TMI Blog2010 (6) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... e set off of such brought forward unabsorbed depreciation allowance against income under the head `Income from other sources’, that cannot be accepted - Accordingly decided against the assessee - ITA Nos. 4917 & 4918/Mum/2008 - - - Dated:- 30-6-2010 - D. Manmohan Vice President N.V. Vasudevan Judicial Member J. R.S. Syal Accountant Member J. Appellant by : Shri Hemant J Lal Respondent by : Sh. K. Shivram JUDGMENT Per. S. Syal (AM) : The Hon ble President of the Income Tax Appellate Tribunal has constituted this Special Bench and posted the following question for our consideration and decision:- On the facts and circumstances of the case, whether the unabsorbed depreciation relating to A.Y. 1997-1998 to 1999-2000 is to be dealt with in accordance with the Provisions of Section 32(2) as applicable for A.Y. 1997-1998 to 1999-2000 as claimed by the revenue or the same has to be dealt with in accordance with the said provisions as applicable to A.Y. 2003-2004 and 2004-2005 as claimed by the Assessee? 2. These two appeals by the Revenue emanate from the common order passed by the Commissioner of Income-tax (Appeals) dated 5.5.2008 in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved, the assessee preferred appeals before the learned CIT (A) urging that unabsorbed depreciation determined in assessment year 1997-98 to 1999-2000 be allowed set off against income under the head Income from other sources . The learned CIT(A) observed that the A.O. had neither discussed the plea of the assessee about such set off nor had given any reason as to why such set off was not allowed. The assessee detailed the facts before the CIT(A) explaining that it had declared income of Rs.31,13,625 including bank interest of Rs.28,80,000 which was sought to be set off against brought forward losses including unabsorbed depreciation. It was put forth that on the Assessing Officer s questioning as to why the interest income be not treated as Income from other sources , the assessee did not raise any objection to the consideration of such income under the residual head, but claimed that unabsorbed depreciation be allowed set off against the income under the head Income from other sources . In the first appeal, the assessee also relied on the judgments of the Hon ble Supreme Court in the case of CIT Vs. Virmani Industries Private Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to period prior to assessment year 1997-98 which was sought to be set off against the income from house property and short term capital gains in assessment year 2002-2003 and the Tribunal, relying on the intention of the legislature as reflected from the speech of the Finance Minister, accepted the contention that such unadjusted depreciation could be set off against non-business income. He referred to the Form of income tax return applicable to companies in ITR No.6 in the assessment year 2009-2010. Referring to schedule BFL.A of the said Form, he contended that a separate column has been created for year-wise brought forward depreciation set off under the main head of Details of income after set off of brought forward losses of earlier years. Similar position was stated to be there in the relevant income-tax return Forms for companies as applicable to assessment year 2002-2003 onwards, which contained Schedule containing a separate column for brought forward depreciation set off. It was stated that if the intention of the legislature had been to treat unabsorbed depreciation for assessment years 1997-98 to 2001-2002 as part of current depreciation in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. To strengthen this proposition, he relied on the judgment of the Hon ble Madras High Court in Seshasayee Paper and Boards Ltd. Vs. CIT [(2003) 260 ITR 419 (Mad.)] . The next argument taken by the learned A.R. was that even if it was held that law of the year of loss was to be applied, then also unabsorbed depreciation should be set off against income from heads other than `Profits and gains of business or profession . He also argued that the expression profits and gains chargeable used in section 32(2) has been interpreted by the Hon ble Supreme Court in the case of Virmani Industries Private Limited (supra) as covering income from all heads. Taking strong assistance from this judgment, the learned A.R. argued that even going by the provisions of law as applicable in assessment years 1997-98 to 1999-2000 the assessee was entitled to set off the unabsorbed depreciation against interest income which was held to be falling under the head `Income from other sources . He also questioned the very action of the Assessing Officer in assessing interest income from bank under the head `Income from other sources . He submitted that the assessee was engaged in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: Provided that the business or profession for which the allowance was originally computed continued to be carried on by him in the previous year relevant for that assessment year : Provided further that the time limit of eight assessment years specified in Sub-clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation For the purposes of this clause, net worth shall have the meaning assigned to it in Clause (ga) of Sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2006) 103 ITD 198 (Chennai)(SB) the assessee sought to set off the unabsorbed depreciation relating to A.Y. 1997-98 against the income under the head capital gains in A.Y. 1999-2000. Repelling this stand, the Special Bench held that the unabsorbed depreciation relating to A.Y. 1997-98 cannot be set off against income under the head Capital gains in A.Y. 1999-2000 and the assessee can only claim carry forward of such unabsorbed depreciation for six more assessment years to be adjusted against the profits and gains from the business as per the provisions of section 32(2)(iii). It is noticed from the facts of the instant case we note that it is during this period, that is assessment years 1997-98 to 1999-2000 that the amount of unabsorbed depreciation allowance resulted, which could not be set off due to inadequacy of profits as per the relevant provisions and led to the present controversy. 