I-T - Whether in view of amended provisions of Sec 32(2), assessee is entitled to set off unabsorbed depreciation prior to AY 2001-02, beyond period of eight years - YES: ITAT
By TIOL News Service
KOLKATA, JUNE 23, 2016: THE issue is - Whether in view of the amended provisions of section 32(2) of the Act the assessee would be entitled to set off the unabsorbed depreciation prior to assessment year 2001-02, beyond a period of 8 years. YES is the answer.
Facts of the case
Assessment u/s 143(3) was completed determining the loss to be carried forward at Rs. 29.23 crores. The loss represented unabsorbed depreciation which was to be carried forward to the subsequent assessment year along with the earlier year's unabsorbed depreciation.
CIT in exercise of his powers u/s 263 was of the view that unabsorbed depreciation allowed to be carried forward for set off by the AO also included unabsorbed depreciation relating to AY 1996-97, 1997-98, 1998-99 & 2000-01 and as per the law applicable to those years, those unabsorbed depreciation cannot be carried forward without set off beyond a period of 8 years. AO ought to have held that unabsorbed depreciation which remained without set off ought to have been treated by the AO as not eligible for carry forward. Thus, CIT passed an order under section 263.
After hearing both the parties, the ITAT held that,
++ the provisions of s. 32(2) prior to the amendment made by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997 indicates that if there are sufficient profits or gains to adjust full depreciation allowance for the current year under s. 32(1) of the Act, then it will be adjusted accordingly. If however there are no profits or gains at all or they are insufficient to accommodate the depreciation allowance for the year in full, then subject to the provisions of ss. 72(2) and 73(3), the amount of such unadjusted allowance, to which effect has not been given, 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.
++ the provisions of s. 32(2) as substituted by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997 indicates that where the amount of depreciation allowance under s. 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 remained 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 "Profits and gains of business or profession" from any other business or profession carried on by the assessee for that assessment year. If such business profit is also insufficient to absorb the unabsorbed depreciation allowance, then the remaining amount shall be set off against income under other heads, as mentioned in s. 14 of the Act assessable for that assessment year. This exercise of setting off the unabsorbed depreciation allowance against any head of income is restricted to the year in which the claim for depreciation has arisen under s. 32(1). If however income of the assessee under all heads is insufficient to absorb the unabsorbed depreciation allowance, then such amount is to be carried forward to the following assessment year to be set off against the income arising under the head ‘Profits and gains of business or profession'. Not only that, the business or profession for which the allowance 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 upto eight assessment years immediately succeeding assessment year for which the aforesaid depreciation allowance was first computed.
++ the provisions of Sec.32(2) as substituted by the Finance Act, 2001 w.e.f. 1st April, 2002, provides that where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-s. (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-s. (2) of s. 72 and sub-s. (3) of s. 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.
++ the third amendment by Finance Act 2001 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-s (2) of s. 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. Thus, the order of the CIT cannot be sustained.
++ Section 263 requires the satisfaction of two conditions viz. (i) the order sought to be revised is erroneous; and (ii) it is prejudicial to the interests of Revenue. If one of them is absent i.e. if the order sought to be revised is erroneous but not prejudicial to the interest of Revenue or if it is not erroneous but is prejudicial to the interests of Revenue, the provisions of section 263(1) of the Act are not attracted as the phrase ‘prejudicial to the interests of Revenue' is to be read in conjunction with an ‘erroneous' order passed by the Assessing Officer. When an Assessing Officer adopts one of the courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of Revenue. We therefore quash the order u/s.263 of the Act and allow the appeal of the Assessee.
(See 2016-TIOL-1131-ITAT-KOL)
