Tax effect for revenue appeals, when income is enhanced from a returned loss, is calculated on the returned loss plus assessed income,

Tax effect for revenue appeals, when income is enhanced from a returned loss, is calculated on the returned loss plus assessed income, excluding uncarried forward earlier year losses.

Issue:

How to determine the “tax effect” for the purpose of the monetary limit for filing appeals by the revenue under Section 268A of the Income-tax Act, 1961, especially when the Assessing Officer (AO) has enhanced the assessee’s income from a returned loss, and whether the tax effect of earlier years’ losses that were not permitted to be carried forward should be included in this calculation.

Facts:

• The case pertains to Assessment Year 2018-19.
• The issue involves the interpretation of CBDT Circular No. 5 of 2024 dated March 15, 2024, and Circular No. 9 of 2024 dated September 17, 2024, regarding monetary limits for filing appeals.
• The specific scenario is where the Assessing Officer had enhanced the income of the assessee to reflect an assessed income, implying the assessee might have originally filed a return showing a loss.

Decision:

The court held in favor of the assessee. It ruled that:

1. In terms of CBDT Circular No. 5/2024 and Circular No. 9/2024, where the Assessing Officer had enhanced the income of the assessee to reflect assessed income, the tax effect would be determined on the amount of returned loss plus the assessed income.
2. Therefore, the tax effect of losses of earlier years which were not permitted to be carried forward was not to be taken into account to determine the overall tax effect for the purpose of filing an appeal by the revenue.

Key Takeaways:

• Purpose of Section 268A and CBDT Circulars: Section 268A empowers the CBDT to issue instructions to restrict the filing of appeals by income-tax authorities based on monetary limits. The circulars (No. 5/2024 and No. 9/2024 in this context) lay down these specific monetary thresholds. The objective is to reduce frivolous litigation for small amounts and allow the department to focus on cases with higher tax implications.
• Calculation of “Tax Effect” for Enhanced Income from Loss: When an assessee declares a loss, but the AO makes additions that convert the loss into positive income, the “tax effect” for appeal purposes is calculated by adding the amount of the returned loss to the assessed income. This effectively represents the total positive adjustment made by the AO.
  • Example: If returned loss is Rs. 10 lakhs and assessed income is Rs. 5 lakhs, the “tax effect” relevant amount would be Rs. 10 lakhs (loss) + Rs. 5 lakhs (assessed income) = Rs. 15 lakhs. The tax on this Rs. 15 lakhs would then be compared with the monetary limit.
• Exclusion of Unpermitted Carried Forward Losses: The ruling specifically clarifies that losses of earlier years which were not permitted to be carried forward (i.e., not allowed as a deduction in the current year’s assessment) are not to be included in determining the current year’s “tax effect” for appeal purposes. This is because these unabsorbed losses do not represent a “tax effect” pertaining to the current year’s dispute or assessment outcome. They are separate issues.
• Focus on Disputed Amount’s Impact: The intent of the circulars is to measure the tax at stake directly from the additions or disallowances made in the assessment year under consideration. Unabsorbed losses from previous years, even if disallowed, are conceptually distinct from the current year’s assessed income enhancement.
• Facilitating Appeal Management: This clarification helps in streamlining the process for tax authorities by providing a clear methodology for calculating the “tax effect” in complex scenarios involving losses, ensuring that appeals are filed only in genuinely high-stake cases as per policy.