment made for the year in which he has incurred the loss. The assessing officer has to notify to the assessee by an order in writing the amount of the business loss as computed by him which the assessee is entitled to have carried forward. Where the business loss determined has not been notified to the assessee by the assessing officer, the assessee can have it determined in a subsequent year in which the business loss is to be set off. It was an admitted fact as is apparent from a perusal of the order of the Commissioner(A) that no valid return for the assessment year 1986-87 had been made by the assessee and accordingly no assessment could be made and the business losses could not be notified to the assessee. Once it is established that no valid return had been filed by the assessee for the assessment year 1986-87, the assessee cannot be allowed to set off the business losses of earlier years during the assessment year 1987-88. The Tribunal, thus, clearly erred in allowing set off of business losses for earlier assessment years 1984-85 and 1985-86 during the assessment year 1987-88. Once it is concluded that the Tribunal was in error in allowing set off of business losses for earlier assessment years, the second limb of this point whether the same can be allowed to be agitated before the Tribunal especially when it was never raised by the assessee before the Commissioner(A), becomes academic only and is being left open in the present case. Now adverting to the second issue regarding set off of unabsorbed depreciation, it would be relevant to reproduce section 32(2) of the Act. The same reads as under : 'Where, in the assessment of the assessee or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners, full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.' A reading of section 32(2) of the Act makes it clear that a carried forward unabsorbed depreciation allowance is deemed to be part of and stands on the same footing as current depreciation, i.e., in the assessment of the assessee, if full effect cannot be given to any allowance in any previous year owing to there being no profits or gains chargeable for that previous year, the allowance or part of the allowance to which effect has not been given, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of the said allowance. There is no time limit provided under section 32(2) of the Act for carry forward of unabsorbed depreciation to any subsequent year. The apex court in CIT v. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 (SC), has held that unabsorbed depreciation of past years had to be added to depreciation of the current year and the aggregate unabsorbed and current year's depreciation had to be deducted from the total income of the assessment year. In Virmani Industries (P) Ltd.'s case (1995) 216 ITR 607 (SC), the assessee was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The assessee had stopped the business in that year and had let out the factory on hire. Ten years later, i.e., in the previous year relevant to the assessment year 1965-66, the assessee started the business of manufacture of steel pipes and that business used part of the old machinery which was being used for soap and oil. It was during the assessment proceedings relating to the assessment year 1965-66, the assessee claimed that the unabsorbed depreciation should be brought forward and set off against the profits of the new business in respect of it pertained to the old machinery utilised in the new business. The apex court ruled that a depreciation allowance which remained unabsorbed could be set off against the income for the accounting period relevant to the assessment year 1965-66. The Madras High Court in Sri Rajarathinam Transports' case (1993) 199 ITR 203 (Mad), was dealing with a case relating to the assessment year 1965-66. The brief facts are that the assessee, who was a private limited company claimed that unabsorbed depreciation totalling Rs. 78,984 in respect of the assessment years 1960-61 to 1964-65 should be allowed to be set off in the assessment year 1965-66. The assessing officer observed that the unabsorbed depreciation had not been determined for the purpose of being carried forward and set off and, therefore, unabsorbed depreciation of the assessment years 1960-61 to 1964-65 could not be allowed to be set off from income of the assessment year 1965-66. The High Court held that in the absence of specific orders of the assessing authority determining the depreciation not only for the purpose of assessment, but also for its carry forward from assessment year to assessment year the assessee cannot be permitted to claim set off of unabsorbed depreciation for the assessment year 1965-66. After giving our thoughtful consideration, we are unable to accept the view as laid down by the Madras High Court in Sri Rajarathinam Transports' case (1993) 199 ITR 203 (Mad). Under section 32(2) of the Act, the unabsorbed depreciation of earlier previous years forms part of the current year's depreciation and thereafter allowance for depreciation is given from the current year's income. There is no such provision in section 72 of the Act by virtue of which business losses of earlier years shall form part of the current year's business losses and be allowed to be set off from current year's income. However, only the business losses of earlier years which are notified by the assessing officer are allowed to be carried forward and set off from the current year's income. Similarly, there is no provision under the Act which makes it mandatory for the assessee to file return for carry forward and set off of unabsorbed depreciation which is to be notified by the assessing officer as in the case of unabsorbed business loss. Thus, from a reading of the provisions of the Act, the distinction between unabsorbed depreciation and unabsorbed business loss for the purposes of set off and carry forward is clear. Therefore, the Tribunal was right in holding that the assessee is entitled to get unabsorbed depreciation of the earlier years 1984-85 and 1985-86 set off in 1987-88 even if no valid return for the assessment year 1986-87 had been filed by the assessee. Resultantly, the appeal is partly allowed and it is held that in the absence of the assessee's filing a valid return and consequently, no order being passed by the assessing officer for set off and carry forward of business losses, for the assessment year 1986-87, the assessee could not be held entitled to set off and carry forward business loss during the assessment year 1987-88. However, the unabsorbed depreciation of the assessment years 1984-85 and 1985-86 is to be set off from the business income of the assessment year 1987-88 and the unabsorbed depreciation is to be carried forward to subsequent assessment years. The substantial questions of law reproduced above stand answered accordingly. OPEN SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2005 TaxPub(DT) 1403 (P&H-HC) : (2006) 007 (I) ITCL 0128 : (2005) 276 ITR 0521 : (2005) 197 CTR 0449 : (2005) 148 TAXMAN 0373

