2025 (5) TMI 1299 - AT - Income Tax

Disallowing set-off of brought forward unabsorbed depreciation against the income from other sources - HELD THAT - As brought forward unabsorbed depreciation needs to be added to current year depreciation and is treated as current depreciation loss. Once it takes the colour of current year depreciation then it becomes eligible for set-off against other income as provided in section 72(1) of the Act. The above provisions is squarely applicable in the facts of the instant case and therefore the claim of the assessee of setting-off of unabsorbed depreciation brought forward from preceding year against the current year income from other sources is valid and deserves to be allowed. CIT(A) is set-aside. Effective grounds of appeal raised by the assessee are allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this appeal is whether the brought forward unabsorbed depreciation from previous assessment years can be set off against income from other sources in the current assessment year. More specifically, the issue is whether unabsorbed depreciation, which is a form of business loss, can be adjusted against income under a different head (income from other sources) rather than income from business or profession, as per the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Whether unabsorbed depreciation brought forward from previous years can be set off against income from other sources in the current year.

Relevant Legal Framework and Precedents:

The primary statutory provisions relevant to this issue are sections 32(2) and 72(1) of the Income Tax Act, 1961. Section 32(2) deals with the treatment of unabsorbed depreciation, allowing it to be carried forward and added to the depreciation allowance of subsequent years if it cannot be fully utilized due to insufficient profits or gains. Section 72(1) restricts the set-off of carried forward losses, including unabsorbed depreciation, to profits and gains of any business or profession only.

Precedents cited by the assessee include judgments from the Hon'ble Bombay High Court and the Hon'ble Gujarat High Court, which distinguish unabsorbed depreciation from other business losses, asserting that unabsorbed depreciation can be carried forward indefinitely and may be set off against income from other sources as well.

Court's Interpretation and Reasoning:

The Tribunal carefully examined the provisions of section 32(2), which mandates that unabsorbed depreciation not allowed in a previous year is to be added to the depreciation allowance of the following year, effectively converting it into current year depreciation allowance. The Tribunal reasoned that once the brought forward unabsorbed depreciation is added to the current year's depreciation allowance, it assumes the character of current year depreciation loss.

Consequently, the Tribunal held that the set-off of this adjusted depreciation loss should not be restricted to business income alone. Instead, it can be applied against income from other sources, as the loss is now treated as a current year allowance. This interpretation diverges from the view of the lower authorities, including the CIT(A), who relied on section 72(1) to restrict the set-off only to business income, thereby disallowing the claim.

Key Evidence and Findings:

The assessee filed returns for the relevant years showing losses under business and income under other sources. The unabsorbed depreciation amounts carried forward from AY 2018-19 and AY 2019-20 were substantial. The assessee claimed set-off of unabsorbed depreciation against income from other sources for AY 2021-22, which was denied by the CPC and confirmed by the CIT(A).

The Tribunal found the lower authorities' reliance on section 72(1) misplaced in light of the specific provisions of section 32(2), which effectively transforms unabsorbed depreciation into current year depreciation allowance, thereby permitting set-off against income from other sources.

Application of Law to Facts:

Applying the legal provisions, the Tribunal concluded that the unabsorbed depreciation carried forward is to be treated as depreciation allowance of the current year under section 32(2). This allowance, being current year depreciation, is not restricted by section 72(1) in terms of set-off against income heads. The assessee's claim to set off the unabsorbed depreciation against income from other sources, therefore, stands on a sound legal footing.

Treatment of Competing Arguments:

The lower authorities and the Revenue argued that section 72(1) confines the set-off of carried forward business losses, including unabsorbed depreciation, to business income only, and hence disallowed the claim. The Tribunal rejected this argument by emphasizing the specific mechanism under section 32(2) that recharacterizes unabsorbed depreciation as current year allowance, thus permitting wider set-off.

The assessee's reliance on judicial precedents distinguishing unabsorbed depreciation from business loss and allowing its set-off against other income was found persuasive and consistent with the statutory scheme.

Conclusions:

The Tribunal concluded that the denial of set-off of brought forward unabsorbed depreciation against income from other sources was erroneous. The claim of the assessee is valid and deserves to be allowed. The findings of the CIT(A) and the CPC were set aside accordingly.

3. SIGNIFICANT HOLDINGS

"From perusal of the above provisions, in our considered view, brought forward unabsorbed depreciation needs to be added to current year depreciation and is treated as current depreciation loss. Once it takes the colour of current year depreciation then it becomes eligible for set-off against other income as provided in section 72(1) of the Act."

"The above provisions is squarely applicable in the facts of the instant case and, therefore, the claim of the assessee of setting-off of unabsorbed depreciation brought forward from preceding year against the current year income from other sources is valid and deserves to be allowed."

Core principles established include the interpretation that unabsorbed depreciation carried forward under section 32(2) is not a mere business loss but a current year allowance, thereby permitting set-off against income from other sources, notwithstanding the general restrictions under section 72(1).

The final determination was to allow the appeal of the assessee, permitting the set-off of brought forward unabsorbed depreciation against income from other sources for the assessment year 2021-22.

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