Appeal

Ceiling for filing of appeal by Revenue — If CBDT Circular clarifies that the connotation of “tax effect” also takes in its ambit the “notional tax effect” in case of losses, it would be operative prospectively — as held by DelHC in CIT v Continental Construction Ltd — In favour of: The Assessee ; ITA Nos. 60 and 61 of 2008

These appeals pertain to AYs 1992–1993 and 1993–1994 and in both these years, the assessee had filed the return with no actual tax effect. There were losses in the earlier years, which were brought forward. The AO while completing the assessment had disallowed the amount paid as fee for service, which addition is deleted by the ITAT. An appeal was filed by revenue. The submission is that even after the disallowance of the aforesaid expenditure by the AO, the assessment is completed at loss and, therefore, there was no “tax effect”. The assessee contended that the appeal was not maintainable as the tax effect was nil and as per the circular issued by the CBDT dated 24 October 2005, appeals could be filed by the Department against the order of the Income Tax Appellate Tribunal to the High Court under s 260A of the Income Tax Act only if the tax effect exceeded Rs 4 lacs. The clarification which clarified that even in loss cases, “notional tax effect” is to be taken into account was issued on 15 May 2008 and was operative only prospectively and as the appeal was filed in December 2007, said clarification will not be applicable.

The issue is whether when CBDT Circular clarifies that the connotation of “tax effect” also takes in its ambit the “notional tax effect” in case of losses, it would also be operative prospectively or would it apply to pending appeals also.

The issue is as to how tax effect is to be calculated and not with the minimum limit of tax effect prescribed in the circular simpliciter. When it comes to the meaning that is to be assigned to the “tax effect” and the modified manner/formula is prescribed in OM dated 15 May 2008, such a circular on this aspect has to be treated having prospective application, more so when para 11 thereof specifically so provides. It would be moreso when the same is to the prejudice of the assessee. Therefore, these appeals are not maintainable and are dismissed on this ground alone

Decided on: 30 March 2011