Order of Tribunal in case of Allied Resins & Chemicals Ltd – vital points “set off of business loss in ninth year is permissible” seems to have been missed by learned counsel of assessee.

[C.A. DEV KUMAR KOTHARI]

Relevant references and links:

Sections 72, 73, 74, 74A and 154 of the Income-tax Act, 1961.

Allied Resins & Chemicals Ltd. Versus Assistant Commissioner of Income Tax Central Circle-IV, Kolkata 2012 (9) TMI 361 - ITAT, KOLKATA

Relevant portion of section 72:

Carry forward and set off of business losses.

72. ¹[(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, ²[* * *] 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 ;

(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 :]

Xxxx  - Proviso  and sub-section (2) are  not relevant for present purpose.

(3) No loss (other than the loss referred to in the proviso to sub-section (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.

Analysis:

On reading of the above provision we find that sub-section (1) provides for carry forward of business loss and its set off in subsequent years. Therefore, the following aspects are covered in sub-section (1):

Determination of   business loss which is eligible for set off under section 71,

Determination of balance of business loss after set off against incomes, under section 71,

Carry forward of business loss to subsequent year for set off,

Set off of business loss brought forwarded from earlier year,

Further carry forward of balance of loss which could not be set off, to yet subsequent year for set off.

Therefore on reading of sub-section (1) we find that the loss which is carried forwarded is to be set off in subsequent year or years as the case may be.  This is clear from the use of the sentence “… shall be carried forward to the following assessment year and so on ..”.  Even otherwise, carry forward is to be with the purpose of set off in future. If a set off is not permissible, then there will be no purpose of carry forward.

If we restrict our reading to sub-section (1) the impression will be that there is no limitation for carry forward.  However, we find a limitation for carry forward vide sub-section (3).

As per sub-section (3), there is a limitation of period for carry forward of business loss. This is clear from the following words found in sub-section (3):

“(3) No loss …. 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”.

Here we find that the limitation is on carry forward, and the limitation is of eight assessment years immediately succeeding the assessment year for which the loss was first computed. Thus there must be eight occasions of eight assessment years, subsequent to the year in which loss was first computed, and business loss or balance of business loss, as the case may be  can be carried forward in eight assessment years subsequent to the year in which loss was computed or the year to which the business loss relates.

From above provision we find that there is reference to two types of years:

Assessment year for which the loss was first computed- let us call it base year or Zero year.

Eight assessment years immediately succeeding the assessment year for which the loss was first computed (that is base year referred in (a).

Limitation:

Limitation is for carry forward.

On reading of the provision we find that the limitation is of eight years immediately succeeding the assessment year for which the loss was first computed (that is base year referred in (a). Thus there can be eight occasions of carry forward for eight assessment years immediately succeeding the assessment year for which the loss was first computed (that is base year referred in (a).

The limitation is not for “carry forward and set off”:

On reading of the provision we find that the limitation is not for “carry forward and set off”, rather the limitation is only for carry forward.

Loss once carried forward can naturally be set off in the subsequent year, and it is specifically provided also in sub-section (1) that the loss carried forwarded is to be set off in subsequent year or years.

If loss which is brought forwarded is not set off it can further be carried forward if law so permit. In case loss cannot be fully set off and cannot further be carried forward due to limitation, then only the loss which is not set off and cannot also be carried forward further to next year, then balance of such loss , which remain unadjusted, will lapse.

The limitation is not like shall not be carried forward beyond eight years as was found in respect of long-term capital loss earlier which was not carried forward beyond four years.

Loss considered by Tribunal:

In case reported as Allied Resins & Chemicals Ltd. Versus Assistant Commissioner of Income Tax Central Circle-IV, Kolkata 2012 (9) TMI 361 - ITAT, KOLKATA , the Tribunal considered loss of AY 1998-99 which was originally allowed to be carried forward in AY 2006-07 and was also set off against business income of AY 2007-08. However, the AO withdrew such set off in AY 2007-08 by way of rectification order under section 154. Before the Tribunal contentions raised were only in relation to limitations for passing order under section 154. And the contention that loss was correctly set off in AY 2007-08 (ninth year)  after having been carried forward in AY 2006-07 (eight time) was not at all raised.

The Tribunal has confirmed such withdrawal of set off as a rectifiable mistake apparent from record. This is because the Tribunal found that the loss of AY 1998-99 could be set off only up to AY 2006-07 and not in AY 2007-08. 

It seems that the provisions of S. 72 were not properly put forth by counsel and thus could not be considered by the Tribunal.

Analysis of loss in case before Tribunal:

Let us see the position of determination, carry forward and set off permissible with help of the following table:

Particulars	Assessment year	Nature of year	Remarks
Loss determined and c/f	1998-99 (0)	Base year that is the year in which loss is first computed and carried forward to first year subsequent to the base year.
Loss further c/f	1999-2000 (1)	First year subsequent to base year.
Loss further c/f	2000-2001 (2)	Second year subsequent to base year.
Loss further c/f	2001-2002 (3)	Third year subsequent to base year.
Loss further c/f	2002-2003 (4)	Fourth year subsequent to base year.
Loss further c/f	2003-2004 (5)	Fifth year subsequent to base year.
Loss further c/f	2004-2005 (6)	sixth year subsequent to base year.
Loss further c/f	2005-2006 (7)	Seventh year subsequent to base year.
Loss further c/f	2006-2007 (8)	Eighth   year subsequent to base year.
Loss b/f from eighth year subsequent to base year can be set off but cannot be c/f further for ninth time subsequent to the base year.	2007-2008 (9)	Ninth year subsequent to base year.

Therefore, on proper consideration of the provisions of section 72 it seems that the loss of AY 1998-99 was correctly setoff in AY 2007-08 after it was carried forward for eighth time, subsequent to the original year, in assessment year in AY 2006-07.

However, before the Tribunal the above contention was not raised, and therefore Tribunal held that the mistake was apparent from records.

From the order of CIT(A):

The learned CIT(A) has observed that “… subsequently it was found by the AO that as per the provision of section 72(3) of the Act time available for set off is only eight years and which has already lapsed. Accordingly, the necessary rectification was carried out”.

Observations:

It appears that the learned AO and the CIT(A) both have somehow read the provision in a manner as if the limitation is provided for set off. As discussed earlier, the limitation is for carry forward only and the law contemplates that the loss which is carried forward, can be set off.