Losses of Previous AY not to be Included while Computing Tax Effect Under CBDT Circular: Delhi HC [Read Order]

In a ruling clarifying the interpretation of CBDT ( Central Board of Direct Taxes ) circulars governing income tax appeals, the Delhi High Court has ruled that losses assessed in previous assessment years (AYs) and disallowed for carry-forward cannot be included while computing the “tax effect” for the purpose of determining the maintainability of an appeal.

The Court dismissed an appeal filed by the Commissioner of Income Tax (International Taxation) against SIS LIVE, citing the appeal’s failure to meet the monetary threshold prescribed under CBDT Circulars No. 05/2024 and 09/2024.

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The respondent-assessee had filed an application under CBDT Circular No. 09/2024, praying for dismissal of the appeal on the ground of low tax effect. The tax effect, as computed by the assessee, amounted to ₹1.71 crore, well below the ₹2 crore limit required for maintainability of appeals before the High Court as per the prevailing CBDT norms.

The Revenue, however, sought to inflate the tax effect by including the tax attributable to losses of ₹30.73 crore from previous assessment years that were disallowed by the Assessing Officer (AO). It argued that the disallowance of brought-forward losses contributed to the overall tax impact of the order and should be considered part of the tax effect.

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The High Court rejected this contention. Referring to paragraph 5.1 of CBDT Circular No. 5/2024, the Court held that the mechanism prescribed therein for calculating tax effect does not contemplate inclusion of taxes attributable to disallowed carry-forward losses from prior years.

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Justices Vibhu Bahkru and Tejas Karia and  that there was no legal basis to include observations related to prior year losses, especially when those years had already attained finality and were not subject to reopening. The bench added that even if such losses were discussed in the assessment order, they did not translate into actual additions to the income of the current year for the purpose of tax effect computation.

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Consequently, the Court held that the tax effect in the present case was below the prescribed monetary limit, and accordingly dismissed the appeal, upholding the decision of the Income Tax Appellate Tribunal (ITAT) in favour of the assessee.

To Read the full text of the Order CLICK HERE

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