CIT v. Haryana Hotels Ltd. ()

INCOME TAX

--Loss----Carry forward and set-offWhether filing of valid return and order of AO notifying amount of business loss essential--Held: Since no valid return for the assessment year 1986-87 had been made by assessee and accordingly no assessment could be made and business losses could not be notified to the assessee, the assessee could not be allowed to carry forward and set-off business loss during the assessment year 1987-88.

Income Tax Act, 1961 s.72, 73, 74, 74A, 80 & 139.

INCOME TAX

--Depreciation----Unabsorbed depreciationCarry forward and set-off--For the assessment year 1987-88, the assessee filed original return on 31-7-1987 declaring nil income which was treated as invalid return as it was not accompanied by audited accounts and tax audit report. Revised return, accompanied by audited accounts and tax audit report, was submitted on 24-4-1992 declaring loss of Rs. 24,66,432 for the previous year relevant to assessment year 1987-88. The delay was condoned under section 119(2B). Another revised return was furnished on 31-3-1994 declaring loss of Rs. 26,50,915. The AO allowed carry forward of unabsorbed depreciation to the extent of Rs. 24,17,869 but disallowed the brought forward losses and unabsorbed depreciation for earlier assessment years and their set-off on the ground that no valid assessment had been made for the assessment year 1986-87. The Tribunal while allowing the appeal of the assessee directed the AO to allow the claim of carry forward of unabsorbed depreciation as well as unabsorbed losses subject to the period of limitation. Held: The Tribunal was right in holding that the assessee was entitled to get unabsorbed depreciation of earlier years 1984-85 and 1985-86 set off in 1987-88 even if no valid return for the assessment year 1986-87 had been filed by the assessee.

Income Tax Act, 1961 s.32

In the Punjab & Haryana High Court G.S. Singhvi & A.K. Mittal, JJ.

I.T.A. No. 145 of 2002 17 February 2005

Counsel: Rajesh Bindal, for the Revenue H.N. Mehtani, for the Assessee.

JUDGMENT

Ajay Kumar Mittal, J.

The judgment of the court was delivered by

The revenue feeling aggrieved by order dated 9-10-2001, passed by the ITAT, Delhi Bench 'E', New Delhi (hereinafter referred to as 'the Tribunal'), has filed this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as, 'the Act'), which was admitted on 7-12-2004, for determination of the following substantial questions of law by this court :

'(i) Whether, on the facts and in the circumstances of the case, the ITAT was right in law in giving the relief on a ground (carry forward of unabsorbed losses) which was never taken by the assessee before the learned Commissioner (Appeal) and which accordingly does not emerge out of the order of the learned Commissioner (Appeal)?

(ii) Without prejudice of the above, whether, on the facts and in the circumstances of the case, the ITAT was right in law in allowing the carry forward of business losses and depreciation when neither any valid return for the assessment year 1986-87 was filed nor any business loss and depreciation was determined for the assessment year 1986-87 to be carried forward in the succeeding year, i.e., the assessment year 1987-88?