11. At this juncture it will be befitting to note the provisions of section 32(2) prior to the amendment made by the Finance (No.2) Act, 1996 with effect from 1st April, 1997 (hereinafter called the first period ) as under:- (2) Where, in the assessment of the assessee, ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, states that where any allowance u/s.32(2) or 35(4) is to be carried forward, the effect shall first be given to the brought forward loss. In other words if there is a brought forward business loss as well as brought forward unadjusted depreciation of earlier years, then brought forward business loss shall have preference over the unadjusted depreciation for the purposes of set off against the business income of the succeeding year. It is so for the reason that a time limit has been enshrined for carry forward of brought forward business loss up to a period not more than eight assessment years. As against that the amount of brought forward unadjusted depreciation u/s.32(2) can go on for indefinite period for set off against the business income in the following years. Section 73 deals with losses in speculation business and provides that the unabsorbed speculation loss shall be carried forward to the succeeding years for not more than four assessment years immediately succeeding the assessment year for which the loss was first computed. The prescription of sub-section (3) of section 73 is similar to that of sub-section (2) of section 72 providing fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absorbed depreciation was to be treated as the depreciation allowance for the next year and so on until it was completely wiped out. Eventually when the matter came up consideration before the Hon ble Supreme Court it was noticed that from assessment year 1956-57 to 1965-66 there was a gap of about eight years in which the assessee was in receipt of income from house property only. Upholding the assessee s contention, the Hon ble Apex Court held as under:- However, what should have been done is this : the unabsorbed depreciation allowance relating to the asst. yr. 1956-57 should have been set off against the income (income from property) in the following year, i.e., in the following previous year (relevant to asst. yr. 1957-58) and if the income in that year was not sufficient to absorb the entire depreciation allowance so carried forward, it had to be carried forward to the next following year and so on. Only if some depreciation allowance still remained to be absorbed, it could have been set off against the total income for the asst. yr. 1965-66. It is true that the question which was referred to the Tribunal under s. 256(1) of the Income-tax Act m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion `profits and gains does not refer to the income under the head `Profits and gains of business or profession as is apparent from the definition of income u/s 2(24) of the Act. It can be noticed that although clause (i) of sub-section (24) of section 2 talks of `profits and gains , yet clauses (v), (va) etc. also refer to income u/s 28, which is part of Chapter IV-D. From here it follows that though technically the expression `profits and gains may not refer to the income under the head `Profits and gains of business or profession , but for the purposes of clause (i) of substituted sec. 32(2), it refers to income under the head `Profits and gains of business or profession . Clause (ii) of sub-section (2) makes the position clear by providing that if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), then the amount not so set off shall be set off from the `income under any other head , if any, assessable for that assessment year. If the interpretation given in Virmani Industries (supra) had been intended to be retained, then there was no need to have two looking alike expressions in the language of sub-section (2), viz, firstly, ` ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct on industry. Eight years is a period long enough for industry to adjust itself to the new dispensation and provide for depreciation accordingly. 18. It is this clarification by the Finance Minister that sealed the fate of the unadjusted brought forward depreciation upto the end of the first period as available for set off against taxable profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years. Here it will be useful consider the order passed by the Chandigarh Bench of the Tribunal in Keshwa Enterprises (P) Ltd. (supra) in which question for consideration was the set off of carried forward unabsorbed depreciation for period prior to assessment year 1996-97 against the income from house property and short term capital gain relevant to assessment year 2002-2003. The Tribunal decided the controversy in assessee s favour by holding that the unabsorbed depreciation pertaining to the A.Y. 1996-97 and earlier period could be set off against income under other heads in A.Y. 2002-03. In reaching this conclusion the tribunal mainly relied on the speech given by the Finance Minister. 19. From the above discussion it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full effect cannot be given to any allowance under Sub-section (1 ) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of Sub-section (2) of Section 72 and Sub-section (3) of Section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years . 