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TMI Blog2010 (6) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... ent years 2003-2004 and 2004-2005. The following effective common grounds have been raised in both the years:- "1. On the facts and circumstances of the case and in law the ld.CIT(A) erred in granting set off of unabsorbed depreciation against income from other sources. 2. Further, placed in the above factual and legal scenario, the impugned order of the ld.CIT(A) is, the appellant prays, contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored." 3. Briefly stated the facts of the case are that the assessee continued to derive income from the business of merchant banking activity. It filed return for assessment year 2003-2004 declaring loss of Rs.82,86,513. Assessment order was passed u/s.143(3) on 17.3.2006 in which the Assessing Officer made the following computation of total income as per normal provisions of the Act:- (I) Profits and gains of business (As shown in the computation of total income) (-) Rs.1,10,27,156 Add : Disallowances (+) Rs.1,14,16,014 Less : & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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. Virman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions rendered in assessee's favour including ITO Vs. Keshwa Enterprises (P) Ltd. in ITA No. 533 (Chd) of 2004 dated 22.12.2005, the learned Departmental Representative contended that unadjusted depreciation in this case related 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 containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. Vs. CIT [(1979) 120 ITR 921 (SC)]. 8. The learned A.R. next submitted that the Revenue was not entitled to take a conflicting stand. He referred to the order passed by the Delhi Bench of the tribunal in Jai Ushin Ltd. Vs. DCIT in ITA No.3412/(Delhi)/2006 in which the departmental contention that the law as amended by the Finance Act, 2001 should be applied, was accepted by the Tribunal. He submitted that it was not open to the Departmental Representative in other stations to argue contrary to what was argued before the Delhi Bench. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by him and assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under Clause (i) and Clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and - (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was computed should continue to be carried on by the assessee during the previous year relevant to assessment year in which the set off is claimed. The exercise of carrying forward such unabsorbed depreciation allowance is to be continued up to eight assessment years immediately succeeding assessment year for which the aforesaid depreciation allowance was first computed. From here it follows that the amount of unabsorbed depreciation allowance which could not be set off against income under any head in the year in which the allowance was first computed, shall be eligible to be carried forward for set off only against income under the head `Profits and gains of business or profession' to the following assessment year(s) not more than eight assessment years immediately succeeding the assessment year for which it was first computed. In Southern Travels VS. ACIT (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. 1999-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; shall be added to the amount of depreciation allowance for the following previous year and deemed to be part of depreciation allowance for that previous year and so on for eternity. 13. Section 32(2) deeming the unadjusted depreciation allowance of the current year as the current depreciation allowance of the following year, is subject to the provisions of section 72(2) and section 73(3). Section 72(1) provides that where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any other head of income in accordance with the provisions of section 71, then such loss shall be carried forward to the following assessment year to be set off against business income. Sub-section (3) provides that no loss shall be carried forward under this section for more than eight assessment years immediately succeeding assessment year for which the loss was first computed. Sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that year whereafter the factory was let out on hire. Ten years later, that is, in the previous year relevant to the assessment year 1965-66, the assessee started the business of manufacture of steel pipes. For the purpose of this business a part of the old machinery used in the manufacture of soap and oil was utilized. In the assessment proceedings relating to assessment year 1956-57 depreciation u/s.32 (1)(ii) was found to be more than the profits and gains of the assessee for that assessment year. In the assessment proceedings relating to assessment year 1965-66, the assessee claimed that unabsorbed depreciation, to the extent it pertained to the old machinery utilized in the new business, should be brought forward and set off against the profits of the new business. This claim was rejected by the ITO and by AAC on the ground that such a set off was permissible only where the business carried on in the subsequent assessment year was the same business that was carried on in the earlier assessment year. