TMI Blog2014 (1) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee. - I.T.A. No. 6735/Mum/2012 - - - Dated:- 15-1-2014 - Shri R. C. Sharma And Shri Vivek Varma,JJ. For the Appellant : Shri R. Murlidhar For the Respondent : Shri M. L. Perumal ORDER Per R. C. Sharma, A. M. This is an appeal filed by the assessee against the order by the ld. CIT(A)-15, Mumbai dated 09.08.2012, for the assessment year (A.Y.) 2008-09. The following grounds have been taken by the assessee: "On the facts and circumstances of the case, the Hon'ble CIT(A): Disallowance of carry forward of unabsorbed depreciation under section 32(2) of the Act 1. erred in confirming disallowance of carry forward of unabsorbed deprecation from A.Y. 1995-96 to A.Y. 2001-02 without appreciating the provisions of section 32(2) of the Act as applicable from 1 April 2002; 2. without prejudice to the above, erred in confirming disallowance of carry forward of unabsorbed deprecation pertaining to AY 2001-02 without appreciating that the above years are within the period of 8 years for the assessment under consideration." 2. At the outset it was contended by the ld. AR that the issue is squarely covered by the decision of the Co-ordinate Bench in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 32(2) as applicable to A.Ys. 1997-98 to 1999-2000, the assessee could set off the unabsorbed depreciation against the income under the head 'profits and gains of business'. The precise observation of the Bench was as under: HELD The short controversy that came up for disposal was as to whether depreciation for the assessment years 1997-98 to 1999-2000 which could not be absorbed, could be set off against 'Income from other sources' in the assessment years 2003- 04 and 2004-05. In order to examine and evaluate the rival contentions on this issue, it would be apt to take stock of the provisions of section 32(2) as substituted by the Finance (No. 2) Act, 1996 with effect from 1-4-1997. [Para 9] A bare perusal of the aforesaid provision indicates that where the amount of depreciation allowance under section 32(1) for the current year of a business cannot be absorbed fully or partly due to inadequacy of profits or gains from such business, then such allowance or part of it which remains unabsorbed, is to be referred to as 'unabsorbed depreciation allowance'. Such unabsorbed depreciation allowance is to be set off firstly against the income under the head 'Prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation allowance for the following previous year and deemed to be part of depreciation allowance for that previous year and so on for eternity. [Para 12] 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 the assessment year for which the loss was first computed. Sub-section (2) of section 72, which is relevant for present purpose, states that where any allowance under section 32(2) or section 35(4) is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or profession' by making a little departure in the language of the later part of the substituted provision. It is apparent from clause (i) of substituted sub-section (2), in the second period, that the unabsorbed depreciation allowance shall be set off against 'profits and gains' of any business or profession carried on by the assessee for that assessment year. It indicates that the set off provided under this clause is against the income chargeable under the head 'Profit and gains of business or profession'. Ordinarily the expression '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 under section 2(24). It can be noticed that, although sub-clause (i) of clause (24) of section 2 talks of 'profits and gains', yet sub-clauses (v), (va), etc., also refer to income under section 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', yet for the purposes of clause (i) of substituted section 32(2), it refers to income under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Parliament on this issue. To this, the Finance Minister clarified the position on the floor of the Houses. [Para 17] It is this clarification by the Finance Minister that sealed the fate of the unadjusted brought forward depreciation up to 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 the seven subsequent assessment years. [Para 18] From the above discussion 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 the eight assessment years and secondly, the period of eight years would commence from the 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 the assessment year 1997-98 irrespective of the fact that the unadjusted brought forward depreciation arose in the assessment year 1984-85 or 1994-95. [Para 19] The above provision h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the negative terms while referring to the allowance to which effect 'cannot be' and 'has not been' given. So the starting point of sub- section (2) is the assessment of the assessee and the allowance under section 32(1) to which full effect cannot be given. Section 32(1) deals with depreciation allowance for the current year. It implies that it is only when the assessment of the assessee from the assessment year 2002-03 onwards is made in which depreciation allowance for the current year under section 32(1) cannot be given full effect to, owing to the inadequacy of the profit, that the directive of the deeming provision under section 32(2) shall apply. The mention of the words 'cannot be' and 'has not been' indicates that it speaks of the depreciation al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1993. This section, dealing with losses of firms, provides that where the assessee is a firm, any loss in relation to the assessment year commencing on or before 1-4-1992, which 'could not be' set off against any other income of the firm and which 'had been' apportioned to a partner of the firm but 'could not be' set off by such partner prior to the assessment year commencing on 1-4-1993, then such loss shall be allowed to be set off against the income of the firm subject to the condition that the partner continues in the said firm for the loss to be carried forward for set off under sections 70, 71, 72, 73, 74 and 74A. At this point in time it would be relevant to mention that section 75 has been substituted for sections 75, 76 and 77 by the Finance Act, 1992. Section 75(1), before substitution, provided that where the assessee is a registered firm, and any loss which 'cannot be' set off against any other income of the firm shall be apportioned between the partners of the firm, and they alone shall be entitled to have the amount of the loss set off and carried forward for set off under sections 70, 71, 72, 73, 74 and 74A. On a conjoint reading of section 75, before and after subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third period, so as to be covered within sub-section (2) of section 32. As the language of this deeming provision does not talk of any brought forward 'Unabsorbed depreciation allowance' or the depreciation allowance which could not be given effect to in the earlier years that resultantly became part of section 32(2), there is no question of expanding the scope of the legal fiction. [Para 25] Thus, it can be seen that the purpose of legal fiction in section 32(2) [which is analogous to proviso (b) to section 10(2)(vi) of the Indian Income-tax Act, 1922] is to make the unabsorbed carried forward depreciation partake the same character as the current depreciation in the following year. In other words, 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. In the second year, such depreciation of the first year becomes part and parcel of depreciation under section 32(1) of the second year. If again in the second year, the total of depreciation under section 32(1) [including the amount of allowance which came from fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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