Direct Tax Alert

BACKGROUND

Section 80 of the Income-tax Act, 1961 (IT Act) restricts the carry forward of losses if the return of loss is not filed under section 139(3) of the IT Act. As per section 139(3) of the IT Act, any person who has incurred loss under the head ‘Profit and Gains from Business and Profession’ or ‘Capital Gains’ and claims that such loss should be carried forward, is required to file the tax return within the time prescribed under section 139(1) of the IT Act¹ and thereupon all the provisions of IT Act shall apply as if it was a return under section 139(1) of IT Act.

Further, section 139(5) of the IT Act provides for revising the tax return if the taxpayer discovers any omission or wrong statement in the tax return filed under section 139(1) of the IT Act. A situation may arise wherein the original tax return filed is for positive income, but a loss is claimed in the revised tax return. In such a situation, can such loss be carried forward or not? Recently, the Delhi Tax Tribunal² (Tribunal), had to examine a similar situation i.e., whether the taxpayer is eligible to claim carry forward of long-term capital loss (LTCL) by way of revised return when the original tax return did not contain any loss.

We, at BDO India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

Taxpayer, an investment holding company, was set up to acquire and hold shares of NDTV Limited and its group companies.
It filed its original tax return declaring positive total income. The same was selected for scrutiny proceedings by the tax officer. While the proceedings were ongoing, the taxpayer filed a revised tax return. In the said revised tax return, the taxpayer claimed to carry forward LTCL arising on account of the sale of shares.
The tax officer opined that such LTCL cannot be carried forward by observing that the claim for LTCL was not made in the original tax return which was filed under section 139(1) of the IT Act.
The tax officer also observed that in the original tax return, there is not even an iota of reference to any transaction involving any capital gains or capital loss. Further, the tax officer noted that as per section 139(3) of the IT Act, for entitlement of carry forward of losses, the loss return has to be necessarily filed within the time allowed for filing return under section 139(1) of the IT Act whereas in the instant case, the capital transactions resulting in loss has been claimed for the first time in the revised return which is filed beyond the time limit stipulated under section 139(1) of the Act. Accordingly, he denied the taxpayer’s claim to carry forward the LTCL.
Apart from this, the Tax Officer also denied the claim for expenditure against interest income.
First Appellate Authority confirmed the tax officer’s order. Aggrieved, the taxpayer filed an appeal before the Delhi Tax Tribunal.

Tribunal Ruling

The Delhi Tax Tribunal confirmed the order of the tax officer i.e. LTCL cannot be claimed by filing a revised tax return. While coming to this conclusion, the Delhi Tax Tribunal made the following observations:

The original return filed under section 139(1) of the IT Act does not refer to the existence of any capital loss at all. The loss has been claimed for the first time in the revised tax return beyond the time limit prescribed under Section 139(1) of the IT Act. The provision of Section 80 of the IT Act thus comes into play. The law codified thus is plain and concrete and does not admit to any ambiguity.
An altogether fresh claim of capital loss has been made in the revised return filed beyond the section 139(1) time limit. It is not a case of mere correction or modification in the existing claim of capital loss. The capital loss claimed when seen qua revised return filed under section 139(5) of the IT Act, the claim of carry forward thereof clearly does not pass the muster of law.
The impugned capital loss was not reported in the audited financial statement at all. The Profit and Loss account does not make any reference to such loss at all. It is not known how the loss has been accounted for in the books.
The loss claimed to have resulted but not reported appears incomprehensible from the perspective of rudimentary principles of accounting.
The basic details of the nature of capital loss and how such loss was been determined were also not placed despite the specific opportunity.
It is quite difficult to affirm that the omission or wrongful statement in the original return towards such colossal loss is sheer inadvertence, not deliberate or willful.
Reference was made towards the Hon’ble Supreme Court decision³ in the case of Kumar Jagdish Chandra Sinha wherein it was held that a revised return cannot be filed to cover up deliberate omission etc. in the original return.

With respect to the deduction of interest expenditure against interest income, Delhi Tax Tribunal held that in the absence of any live nexus between the expenditure and the corresponding income, the tax officer has rightly disallowed the claim of interest expenses having regard to the narrower scope of deductions eligible under Section 57(iii) of the IT Act.

BDO INDIA COMMENTS

Loss under the head ‘Profit and Gains from Business or Profession’ and ‘Capital Gain’ can be carried forward only if the tax return is filed within the prescribed time. This ruling harps upon that if the loss is not mentioned in the original tax return, then the same cannot be carried forward. It may be noted recently Pune Tax Tribunal in the case of Bilcare Limited⁴ has observed that where a return of income was filed within the due date prescribed under 139(1) of the IT Act showing a loss, additional loss determined by the tax office during the course of assessment proceedings on assessment in the assessment order can be carried forward and set off against the subsequent profits. It is imperative to note that Delhi Tax Tribunal has not referred to the Pune Tax Tribunal decision. With the judiciary divided on whether loss can be claimed by filing a revised tax return, it is advisable to carry out a detailed analysis before making a fresh claim of carry forward of loss by way of filing a revised tax return.

¹ As per section 139(1) of the IT Act every company and every person (other than company) if his total income exceeds the maximum amount not chargeable to tax is required to file tax return on or before the specified due date.