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2016 (8) TMI 421 - ITAT CHANDIGARH

2016 (8) TMI 421 - ITAT CHANDIGARH - TMI - Set off unabsorbed depreciation against the deemed income under section 69, 69A, 69B and 69C - deemed income - Held that:- The issue is, therefore, covered in favour of the assessee by the order of the ITAT Chandigarh Bench in the case of M/s Liberty Plywood [2013 (1) TMI 510 - ITAT CHANDIGARH ] wherein held that the adjustment of current year or unabsorbed depreciation can be made against such deemed income - Decided against revenue - Disallowance .....

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asset is for the expansion of the existing business. The assessee explained that it is constructing a building at Doraha and the place is used for storage. The Assessing Officer has nowhere held that building being constructed is for expansion of the existing business. Therefore, provisions of Section 36(1)(iii) and 43(1) would not be attracted in this case. Further, the assessee explained that it has sufficient funds available for raising the construction on which no interest has been paid. The .....

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y revenue has been directed against the order of ld. CIT(Appeals)-1 Ludhiana dated 30.09.2015 for assessment year 2011-2012. 2. I have heard ld. Representatives of both the parties, perused the findings of authorities below. 3. On ground Nos. 1 and 2, revenue challenged the order of ld. CIT(Appeals) in allowing the assessee to set off unabsorbed depreciation upto the extent of ₹ 50 lacs against the deemed income under section 69, 69A, 69B and 69C of the Income Tax Act. 4. Briefly the facts .....

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8,56,371/- including the surrendered income of ₹ 50 lacs. The assessee had shown less income therefore, explanation of the assessee was called for with reference to the decision of Hon'ble Punjab & Haryana High Court rendered in the case of Kim Pharma Pvt. Ltd. and assessee was required to show cause as to why the income voluntarily disclosed during survey should not be separately assessed as deemed income under section 69, 69A, 69B and 69C. The assessee filed detailed reply before .....

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is noted in which assessee also made a claim that request was made at assessment stage to adjust the unabsorbed depreciation claim under section 32(2) of the Income Tax Act against the surrendered amount as per provisions of the Act. It was pleaded that the adjustment of current year or unabsorbed depreciation can be made against such deemed income as per decision of jurisdictional ITAT Chandigarh Bench in the case of Liberty Plywood Pvt. Ltd. in ITA 727/2012 vide order dated 17.12.2012. The ld. .....

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reciation loss. The assessee reiterated the same submissions before ld. CIT(Appeals) and submitted that there was no issue of set off of depreciation including unabsorbed depreciation under section 32 against the amount surrendered in survey and treated as deemed income. On the same facts, ITAT Chandigarh Bench in the case of Liberty Plywood Pvt. Ltd. (supra), after considering decision of the Hon'ble Punjab & Haryana High Court in the case of Kim Pharma Pvt. Ltd. (supra) has held that d .....

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od Pvt. Ltd. (supra) and Special Bench in the case of DCIT Vs Times Guaranty Ltd. (supra), allowed the appeal of the assessee. His findings in para 4.2 of the appellate order are reproduced as under : "4.2 I have considered the facts of the case, the basis of addition and the submissions during the course of the assessment as well as appellate proceedings. The Assessing Officer considered the surrendered income as deemed income u/s 69A,69B and 69C and the same was not allowed to be set off .....

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High court in the case of M/s Kim Pharma (P) Ltd. vs. CIT. it was held that surrendered income during the survey has to be assessed separately as deemed income and set-off of losses under section 70 and 70(1) was not possible against such income. However, the said decision does not deal with the issue of setting off of depreciation under section 32(2) and that unabsorbed depreciation which is carried forward as current depreciation u/s 32(2) is clearly available for setting-off. The Hon'ble .....

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n to only allow set off of unabsorbed depreciation which is outside the block of Assessment Year 1997-98 to 2001-02." Accordingly, the Assessing Officer was not justified in not adjusting depreciation of current year against the deemed income. Thus, these grounds of appeal are allowed." 7. The ld. DR relied upon order of the Assessing Officer and submitted that in the case of M/s Kim Pharma Pvt. Ltd. (supra), the decision of Gujrat High Court in the case of Fakir Mohmed Haji Hasan V CI .....