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confined to the profits and gains derived from the business alone. On the basis of the above-referred judgments, the legal position about the interpretation of section 32(2) in the first period becomes clear that the current depreciation u/s 32(1) can be adjusted against the income under any head including `Capital gain' or `Income from house property' etc. in the same year. But if there remains some unadjusted depreciation allowance, then that shall be carried forward in the following year(s) for set off against the income under any other heads just like current depreciation allowance u/s 32(1) pertaining to such year. 16. In order to neutralize the effect of the judgment of the Hon'ble Supreme Court in the case of Virmani Industries Private Limited (supra) explaining the scope of expression "profits or gains chargeable" employed u/s.32 (2) as extending not only to `Business income' but also to other heads of income as given in section 14, the legislature substituted sub-section (2) of section 32 by the Finance (No.2) Act, 1996 with effect from 1.4.1997, as discussed above. By virtue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance not so set off under clauses (i) and (ii) shall be carried forward to the following assessment year and then set off against the "profits and gains" of any business or profession carried on by the assessee in the following assessment year. Here again we find that the expression "profits and gains" has been used which is similar to that used in clause (i). Had the legislature desired to give wider meaning to the expression "profits and gains" as including income under other heads also, then there was no need at all to have clause (ii) of sub section (2) providing for the set off of the unabsorbed depreciation allowance against `income under any other head'. From the above discussion it can be easily ascertained that the expression "profits and gains" as used in clause (i) or (iii)(a) refers only to income under the head `Profits and gains of business or profession'. 17. The further fallout of this substitution of section 32(2), in the second period, is that the provision of carry forward and set off of unabsorbed depreciation for any number of years against income under any he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion it is patent that in the second period, relaxation was allowed by the Finance Minister on two counts, viz., firstly, the cumulative unadjusted brought forward depreciation as on 1.4.1997 could still be set off against taxable income under any head in eight assessment years and secondly, the period of eight years would commence from assessment year 1997-98 irrespective of the year to which such unadjusted depreciation related. In other words, the period of eight years as per clause (iii)(b) of section 32(2) came to be reckoned from assessment year 1997-98 irrespective of the fact that the unadjusted brought forward depreciation arose in assessment year 1984-85 or 1994-95. It is in the light of the speech given by the Finance Minister that the Chandigarh Bench of the Tribunal in Keshwa Enterprises (P) Ltd. (supra) held that the unabsorbed depreciation for a period prior to assessment year 1996-97 could be set off against income from house property and short term capital gain for assessment year 2002-2003. On the same pattern, the Hon'ble Madras High Court in CIT Vs. Pioneer Asia Packing P.Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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 procedural one. It is settled legal position that the amendment to substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere coming up either from the Notes on clauses or Memorandum explaining the provision of the Finance Bill 2001, that substitution of sub-section (2) of section 32 is retrospective. It is, therefore, patent that the substantive provision contained in section 32(2) as substituted by the Finance Act, 2001 with effect from 1.4.2002, is prospectively applicable to A.Ys. 2002-2003 onwards. 22. A great deal of emphasis has been laid by the learned A.R. on the applicability of law as prevailing on first April of the relevant assessment year. The Hon'ble Supreme Court in CIT Vs. Scindia Steam Navigation Co. Ltd. [(1961) 42 ITR 589 (SC)] has held that the law available as on the first day of the relevant assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowances -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 succeeding previous years. 23. Firstly it is obvious that section 32(2) is a deeming provision and by the legal fiction, the amount of depreciation allowance u/s.32(1) which is not fully absorbed against income for that year is deemed to be the part of depreciation allowance for the succeeding year(s). A deeming provision or a legal fiction as it is commonly called is one, the mandate of which does not exist but for such provision. Due to such provision only the given imaginary state of affairs is taken as reality despite it being at variance with the scope of the enactment. It is trite law that a deeming provision cannot be extended beyond the purpose for which it is intended. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. Necessary ingredients of the provision, in the third period, have been dotted above. First thing in sub-section (2) is the reference to the assessment of the assessee in which full effect "cannot be" given to any allowance under sub-section (1) in any previous year. Later part of the provision provides that the allowance or part of the allowance to which effect "has not been" given, shall be added to the amount of allowance for depreciation in the succeeding years. At both the places, present tense has been used in negative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss 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 the Finance Act, 1992, with effect from 1.4.1993. This section, dealing with losses of firms, provides that where the assessee is a firm, any loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferently 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried forward business loss should be set off first in each year before deducting current year's depreciation. The Tribunal accepted the departmental contention