(iii) Whether, on the facts and in the circumstances of the case, the ITAT was right in law in allowing carry forward of business losses when in view of section 80 of the Income Tax Act losses which have not been determined cannot be allowed to be carried forward and when in view of section 139(3) the assessee should file a valid return as per the provisions of section 139(1) to claim carry forward of losses?'

Briefly, the facts are that for the assessment year 1987-88, the assessee filed original return on 31-7-1987, declaring its income as nil. The same was treated as an invalid return as it was not accompanied by audited accounts and the assessee was informed accordingly. The assessee filed its revised return accompanied by audited accounts and tax audit report on 24-4-1992. The assessee had declared the loss of Rs. 24,66,432 for the previous year relevant to the assessment year 1987-88. The delay was condoned under section 119(2B) of the Act by the competent authority and the assessing officer was directed to complete the assessment in relation to time-limit prescribed under the Act and another revised return was filed by the assessee on 31-3-1994, declaring loss at Rs. 26,50,915. The assessing officer, while passing the assessment order under section 143(3) of the Act, allowed unabsorbed depreciation to be carried forward to the extent of Rs. 24,17,869. However, he disallowed the brought forward losses and unbsorbed depreciation of earlier assessment years and their set off on the ground that no valid assessment had been made for the assessment year 1986-87.

The assessee, feeling aggrieved, preferred an appeal before the Commissioner(A) (in short, 'the Commissioner(A)'), wherein in ground No. 7, it had challenged the action of the assessing officer in not allowing set off of unabsorbed depreciation during the assessment year 1987-88 on the ground that the same is not allowed as the assessment for the year 1986-87 had not been completed. The Commissioner(A), however, partly allowed the appeal and directed the assessing officer to recalculate the depreciation by taking written down value determined as on 31-3-1985, and thereafter to calculate and allow the same for the assessment year in question and written down value should accordingly be re-determined for being carried forward to the succeeding year.

The assessee preferred further appeal to the Tribunal assailing the order of the Commissioner(A) regarding the carry forward of unabsorbed losses and disallowance of unabsorbed depreciation for the assessment years 1984-85 and 1985-86 during the assessment year 1987-88. The Tribunal, vide order dated 9-10-2001 allowed the appeal of the assessee and directed the assessing officer to allow the claim of carry forward of unabsorbed depreciation as well as unabsorbed losses subject to the period of limitation in respect of the unabsorbed losses.

The revenue had also filed an application under section 254(2) of the Act before the Tribunal on the ground that the issue regarding carry forward of business losses was not taken up by the assessee before the Commissioner(A) and, therefore, the issue decided by it did not emerge from the order of the Commissioner(A). The Tribunal, vide order dated 3-9-2003, rejected the application and observed that the point of unabsorbed business losses was raised by the assessee before the Commissioner(A) and the same was rejected by him and, thus, such issue arose from the order of the Commissioner(A) and it was justified in adjudicating the issue. The copy of the application filed before the Tribunal, the reply filed by the assessee and the order dated 3-9-2003, passed by it were allowed to be placed on record vide order dated 23-11-2004, passed in Civil Miscellaneous No. 22284-CII of 2004.

Shri Rajesh Bindal, learned counsel for the appellant, drew our attention to the provisions of sections 72, 80, 139(3) and 157 of the Act and contended that in the event of failure on the part of the assessee to file a valid return, no business loss can be carried forward and the Tribunal has, thus, erred in granting relief to the assessee. He submitted that the claim regarding business loss was never claimed before the Commissioner(A) and, therefore, the Tribunal was not justified in granting relief to the assessee regarding carry forward of business losses. Learned counsel further submitted that on the same analogy, even unabsorbed depreciation under section 32(2) of the Act could not be allowed to be carried forward and the Commissioner(A) and the Tribunal have wrongly allowed the same. He placed reliance on Sri Rajarathinam Transports (P) Ltd. v. CIT (1993) 199 ITR 203 (Mad) to augment his submission.

Shri H.N. Mehtani, learned counsel for the assessee, controverting the submissions of learned counsel for the appellant supported the orders of the Commissioner(A) and the Tribunal and submitted that in view of the decision of the Apex Court in CIT v. Virmani Industries (P) Ltd. (1995) 216 ITR 607 (SC), the Tribunal had rightly allowed set off and carry forward of unabsorbed depreciation and business losses.

We have thoughtfully considered the arguments of learned counsel for the parties and with their assistance have carefully perused the record and seen the case law.

