ITAT Kolkata Invalidates Section 143(1) Adjustment for Denying Loss Carry Forward Without Mandatory Pre-Adjustment Notice

Case Overview

The Income Tax Appellate Tribunal (ITAT), Kolkata Bench has delivered a significant judgment in the matter of ITO Vs United Provinces Sugar Company Pvt. Ltd., addressing the procedural safeguards that tax authorities must observe while processing income tax returns under Section 143(1) of the Income Tax Act, 1961. The Tribunal emphasized that adjustments made during return processing, particularly those involving denial of carry forward of business losses and unabsorbed depreciation, must comply with mandatory notice requirements stipulated under the first proviso to Section 143(1)(a) of the Act.

The judgment reinforces the principle that tax authorities cannot arbitrarily disallow legitimate claims during the summary assessment proceedings without affording the assessee an opportunity to be heard. This decision holds significant implications for corporate assessees who carry forward substantial business losses and depreciation across multiple assessment years.

Factual Background of the Dispute

United Provinces Sugar Company Pvt. Ltd., an unlisted public company engaged in sugar manufacturing operations, filed its return of income electronically on 11.10.2024 for the Assessment Year 2024-25. The assessee claimed a refund amounting to Rs.15,61,200/- after setting off brought forward business losses against the income reported for the relevant year.

The Central Processing Centre (CPC) issued an intimation under Section 143(1) of the Income Tax Act on 01.11.2024, determining a refund of Rs.16,22,410/-. The intimation allowed the set-off of brought forward losses against the current year's income as claimed in the original return. However, the CPC's order failed to recognize the schedule containing carry forward business loss of Rs.22,62,99,067/- and unabsorbed depreciation of Rs.31,68,32,220/- from earlier assessment years.

Historical Pattern of Acceptance

The assessee had consistently claimed and received acceptance for similar brought forward losses in previous assessment years. Documentary evidence demonstrated that:

  • For AY 2018-19, an intimation order dated 06.01.2020 under Section 143(1) accepted the brought forward losses
  • Subsequent intimation orders for AY 2019-20, AY 2020-21, and AY 2022-23 similarly acknowledged these losses
  • For AY 2021-22, when the tax department initially raised a demand of Rs.3,04,550/- against a claimed loss of Rs.23,25,181/-, the CIT(A) allowed the assessee's appeal and restored the loss carry forward
  • For AY 2023-24, the Assessing Officer accepted the set-off of brought forward losses in the intimation order without any objection

This historical acceptance of identical claims across multiple years strengthened the assessee's contention that the sudden disallowance lacked justification and proper procedural compliance.

Proceedings Before CIT(A)

Aggrieved by the CPC's action in denying the carry forward of losses despite allowing the current year's set-off, the assessee preferred an appeal before the Additional/Joint Commissioner of Income Tax (Appeals)-9, Delhi.

The assessee argued before the first appellate authority that:

  1. The CPC disallowed carry forward of business losses and unabsorbed depreciation without providing any reasoning or justification in the intimation order
  2. No show-cause notice under Section 143(1)(a) was issued before making the adjustment, violating the mandatory requirement under the first proviso
  3. The same losses had been consistently accepted and allowed in all previous assessment years without any adverse findings
  4. The adjustment was made without affording any opportunity of being heard to the assessee
  5. The action was void ab initio due to non-compliance with statutory procedural requirements

CIT(A)'s Findings and Decision

After examining the written submissions, statements of facts, and supporting documents furnished by the assessee, the CIT(A) accepted the contentions raised. The appellate authority observed that the disallowance of carry forward losses and unabsorbed depreciation was contrary to law, particularly when:

  • The identical losses had been accepted by tax authorities in preceding years
  • No reason or justification was provided in the impugned intimation order
  • The mandatory notice requirement under the first proviso to Section 143(1)(a) was not fulfilled
  • The intimation order itself had allowed set-off against current income, creating an internal inconsistency

The CIT(A) referred to the decision in Fortum SAR B.V. V. ADIT, CPC (ITA NO.2028/Del/2023, dated 27.06.2024), where the Delhi Tribunal had dealt with similar factual circumstances and held that adjustments by CPC without proper notice were legally unsustainable.

Consequently, the CIT(A) directed the Assessing Officer to: