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2025 (5) TMI 1421 - HC - Income TaxMaintainability 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 CONSIDERED
The core legal questions considered by the Court in this matter include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Determination of Tax Effect Threshold as per CBDT Circulars Relevant legal framework and precedents: The CBDT Circulars No. 05/2024 and No. 09/2024 prescribe the threshold tax effect limit of Rs. 2 crores for filing appeals before the appellate authorities. Paragraph 5.1 of Circular No. 05/2024 defines "tax effect" as the difference between tax on total income assessed and tax on income reduced by disputed issues, inclusive of surcharge and cess but excluding interest (except where interest chargeability is itself disputed). Court's interpretation and reasoning: The Court examined the computation of tax effect submitted by the Assessee, which showed a tax effect of Rs. 1,13,33,599/-, below the threshold of Rs. 2 crores. The computation was based on the notional addition of Rs. 3,80,62,759 (sum of loss converted into income and assessed income), with tax rates applied as per the assessment order (30% on business income and 15% on interest income), along with surcharge and cess. Key evidence and findings: The Court noted no dispute with the Assessee's tax effect calculation. The assessment order (paragraph 23) confirmed the total income assessed at Rs. 91,06,616/-, with the returned loss of Rs. 4,54,08,852/- fully wiped out by disallowance of expenses and additions. Application of law to facts: Applying paragraph 5.1 of the Circular, the Court held that the tax effect must be computed on the amount by which the returned loss is reduced plus the assessed income, amounting to Rs. 5,45,15,468/-. The resultant tax effect was below the Rs. 2 crore threshold. Treatment of competing arguments: The Revenue argued that the tax effect should be higher because losses from prior years, disallowed by the AO, should also be included. The Court rejected this, holding that the Circular's methodology does not contemplate inclusion of losses from prior years for which assessments have attained finality and have not been reopened. Conclusions: The Court concluded that the tax effect as per the Circular is below the threshold limit, thus the appeal is not maintainable on the ground of low tax effect. Issue 2: Inclusion of Disallowed Carry Forward Losses from Prior Years in Tax Effect Computation Relevant legal framework and precedents: The principle that losses from prior years cannot be disallowed without reopening those prior years' assessments, which have attained finality, is well established. The CBDT Circular does not require inclusion of such prior years' losses in tax effect computation. Court's interpretation and reasoning: The Court observed that the AO had noted disallowance of business losses of Rs. 56,40,20,407 from prior years but emphasized that these assessments have attained finality and have not been reopened. The Circular's paragraph 5.1 does not mandate inclusion of these losses for tax effect calculations. Key evidence and findings: The AO's observation on disallowance of prior years' losses was found to be extraneous to the tax effect calculation under the Circular. The Court noted that reopening prior years' assessments is a separate legal process and cannot be assumed for the purpose of tax effect computation. Application of law to facts: The Court applied the legal principle that finalized assessments cannot be disturbed and the Circular's clear instructions, to hold that prior years' losses cannot be factored into the tax effect computation. Treatment of competing arguments: The Revenue's argument that the tax effect should include the impact of disallowing prior years' losses was rejected as legally unsustainable and contrary to the Circular's methodology. Conclusions: The Court held that the carry forward losses from prior years must be excluded from the tax effect computation, reinforcing the finality of assessments and the procedural safeguards against reopening. 3. SIGNIFICANT HOLDINGS The Court held that:
Applying this principle, the Court concluded that the tax effect in the present case is below the Rs. 2 crore threshold, and thus the appeal is not maintainable. The Court further established that losses from prior assessment years, which have attained finality and have not been reopened, cannot be included in the tax effect computation. The Court also emphasized the principle of finality of assessments by stating:
Accordingly, the Court dismissed the appeal and allowed the application filed by the respondent, directing the Revenue to accept the ITAT's decision as final.
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