The controversy raised in this appeal can be divided into two parts :

Firstly, whether in the facts and circumstances, the assessee who had not filed any valid return for the assessment year 1986-87 and the business loss, thus, had not been determined for the said assessment year, the assessee still would be held entitled to carry forward the same in the assessment year 1987-88. The second limb/aspect of the question is could the Tribunal grant relief on a ground regarding carry forward of unabsorbed business losses which was never taken by the assessee before the Commissioner(A).

Secondly, the question would be whether in the facts and circumstances, the unabsorbed depreciation could be allowed to be set off when no valid return for the assessment year 1986-87 was filed and, thus, there was no unabsorbed depreciation determined for carrying forward to assessment year 1987-88.

Now, adverting to the first issue, the relevant provisions need to be noticed :

'72. (1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and

(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :

Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :

Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and

(a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year ; and

(b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.

(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.

(3) No loss (other than the loss referred to in the proviso to subsection (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

80. Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed within the time allowed under sub-section (1) of section 139 or within such further time as may be allowed by the Income Tax Officer, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.

139. (3) If any person who has not been served with a notice under sub-section (2) has sustained a loss in any previous year under the head 'Profits and gains of business or profession' or under the head 'Capital gains' and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1) or by the thirty-first day of July of the assessment year relevant to the previous year during which the loss was sustained, a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).

157. When, in the course of the assessment of the total income of any assessee, it is established that a loss has taken place which the assessee is entitled to have carried forward and set off under the provisions of sub-section (1) of section 72, sub-section (2) of section 73, sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A, the assessing officer shall notify to the assessee by an order in writing the amount of the loss as computed by him for the purposes of sub-section (1) of section 72, sub-section (2) of section 73, sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.'

Section 72 of the Act deals with carry forward and set off of business loss. It provides that where the net result of the computation under the head 'Profits and gains' of business or profession is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year subject to other provisions of Chapter VI. In sub-section (2) effect is to be given to the provisions of section 72 over any allowance or part thereof under sections 32(2) and 35(4) to be carried forward. Under sub-section (3), the period for which loss can be carried forward is eight years.

The mandate under section 80 is that the losses under sections 72(1), 73(2), 74(1), 74(3) and 74A(3), if not determined in pursuance of a return filed, shall not be carried forward and set off.

Section 139(3) enacts that if the assessee who has sustained a loss under the head 'Profits and gains of business' or 'Capital gains' and claims to carry forward a loss, return can be filed in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and that all the provisions of the Act shall apply as if it were a return under sub-section (1).

Section 157 casts a duty upon the assessing, officer to notify to the assessee the amount of loss as computed by him when in the course of the assessment of the total income of the assessee, it is established that a loss has taken place which the assessee is entitled to have carried forward and set off under the provisions of sections 72(1), 73(2), 74(1) or 74(3) or 74A(3). In CIT v. Khushal Chand Daga (1961) 42 ITR 177 (SC), the Apex Court ruled that where the loss determined has not been notified to the assessee, the assessee can have it redetermined in a subsequent year.

An irresistible conclusion on the conjoint reading of the aforesaid provisions would be that a business loss cannot be carried forward unless it has been determined in pursuance of a return filed under section 139 of the Act. In order to be entitled to carry forward a business loss, the assessee must submit a return under section 139(3) of the Act and have an assessment made for the year in which he has incurred the loss. The assessing officer has to notify to the assessee by an order in writing the amount of the business loss as computed by him which the assessee is entitled to have carried forward. Where the business loss determined has not been notified to the assessee by the assessing officer, the assessee can have it determined in a subsequent year in which the business loss is to be set off.

It was an admitted fact as is apparent from a perusal of the order of the Commissioner(A) that no valid return for the assessment year 1986-87 had been made by the assessee and accordingly no assessment could be made and the business losses could not be notified to the assessee. Once it is established that no valid return had been filed by the assessee for the assessment year 1986-87, the assessee cannot be allowed to set off the business losses of earlier years during the assessment year 1987-88. The Tribunal, thus, clearly erred in allowing set off of business losses for earlier assessment years 1984-85 and 1985-86 during the assessment year 1987-88.

