2011 (7) TMI 39 - HC - Income Tax

Depreciation - Carry forward and set off of unabsorbed depreciation - whether the assessee can still be said to be in business or not - No doubt the hotel of the assessee was washed away and in that respect it can be said that it has not conducted any hotel business thereafter. However the Company does not cease to exist - once the Company is in existence the assessee can seek depreciation - Decided in favour of the assessee Regarding unabsorbed depreciation - When the depreciation allowance of a business of the assessment year is not absorbed by any other business of the same assessment year then the remaining unabsorbed depreciation allowance could be set off against the income under any other head that is assessable for the same assessment year - since the hotel was not in existence therefore the un-absorbed depreciation became part of the depreciation for the assessment year 1998-99 and now could not be set off against the income from other sources - the fact is that this was depreciation of the previous year and the Finance Minister in his speech clearly indicated that there was no substantial change and that the only difference was that now limitation of 8 years would be applicable - Decided in favour of the assessee

Summary

Issues Involved:
1. Whether depreciation on vehicles is allowable as a deduction against interest income when such income is chargeable under "other sources" as per Section 56 of the Income Tax Act.
2. Whether unabsorbed depreciation up to the assessment year 1996-97 can be carried forward and set off against income chargeable under any head in subsequent years, considering the amendments to Section 32(2) by the Finance (No.2) Act, 1996.

Issue-wise Detailed Analysis:

Issue 1: Allowability of Depreciation on Vehicles against Interest Income
The primary question was whether depreciation on vehicles could be deducted against interest income classified under "other sources" per Section 56 of the Income Tax Act, despite the provisions of Section 57. The Tribunal had previously allowed such depreciation, but the Revenue challenged this decision.

The High Court held that the assessee, despite not conducting hotel business after the hotel was washed away in floods, continued to exist as a company and thus was entitled to claim depreciation. The Court referenced judgments from the Madras High Court and Calcutta High Court, which supported the view that a company continues to exist as a juristic entity and must fulfill its obligations under the Companies Act. Consequently, the business was deemed ongoing, and the assessee could claim depreciation. The Court concluded that the Revenue's reliance on the first proviso of Section 32(2) was misplaced and ruled in favor of the assessee, allowing the depreciation deduction against interest income.

Issue 2: Carry Forward and Set Off of Unabsorbed Depreciation
The second issue involved whether unabsorbed depreciation up to the assessment year 1996-97 could be carried forward and set off against any head of income in subsequent years, considering the amendments to Section 32(2) effective from 1.4.1997. The Tribunal had held that the unamended provisions of Section 32(2) would apply, allowing the set-off against subsequent years' income, including income from other sources.

The High Court examined the amendments and the Finance Minister's speech during the amendment's introduction. The Court noted that the amendments were intended to be prospective, allowing cumulative unabsorbed depreciation as of 1st April 1997 to be set off against business profits or income under any other head for the assessment year 1997-98 and subsequent seven years. The Court referenced judgments from the Madras High Court and Delhi High Court, which supported this interpretation.

The Court concluded that the amendments provided that unabsorbed depreciation could be set off against business profits first and then against income under any other head, but only for eight years. The contention that the unabsorbed depreciation could not be set off against income from other sources because the hotel was not operational was rejected. The Court found no merit in the Revenue's argument and ruled in favor of the assessee, allowing the set-off of unabsorbed depreciation as per the unamended provisions.

Conclusion:
Both questions were answered in favor of the assessee and against the Revenue. The appeals were disposed of accordingly, with no costs awarded.