but the Hon'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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As soon as that is done, the purpose of the sub-section is achieved. Nothing more and nothing less than that can be deduced from it. When the Hon'ble Supreme Court, being the highest Court of the land, itself held that the object of section 32(2) is to carry forward the unabsorbed depreciation for the current year in the following year, there cannot be any question of arguing to the effect that section 32(2) in the third period, also refers to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case, was imposed qua the same case. If this contention of the ld. AR is taken to a logical conclusion and the Departmental Representatives are prevented from arguing differently in another case, then the same yardstick should also apply to assesses as one unit, which obviously cannot be the case. 31. Be that as it may we note that the position before the Delhi Bench of the tribunal in Jai Ushin Ltd. (supra) was rather converse. In that case the assessee adjusted carried forward business loss and unabsorbed depreciation against business income only and it was the A.O. who held that the remaining amount of unabsorbed depreciation was liable to be set off against non-business income. The instant 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 asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 202 ITR 291 (Bom.)] has held : "principle of interpretation of a statute that in the event of any doubt in regard to the interpretation, the benefit of doubt should be given to the assessee and the interpretation beneficial to the tax payer should be accepted applies only when there is reasonable and genuine doubt in regard to the interpretation of a particular provision. It has no application to a case where the provision is clear and the law is well settled. This principle cannot be stretched too far. It cannot be used to misinterpret a statutory provision which is otherwise clear and brooks no doubt about its meaning or interpretation just to give the benefit to the tax payer which the statute did not intend to give". In view of this binding precedent coming from the Hon'ble jurisdictional High Court, it is obvious that the principle of favourable interpretation to the assessee applies only where there is a doubt as regards the interpretation of the provision. If however the 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.&n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries Private Limited (supra). We do not find any merit in this submission for the reason discussed above that it was a case on the interpretation of the expressions `profits or gains' as used in the language of sub-section (2) for the first period. By means of substitution of the provision in the second period, the interpretation given by the Hon'ble Supreme Court to the expression `profits or gains' chargeable as covering all the heads of income and not only restricting it the "Business income" was done away with. However the effect of substitution of section 32(2) by the Finance Act, 2001 is that whatever provision and its interpretation was there in second period stood omitted and the status quo ante as existing prior to amendment by Finance Act, 1996 was restored. Resultantly the interpretation given by the Hon'ble Supreme Court to the expression `profits or gains' chargeable has once again resurfaced in the third period as covering not only income under the head `Profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 974] 1 SCC 202: [1974] 2 SCC 530." 37. From above it can be noticed that as per general rule the repeal of a provision destroys the rights dependent on it. If we examine the general effect of repeal of section 32(2) as prevailing in the second period, then brought forward unabsorbed depreciation allowance should obliterate and die its natural death in the third period. But that is not the case here as the exception shall come into play as against the general effect of repeal as per which the repealed law shall continue to be the law of the period during which it was in force. As a result of that the benefit already earned in second period by way of brought forward unabsorbed depreciation allowance shall come to the third period to be dealt with in accordance with the provision of the second period for set off against the income under the head `Profits and gains of business or profession' for a period not more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed. It is still further noted that the Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year separately starting from A.Y. 1997-98 upto 2001-02) can be set off firstly against business income and then against income under any other head. iii. Amount of current depreciation for A.Ys. 1997-98 to 2001-02 this cannot be so set off as per it. above, hereinafter called the `Second unabsorbed depreciation allowance' shall be carried forward for a maximum period of eight assessment years from the A.Y. immediately succeeding the A.Y. for which it was first computed, to be set off only against the income under the head `Profits and gains of business or profession'. C. In the third period ( i.e. A.Y. 2002-03 onwards) i. 'First unadjusted depreciation allowance' can be set off upto A.Y. 2004-05, that is, the remaining period out of maximum period of eight A.Y.s (as per Bi. above) against income under any head. ii. `Second unabsorbed depreciation allowance' can be set off only against the income under the head `Profits and gains of business or profession' within a period of eight A.Ys. succeeding the A.Y. for which it was first computed. iii. Current depreciation for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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