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vt. Ltd. and held as under : "10 We have heard the rival submissions carefully. The main controversy involved is whether the surrender income amounting to ₹ 70.00 lakhs should be treated as business income so as to set off brought forward losses u/s 70 of the Act as well as the depreciation u/s 32(2). As far as the decision of Hon'ble Supreme Court in case of CIT V. D.P. Sandhu Bros. Chembur, P. Ltd. (supra) is concerned, we find that facts in that case are totally different. In t .....

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head 'capital gain". On further appeal, the Tribunal held that though the income was assessable under the head 'capital gain' but since there was no cost of acquisition and therefore, following the decision of Hon'ble Supreme Court in case of CIT V. B.C. Srinivasa Setty, 128 ITR 294 it was held that since the capital gain cannot be computed, the same was not taxable. On revenue's appeal to the High the issue was decided against the Department. When this matter traveled .....

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d computation of total income be classified under six heads of income", namely:- (A) Salaries; (B) Interest on Securities; (C) Income from house property; (D) Profits and gains of business or profession; (E) Capital gains; (F) Income from other sources unless otherwise, provided in the Act has not to be excluded from the total income under the Act, only if it is not chargeable to income tax under any of the heads specified in section 14, items A to E. Therefore, if the income is included un .....

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geable u / s 45. because of the inapplicability of the computation provided u/s 48, it could still imposed tax under the residuary head as fhus unacceptable. If the income cannot be taxed u/s 45, it cannot be taxed at all. (See S.G. Mercantile Corporation P. Ltd. V CIT (1972) 83 ITR 700 (S.C)." 11 Thus it is clear from the above that once the item of receipt is held to be falling under a particular head then the same cannot be charged alternatively under another head particularly under the .....

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njab & Haryana High Court in case of M/s Kim Pharma (P) Ltd. V. CIT, ITA No. 106 of 2011 (O&M), Hon'ble High Court clearly held that surrendered income can be taxed as deemed income without setting off of the losses u/s 70 & 71. We are bound to follow the decision of Hon'ble Punjab & Haryana High Court and following the same, we hold that surrendered income has to be assessed separately as deemed income. 12. Coming to the issue of setting off of depreciation u/s 32(2), fi .....

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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 to 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 de .....

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year. This means that unabsorbed depreciation which can not be set off in a particular year, would become current depreciation in the following year and there is no restriction against such set off. Therefore, un-absorbed depreciation which is carry forward as current depreciation u/s 32(2) is clearly available for setting off and similar view was taken by the Ahmedabad Bench of the Tribunal in case of ITO V. Hytaisun Magnetics Ltd. ITAs No. 2897 & 2898/Ahd/2008 held as under: "We find .....

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nst income of the current year. As per provisions of section 32(2) unabsorbed depreciation are deemed as part of current year's depreciation to the extent of available income. Further there is no provisions under the Income Tax Act to prohibit set off of current year's business loss against income of the assessee which is assessable under the head income from other sources. Section 70 does not prohibit such set off. 13 However, this provision has been amended twice w.e.f. 1.41997 by Fina .....

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ct from April 1,1997 the current depreciation under section 32(1) could be adjusted against income under any head including "Capital gains" and "Income from house property" in the same year. If there remained some unadjusted depreciation allowance, that was carried forward in the following year(s) for set off against income under any other heads just like current depreciation allowance under section 32(1) pertaining to such year. Under sub-section (2) of section 32 as substit .....

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ection (2) if the unabsorbed depreciation allowance could not be wholly set off under clause (i), the amount not so set off could be set off from the "income under any other head", if any, assessable for that assessment year. The provision for carry forward and set-off of unabsorbed depreciation for any number of years against income under any head, was further diluted by way of clause (iii)(b) to section 32(2) restricting the right to set-off of unabsorbed depreciation for a period of .....

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sment year 1997-98 and seven subsequent assessment years. In other words, the period of eight years under 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 an earlier assessment year. Thus, on the strength of the clarification given by the Finance Minister, the unadjusted depreciation brought forward up to April 1,1997 became eligible for set off not only against the business income .....

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om April 1, 2002 restoring the provision as prevailing prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1,1997. Sub-section (2) of section 32 is a substantive prov ision and not a procedural one. It is settled legal position that the amendment to a substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere seen either from the Notes on Clauses or Memorandum explaining the provision of .....

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the depreciation allowance for the succeeding year(s). A deeming provision cannot be extended beyond the purpose for which it is intended. Section 32(1) deals with depreciation allowance for the current year. It is only when the assessment of the assesses from assessment year 2002-03 onwards is made in which depreciation allowance for the current year under section 32(1) cannot be given full effect, owing to the inadequacy of profits, that the directive of the deeming provision under section 32 .....