21.The above provision has been substituted by the Finance Act, 2001 with effect from 1.4.2002. In fact, it is reinforcement of the provision as existing in the first period. Thus the law as existing in the second period was completely taken back and as a result of that the provision as prevailing in the first period was restored. From the language of the sub-section (2) of section 32 it is manifest that it is a substantive provision and not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment. However we need to examine as to what is, in fact, the mandate of law as on the 1st April of the relevant assessment years. Provision of section 32(2), as substituted by the Finance Act, 2001 with effect from 1.4.2002 has been set out above. Such provision is applicable to assessment years 2003-2004 and 2004-2005 under consideration. On dissection of this provision we find that it has following necessary ingredients:- -Where in the assessment of the assessee , full effect CANNOT BE given to any ALLOWANCE UNDER SUB-SECTION (1) in any previous year -owing to there being no PROFITS OR GAINS chargeable FOR THAT PREVIOUS YEAR or owing to the profits or gains chargeable being less than the allowances -then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73 - the allowance or part of allowance to which effect HAS NOT BEEN GIVEN, as the case may be -shall be added to the amount of the allowance for depreciation for the following previous year and -DEEMED TO BE part of that allowance, or if there is no such allowance for that previous year be deemed to be the allowance for that previous year and so on for the succ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit u/s.54E could be allowed. When the matter came up before the Hon ble Bombay High Court, it noted that sub-sections (1) and (2) of section 50 contained a deeming provision and such fiction was restricted only to the mode of computation of capital gain contained in sections 48 and 49 and hence it did not apply to other provisions. Consequently the assessee was held to be eligible for exemption u/s.54E in respect of capital gain arising out of the capital asset on which depreciation was allowed. On the appraisal of above judgments, the legal position which turns out is that whenever a legal fiction is created by way of a deeming provision, it is of paramount importance to go strictly by the prescription of such provision. Such deeming provision cannot be extended beyond the purpose for which it is intended. With this background in mind we will proceed to consider the command of section 32(2), which is a deeming provision. 24. It has been noticed above that section 32(2) in the third period is a substantive provision and hence prospective in nature. When that is so, naturally its recommendation shall apply from only from assessment years 2002-2003 onwards. Nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o set off shall be carried forward to the following assessment years. From these provisions it is amply clear that present tense in negative has been used here also to represent loss under the head `income from house property or business loss of the current year. In the like manner, other sections such as 74 and 74A etc., to the extent they talk of loss for the current year, refer to cannot be and has not been set off. On going through these sections it is palpable that wherever there is mention to loss under a particular head for the current year which is sought to be set off against the income under the same head or other heads of the income for that very year, the set of words `cannot be and `has not been have been brought into play. The necessary corollary which, therefore, follows is that the engaging of same set of words, that is, `cannot be and `has not been in section 32(2) fairly suggest that the reference to depreciation allowance u/s.32(1), which could not be adjusted due to inadequacy of profits, is for current year alone starting from A.Y. 2002-03 onwards. This position ceases to admit any doubt when we go to section 75, as substituted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen sub-section would have been differently worded somewhat like where in the assessment of the assessee full effect could not be given to any allowance or employing the expression `could not be akin to that used in the post-substituted sec. 75. Since sub-section (2) of sec. 32 has been worded in present and not in past or past prefect tense and this being a deeming provision, the brought forward unabsorbed depreciation of the second period cannot be brought within its purview. 25. This position can be appreciated from another angle also. From the language of section 32(2), in the second period, we have noted that 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 . In that view of the matter such unabsorbed depreciation allowance for the assessment years 1997-98 to 2001-2002 strictly comes u/s.32(2) with a special name and character of unabsorbed depreciation allowance changing its situation from sec. 32(1). Once it becomes so and finds its place u/s.32(2), then there cannot be any warrant for considering it as allowance u/s.32(1) in the thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble High Court restored the action of the AAC. It was argued on behalf of the assessee before the Hon ble Supreme Court that the legal fiction arising from the deeming provision of section 32(2) of the Act was applicable and hence the unabsorbed depreciation was not merely to be carried forward to the following year but also deemed to be depreciation for that year. It was put forth that the legal fiction contained in section 32(2) must be given full effect without any reservation. Rejecting this contention, the Hon ble Supreme Court held that in the matter of set off of the unabsorbed business loss of earlier years there was no preference to the unabsorbed depreciation and only the current depreciation was to be first deducted before any question of either carried forward of unabsorbed depreciation or that of unabsorbed depreciation arise. The purpose of legal fiction u/s.32(2) has been clarified by the Hon ble Supreme Court in the following words : Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to section 10(2)(vi) is to make the unabsorbed carried forward depreciation partake of the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o unabsorbed brought forward depreciation of the second period. 