2014 (1) TMI 802 - AT - Income Tax

Carry forward and set off of unabsorbed depreciation of preceding years - Held that - Following CIT v. Virmani Industries (P.) Ltd. 1995 (10) TMI 1 - SUPREME Court - As per section 32(2) - The depreciation allowance for the current year to which full effect cannot be given due to the paucity of profit has been referred to as Unabsorbed depreciation allowance - This is so that unabsorbed depreciation allowance for the assessment years 1997-98 to 2001-02 strictly comes under section 32(2) with a special name and character of Unabsorbed depreciation allowance changing its situation from section 32(1) - The purpose of legal fiction in section 32(2) is to make the unabsorbed carried forward depreciation partake the same character as the current depreciation in the following year - The object of the provision is to treat the whole or part of the depreciation allowance under section 32(1) which could not be adjusted in the first year as the current depreciation under section 32(1) in the second year and so on - Decided in favour of assessee.

Summary

Issues Involved
1. Disallowance of carry forward of unabsorbed depreciation under section 32(2) of the Income Tax Act.

Detailed Analysis

Disallowance of Carry Forward of Unabsorbed Depreciation under Section 32(2) of the Act

1. Grounds of Appeal: The assessee challenged the order of the CIT(A)-15, Mumbai, which disallowed the carry forward of unabsorbed depreciation from assessment years (AY) 1995-96 to 2001-02. The assessee argued that the provisions of section 32(2) as applicable from April 1, 2002, were not properly appreciated by the CIT(A).

2. Assessee's Argument: The assessee contended that the issue was covered by the decision of the Co-ordinate Bench in the case of Milton's Pvt. Limited vs. CIT (ITA No. 2019/Mum/2012) and the Gujarat High Court decision in General Motors India P. Ltd. vs. Dy. CIT (354 ITR 244), which allowed the carry forward of unabsorbed depreciation beyond the eight-year period specified in the earlier provisions.

3. Decisions Relied Upon by Assessee: The assessee also relied on several other judicial pronouncements, including:
- Hindustan Unilever Ltd. vs. Addl. CIT (22 ITR (Trib) 737)
- Dy. CIT vs. M/s. Bisleri Sales Ltd. (151 TTJ 285)
- Asst. CIT vs. ECIL Ltd. (56 SOT 237)
- Dy. CIT vs. Times Guaranty Ltd. (40 SOT 14)

4. Revenue's Argument: The Departmental Representative (DR) relied on the orders of the lower authorities, which had disallowed the carry forward and set off of unabsorbed depreciation for AYs 1995-96 to 2001-02 against the business income of AY 2008-09.

5. Tribunal's Analysis:
- The Tribunal considered the rival contentions and reviewed the orders of the lower authorities. It referred to the Gujarat High Court's decision in General Motors India P. Ltd., which held that the unabsorbed depreciation up to AY 2002-03 could be carried forward indefinitely.
- The Tribunal also noted the ITAT Special Bench decision in Times Guaranty Ltd., which clarified that unabsorbed depreciation from AYs 1997-98 to 1999-2000 should be dealt with under the provisions of section 32(2) applicable for those years and could be set off against the income under the head 'profits and gains of business or profession'.

6. Legal Interpretation:
- The Tribunal elaborated on the legislative amendments to section 32(2) over different periods. Initially, unabsorbed depreciation could be carried forward indefinitely. However, the Finance (No. 2) Act, 1996, restricted this period to eight years.
- The Finance Act, 2001, restored the provision to allow indefinite carry forward of unabsorbed depreciation, effective from AY 2002-03 onwards.
- The Tribunal emphasized the prospective nature of the substantive provision, meaning the amended section 32(2) applied from AY 2002-03 onwards.

7. Conclusion: The Tribunal concluded that the lower authorities erred in disallowing the set-off of unabsorbed depreciation from AYs 1995-96 to 2001-02 against the business income of AY 2008-09. The appeal of the assessee was allowed, permitting the carry forward and set off of the unabsorbed depreciation as claimed.

8. Order Pronouncement: The order was pronounced in the open court on January 15, 2014. The appeal of the assessee was allowed, and the disallowance by the CIT(A) was overturned.

Summary
The Tribunal allowed the appeal of the assessee, holding that unabsorbed depreciation from AYs 1995-96 to 2001-02 could be carried forward and set off against the business income of AY 2008-09. This decision was based on the interpretation of section 32(2) of the Income Tax Act, as amended by the Finance Act, 2001, which allowed indefinite carry forward of unabsorbed depreciation from AY 2002-03 onwards. The Tribunal relied on various judicial precedents, including the Gujarat High Court's decision in General Motors India P. Ltd. and the ITAT Special Bench decision in Times Guaranty Ltd.