Once it is concluded that the Tribunal was in error in allowing set off of business losses for earlier assessment years, the second limb of this point whether the same can be allowed to be agitated before the Tribunal especially when it was never raised by the assessee before the Commissioner(A), becomes academic only and is being left open in the present case.

Now adverting to the second issue regarding set off of unabsorbed depreciation, it would be relevant to reproduce section 32(2) of the Act. The same reads as under :

'Where, in the assessment of the assessee or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners, full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.'

A reading of section 32(2) of the Act makes it clear that a carried forward unabsorbed depreciation allowance is deemed to be part of and stands on the same footing as current depreciation, i.e., in the assessment of the assessee, if full effect cannot be given to any allowance in any previous year owing to there being no profits or gains chargeable for that previous year, the allowance or part of the allowance to which effect has not been given, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of the said allowance. There is no time limit provided under section 32(2) of the Act for carry forward of unabsorbed depreciation to any subsequent year. The apex court in CIT v. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 (SC), has held that unabsorbed depreciation of past years had to be added to depreciation of the current year and the aggregate unabsorbed and current year's depreciation had to be deducted from the total income of the assessment year.

In Virmani Industries (P) Ltd.'s case (1995) 216 ITR 607 (SC), the assessee was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The assessee had stopped the business in that year and had let out the factory on hire. Ten years later, i.e., in the previous year relevant to the assessment year 1965-66, the assessee started the business of manufacture of steel pipes and that business used part of the old machinery which was being used for soap and oil. It was during the assessment proceedings relating to the assessment year 1965-66, the assessee claimed that the unabsorbed depreciation should be brought forward and set off against the profits of the new business in respect of it pertained to the old machinery utilised in the new business. The apex court ruled that a depreciation allowance which remained unabsorbed could be set off against the income for the accounting period relevant to the assessment year 1965-66.

The Madras High Court in Sri Rajarathinam Transports' case (1993) 199 ITR 203 (Mad), was dealing with a case relating to the assessment year 1965-66. The brief facts are that the assessee, who was a private limited company claimed that unabsorbed depreciation totalling Rs. 78,984 in respect of the assessment years 1960-61 to 1964-65 should be allowed to be set off in the assessment year 1965-66. The assessing officer observed that the unabsorbed depreciation had not been determined for the purpose of being carried forward and set off and, therefore, unabsorbed depreciation of the assessment years 1960-61 to 1964-65 could not be allowed to be set off from income of the assessment year 1965-66. The High Court held that in the absence of specific orders of the assessing authority determining the depreciation not only for the purpose of assessment, but also for its carry forward from assessment year to assessment year the assessee cannot be permitted to claim set off of unabsorbed depreciation for the assessment year 1965-66.

After giving our thoughtful consideration, we are unable to accept the view as laid down by the Madras High Court in Sri Rajarathinam Transports' case (1993) 199 ITR 203 (Mad). Under section 32(2) of the Act, the unabsorbed depreciation of earlier previous years forms part of the current year's depreciation and thereafter allowance for depreciation is given from the current year's income. There is no such provision in section 72 of the Act by virtue of which business losses of earlier years shall form part of the current year's business losses and be allowed to be set off from current year's income. However, only the business losses of earlier years which are notified by the assessing officer are allowed to be carried forward and set off from the current year's income. Similarly, there is no provision under the Act which makes it mandatory for the assessee to file return for carry forward and set off of unabsorbed depreciation which is to be notified by the assessing officer as in the case of unabsorbed business loss. Thus, from a reading of the provisions of the Act, the distinction between unabsorbed depreciation and unabsorbed business loss for the purposes of set off and carry forward is clear.

Therefore, the Tribunal was right in holding that the assessee is entitled to get unabsorbed depreciation of the earlier years 1984-85 and 1985-86 set off in 1987-88 even if no valid return for the assessment year 1986-87 had been filed by the assessee.

Resultantly, the appeal is partly allowed and it is held that in the absence of the assessee's filing a valid return and consequently, no order being passed by the assessing officer for set off and carry forward of business losses, for the assessment year 1986-87, the assessee could not be held entitled to set off and carry forward business loss during the assessment year 1987-88. However, the unabsorbed depreciation of the assessment years 1984-85 and 1985-86 is to be set off from the business income of the assessment year 1987-88 and the unabsorbed depreciation is to be carried forward to subsequent assessment years. The substantial questions of law reproduced above stand answered accordingly.

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