28. This position can be examined from still another angle. The relevant part of the provision, in the second period, is as under :- (2) Where in the assessment of the assessee full effect cannot be given to any allowance under Clause (ii) of sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance, as the case may be, - 29. Highlighted portion is the relevant part of the language of sub-section (2) in the third period. From the above language of the provision for the second period it is noticed that the amount of depreciation allowance for the current year under sub-section (1), to which full effect cannot be given owing to the inadequacy of profits, has been referred to as `unabsorbed depreciation allowance . When the relevant part of the language of sub-section (2) for the second period (as highlighted above) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factual matrix is otherwise, inasmuch as here the assessee is claiming that the unabsorbed depreciation allowance be allowed set off against the non-business income, which has been denied by the A.O. No authority needs to be cited for the proposition that it is impermissible to view the rationale and reasoning of any decision divorced from its facts. Another important aspect which cannot be lost sight of here is that it is a special bench, which has been constituted to resolve the conflict of opinion amongst some of the benches of the tribunal on this aspect of the matter. Naturally different and contrary arguments, which prevailed upon the minds of the members constituting the division benches to decide the issue in one way or the other, need to be thoroughly taken into consideration. It will be too harsh on the assessee or the Revenue, if we stop them from arguing the case in the way they like. We, therefore, jettison this argument. 32. The learned A.R. has also canvassed a view that if two interpretations are possible, then the view in favour of the assessee should be adopted. In support of this argument, he relied on the judgment of the Hon ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision is unambiguous albeit ticklish, then legislative intention, as reflected from its language, has to be given its true meaning notwithstanding the fact that it goes against the assessee. 33. It was also argued on behalf of the assessee that the Assessing Officer was not justified in treating interest income as falling under the head `Income from other sources . He submitted that since the business of the assessee is that of merchant banking, the interest income ought to have been considered as business income. We are unable to accept this contention at this stage of proceedings for more than one reasons. It is a settled legal position that to find out head under which interest income would fall, needs to be tested by considering the cumulative effect of several factors, such as the nature of business, nature and source of interest income, circumstances in which the funds were parked. However there is unanimity of the opinion that if the surplus funds are deposited in a bank, the interest income will partake of the character of income from other sources irrespective of the nature of assessee s business. In the instant case interest was earned on FDRs from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the second period. Resultantly the unabsorbed depreciation allowance as generated during the second period cannot have a set off against income under the head `Income from other sources in the third period. 35. One more argument was taken by the ld. AR that there was substitution of section 32(2) by the Finance Act, 2001 with effect from 1.4.2002 and it was not a case of amendment. He tried to make out a case that the effect of repeal of the earlier section 32(2) would be that the benefit which had accrued to the assessee as per old provision, will automatically come into being under the new provision. In that view of the matter it was argued that the brought forward unabsorbed depreciation allowance for the second period may be treated as depreciation allowance for the current year in the third period. 36. It is seen that section 32(2) as prevailing in the second period was substituted with a new provision in the third period and it was not a case of some amendment. If there is both repeal of the old provision and also simultaneous insertion of a new provision in its place thereof, it is called as substitution . The submission made on behalf of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst any other head. In the absence of any provision to deal with the unadjusted brought forward depreciation of the first period in the second period, such amount was not available for set off in and thus it would have ceased to have any effect. To fill the vacuum and save the loss of benefit already accrued to the assesses in the first period in the shape of brought forward unadjusted depreciation due to the repeal of the earlier provision, the Finance Minister came out with the relaxation. But for such relaxation given by the Finance Minister in the Parliament, the brought forward unadjusted depreciation of the first period would have elapsed. We are unable to find any such concession given by the Finance Minister while substituting the provisions of section 32(2) in the third period. Ex consequenti, the brought forward unabsorbed depreciation allowance of the second period cannot be treated as the current depreciation in the third period. 38 The legal position of current and brought forward unadjusted/unabsorbed depreciation allowance in the three periods, is summarized as under :- A. In the first period (i.e. upto A.Y. 1996-97) iii. Current depreciation, that is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing year(s) to be set off against income under any head, like current depreciation, in perpetuity. 39. Adverting to the facts of the instant case we find that the unabsorbed depreciation allowance arose in the second period i.e. assessment years 1997-98 to 1999-2000 which could not be adjusted against the income under the head `Profits and gains of business or profession up to assessment year 2002-2003. Now the assessee cannot claim set off of such unabsorbed depreciation allowance against income under any head other than Profits and gains of business or profession in the years under consideration. As the assessee is seeking to claim the set off of such brought forward unabsorbed depreciation allowance against income under the head `Income from other sources , that cannot be accepted. In view of the foregoing reasons we are of the considered opinion that the learned CIT(A) erred in not correctly interpreting the law in this regard. The impugned order is hereby vacated and the action of the Assessing Officer is restored in both the years under consideration. 40. The question posed before this Special Bench is, therefore, answered in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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