ITAT Bangalore Overturns Disallowance of Brought Forward Losses: Timely Filing in Originating Year is Crucial, Not the Preceding Year
The mechanics of carrying forward and setting off business losses under the Income Tax Act 1961 often become a fertile ground for litigation, particularly when procedural lapses intersect with computational errors. In a highly significant judicial pronouncement, the Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) recently adjudicated on a critical matter involving the interpretation of Section 80 concerning the carry forward of business losses.
The case, Chandrashekar Hemanth Vs ITO, pertaining to the Assessment Year (AY) 2017-18, underscores a fundamental legal principle: the eligibility to carry forward and set off a business loss is strictly contingent upon the timely filing of the income tax return in the specific year the loss was originally incurred, not in the subsequent or immediately preceding assessment years.
This comprehensive analysis delves into the factual matrix, the statutory framework, the procedural anomalies committed by the revenue authorities, and the final judicial reasoning that led the Tribunal to restore the assessee's legitimate claim for loss set-off.
Factual Matrix of the Dispute
The assessee in the present appeal is an individual engaged in the hospitality sector, operating a hotel business under the trade name "Pleasant Stay Inn". For the Assessment Year 2017-18, the assessee filed the return of income on 28/03/2018, declaring a total income of ₹4,64,440.
Subsequently, the assessee's case was flagged and selected for limited scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism. The primary objective of this scrutiny was to examine and verify substantial cash deposits reflected in the assessee's bank accounts during the relevant financial year. Consequently, statutory notices under Section 143(2) and Section 142(1) of the Income Tax Act 1961 were issued to the assessee.
During the course of the assessment proceedings, the assessee took a cooperative stance and voluntarily offered an amount of ₹3,00,000 as unexplained money under Section 69A of the Act. However, the trajectory of the assessment took an unexpected turn when the Assessing Officer (AO) shifted focus away from the cash deposits and scrutinized the assessee's claim for the set-off of brought forward business losses.
The Assessing Officer's Erroneous Assumption
In the return of income for AY 2017-18, the assessee had claimed a set-off of brought forward losses amounting to ₹45,18,838. This claim had initially been accepted by the Central Processing Centre (CPC) during the preliminary processing of the return.
The AO, however, disallowed this entire claim. The foundation of the AO's disallowance rested on a procedural observation regarding the immediately preceding year. The AO noted that the assessee had filed the return of income for AY 2016-17 belatedly. Relying on a rigid and ultimately flawed interpretation of Section 80 of the Income Tax Act 1961, the AO concluded that since the return for the preceding year (AY 2016-17) was filed beyond the statutory due date, the chain of carry forward was broken, rendering the accumulated losses ineligible for set-off in AY 2017-18.
Aggrieved by this assessment order, the assessee escalated the matter to the Commissioner of Income Tax (Appeals) [CIT(A)] at the National Faceless Appeal Centre (NFAC). Unfortunately for the assessee, the CIT(A) mechanically upheld the AO's disallowance, reiterating the stance that the belated filing for AY 2016-17 inherently disqualified the losses from being carried forward, as they were purportedly not "determined" in accordance with the law.