Facts of the case
The assessee company was engaged in the business of manufacturing of MS Angles, Channels, Round bars etc. It filed its ROI, declaring net loss of Rs.5797350/- computed after setting off the brought forward depreciation loss with short term capital gain on sale of wind mill in current year. Recording this reason on the ground, AO issued notice u/s 148. In response, assessee filed the return and submitted that carried forward depreciation loss should be treated as current year’s depreciation and the same should be allowable to adjust against current year capital gain which was rejected by AO on the ground that there is no such provision under Income tax Act which says to absorb carried forward depreciation from the current year capital gain and also there is no mentioning in section 71 and 72 of the act regarding the unabsorbed depreciation carried forward to be considered as current year depreciation. Assessment order disallowing the setting off of capital gain against brought forward depreciation loss was passed u/s 143(3) r.w.s. 147.
During review, on perusal of records, the ld. Commissioner found that the assessee has claimed depreciation on wind mill only upto A.Y. 2002-03. Since it is mandatory to claim depreciation, remaining depreciation ought to have been considered as claimed by the assessee after 01-04-2002. Treating the computation of capital gain on wind mill as erroneous and after recording that the Ld. A.O had committed an error by accepting such computation, he issued a show cause notice u/s 263 upon the assessee. In response, it was clarified by the assessee that short-term capital gain was computed adjusting depreciation only to the extent claimed in the return of income for earlier years. Ld. Commissioner not being satisfied with the explanation set aside the assessment order and directed the A.O. to re-compute the short term capital gain as per law.
The assessee filed the present appeal against the order of CIT passed u/s 263 of the Income tax. The grievance raised by the assessee was that Ld. CIT has erred in taking cognizance u/s 263 of the Act and setting aside the well reasoned order of the Assessing Officer.
Submission of Assessee
The Ld. Counsel of the assessee raised below submissions:-
- That the Ld. A.O. had re-opened the assessment in order to find out whether short-term capital gain can be adjusted against the brought forward depreciation loss. On examining the issue, A.O. has concluded that short-term capital gain computed by the assessee cannot be allowed to be set off, meaning thereby that Assessing officer has examined the computation of short-term capital gain and its adjustability. A.O. has taken a possible view on the computation of short-term capital gain, therefore, ld. Commissioner is not justified in taking cognizance u/s 263 of the Act.
- That the subject matter of the assessment proceedings was taken in appeal before the CIT(A) and ld. First appellate authority while examining the issue of adjustability of the STCG could have enhanced the computation of short-term capital gain because both these issues are inextricably linked to each other, therefore, interdiction provided in explanation (C) of Section 263 put an embargo on the power of Ld. Commissioner of Income Tax to take action on the issue which was subject matter of appeal before CIT(A).
- That in earlier assessment years too i.e, from 1997-98 to 2005-06, it offered net losses. In case, the view of the ld. Commissioner, even, if accepted, then, the situation would be that depreciation alleged to have not been claimed by the assessee in A.Y. 2003-04 and 2004-05 would only swell the losses in those two year and assessee would have a higher figure of losses to be carried forward to A.Y. 2005-06. The net result would be no addition, no tax liability. In that case, even if, order of Assessing Officer is erroneous, it is not prejudicial to the interest of revenue. Ld. Commissioner is not justified to take action u/s. 263 of the income tax act.
Contention of Revenue
Ld. DR relied on the order of CIT(A) and contented that after 01-04-2002, it was mandatory to claim depreciation in A.Y. 2003-04 and 2004-05 and accordingly W.D.V. of the wind mill to be worked out for calculating STCG.
Held by Tribunal
After going through section 263 and considering the broader principles to judge the action of CIT taken u/s 263 decided in various case laws, Hon’ble ITAT examine the fact of the present case and in view of the propositions of Ld. counsel of the assessee it was held that before considering any issue, whether set off to be allowed or not, it is but natural that ld. AO would first verify the amounts which can be set off with each other. The computation of short term capital gain is one of the components for verifying this factor, therefore, it suggests that ld. Assessing Officer has applied his mind on the figure of the short term capital gain computed by the assessee and only thereafter disallowed this set off. Where Ld. AO had taken a possible view in law after going through returns of the assessee for earlier years, Ld. Commissioner ought not to have replaced that possible view by his view.
In view of Ld. CIT-DR contention that computation of STCG was never the subject matter of the appellate proceedings it was held that section 251 provides that ld. CIT(A) while disposing an appeal shall have the power to confirm, reduce, enhance or annul the assessment. Further explanation appended to section 251 also authroises the commissioner to consider and decide any matter arising out of the proceedings notwithstanding that such matter was not raised before the Commissioner by the appellant. The computation of capital gain is linked with the ultimate set off, therefore he could have considered the ultimate amount required to be computed as a short-term capital gain. The source and the issue related to that source were subject matter of an appeal and therefore the interdiction available in explanation “C” appended with section 263, sub-section 1 would come in the way of Ld. Commissioner for taking action u/s. 263 against the assessee. The impugned order is not sustainable in view of the second proposition also.
The proposition of the assessee that the assessee had filed a return declaring loss for A.Y. 2003-04 and 2004-05 and this amount of depreciation, if thrust upon would further amplified the brought forward business loss. Therefore order of AO being erroneous is not prejudicial to the interest of revenue. The Hon’ble Karnataka High Court in the case of CIT vs D.G. Godwa has considered this aspect and observed that “the condition precedent for exercising the revisional power under section 263 of the Act is that the order under revision should not only be erroneous, but such erroneous order should result in prejudice to the interests of the Revenue. Mere error would not confer the jurisdiction to exercise the revisional power under section 263 of the Act.”
In this case, even if for the sake of argument, we also assume that ld. Assessing Officer has committed an error by not computing the true capital gain with the application u/s. 50(1) then also ultimately no prejudice has been caused to the revenue. Therefore, the impugned order is not sustainable in law. Appeal of assessee allowed.