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e adjusted due to inadequacy of profits, is for the current year alone starting from assessment year 2002-03 onwards. The brought forward unabsorbed depreciation of earlier years cannot be included within the scope of section 32(2). In section 32(2) the depreciation allowance for the current year to which full effect cannot be given due to the paucity of profits, has been referred to as "unabsorbed depreciation allowance". Such unabsorbed depreciation allowance for the assessment years .....

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arried forward depreciation partake of 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 first year becomes part and parcel of depreciation under section 32(1) of the second year. If again in the seco .....

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is fulfilled. The "unabsorbed depreciation allowance" of the period after substitution by the Finance (No. 2) Act, 1996 cannot be given the character of current depreciation in the assessment years after substitution with effect from April 1, 2002. 711 (SC) relied on. Therefore, the law prevailing as on the 1st April of the assessment year 2002-03 and subsequent years does not permit the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance ( .....

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h concession given by the Finance Minister while substituting the provisions of section 32(2) with effect from April 1, 2002. Therefore, the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 cannot be treated as the current depreciation in the assessment years under consideration. The position can be summed up as follows : For the assessment years 1997-98 to 2001-02 brought forward unadjusted depreciation allowance for and up to a .....

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nder any other head. The amount of current depreciation for assessment years 1997-98 to 2001-02 which cannot be so set off, the "second unabsorbed depreciation allowance", shall be carried forward for a maximum period of eight assessment years from the assessment year immediately succeeding the assessment year for which it was first computed, to be set off only against the income under the head "Profits and gains of business or profession". For the assessment year 2002-03 onw .....

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reciation for the year under section 32(1), for each year separately, starting from assessment year 2002-03 can be set off against income under any head. The amount of depreciation allowance not so set off (the "third unadjusted depreciation allowance") shall be carried forward to the following year. The "third unadjusted depreciation allowance shall be deemed depreciation under section 32(1), that is depreciation for the current year in the following year(s) to be set off against .....

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to 2001-02." 7(ii) In this decision, the Tribunal considered the decision in the case of M/s Kim Pharma Pvt. Ltd. in which set off of the losses under section 70 and 71 was not found possible against such income. The Tribunal also noted that in this decision, the set off of depreciation under section 32(2) was not considered. The Tribunal also followed decision of the Mumbai Special Bench in the case of Times Guaranty Ltd. (supra) and decided the issue in favour of the assessee. The issue i .....

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asked to explain why the same may not be capitalized as the building had not been put to use during the year under consideration. The assessee submitted that the assessee firm is in construction of building at Doraha and construction was started in financial year 2005-06. The place is being used for storage. Similarly, land at Doraha was also purchased on which the building is being constructed. The assessee had purchased the land at Doraha during 2004-05 and paid interest of ₹ 29 lacs du .....

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ee. The Assessing Officer held that the contention of the assessee was not correct and relied upon decision of Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. 286 ITR 1. The Assessing Officer also noted that no interest had been capitalized and added to the cost of building which have not been put to use till the end of the financial year concerned. The Assessing Officer contended that Explanation-8 to Section 43(1) is clear that if any interest is paid by the .....

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Assessing Officer merely presumed that total amount used for construction of building is out of borrowed funds, though no nexus has been established or mentioned in the assessment order except that Assessing Officer followed decision in the case of Abhishek Industries Ltd. (supra). The assessee has availed the secured loan from banks having balance outstanding as on 31.03.2011 in a sum of ₹ 3.80 Crores. The capital work-in-progress is for the purpose of business of the assessee firm. The .....

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he impugned order. The ld. CIT(Appeals), considering explanation of the assessee, deleted the addition and allowed appeal of the assessee. His findings in para 5.2 of the order are reproduced as under : 5.2 I have considered the facts of the case, the basis of addition and the submissions made during the course of the assessment as well as appellate proceedings. The appellant has shown building under construction for ₹ 31,59,651/-. For attracting the proviso to sec 36(i)(iii) two condition .....

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the existing business. It is nowhere held that the production capacity has increased as a result of the same. The appellant had explained that the firm is constructing a building at Doraha and the place is used for storage. The Assessing Officer has nowhere held that the building being constructed is for expansion of the existing business. Under the circumstances proviso to sec 36(l) r/w/s 43(1) is not attracted in the appellant's case in the absence of any finding by the Assessing Officer .....

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