COMMISSIONER OF INCOME TAX vs. G T M SYNTHETICS LTD.

This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated 19.7.2006, passed by the Income Tax Appellate Tribunal, Chandigarh Bench ‘B’, Chandigarh (in short “the Tribunal”) in ITA No. 122/CHANDI/2005, relating to the assessment year 2001-2002. 3. The following substantial question of law has been claimed for determination of this Court: “Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in allowing setting-off the income derived during the year under consideration under the head ‘Income from other sources’ from the unabsorbed depreciation, relevant to the assessment year 1996-97 despite closure of business by the assessee.”

The facts, in brief, necessary for adjudication as narrated in the appeal, are that the assessee filed return for the assessment year 2001-02 on 30.10.2001 declaring a loss of Rs. 7,22,67,400/- which was said to be mainly on account of claim of unabsorbed depreciation/ brought forward losses. The assessing officer while finalizing the assessment proceedings under Section 143(3) of the Act assessed the total income of the assessee at Rs. 71,49,036/-, i.e. the income of Rs. 30,03,629/- received by the assessee on account of enhanced compensation for compulsory acquisition of its land and an amount of Rs. 41,45,407/- received from banks on account of interest on the enhanced amount of compensation. In the said proceedings, the assessing officer noticed that the business being carried out by the assessee had been closed and no business related activities were carried out during the year under reference. The assessing officer for Income Tax Appeal No. 92 of 2007 3 this reason did not allow the assessee to adjust the non-business income out of the brought-forward unabsorbed depreciation of Rs. 2,94,38,438/-, relevant to the assessment year 1996-97 in view of the provisions of Section 32(2) of the Act as amended by Finance (No.2) Act, 1996 and applicable w.e.f. 1.4.1997. The Commissioner of Income- tax (Appeals) {in short “the CIT(A)”}, however, on an appeal being carried out by the assessee allowed setting off of the income from unabsorbed deprecation vide order dated 4.11.2004. The Tribunal by the order appealed against herein confirmed the order passed by the CIT(A).

We have heard learned counsel for the parties and have perused the record.

The point for consideration in this case is, whether the carried forward unabsorbed depreciation allowance could be set off against the income under any other head when the business itself had discontinued.

Section 32(2) of the Act relates to carry forward of unabsorbed depreciation. It has undergone various changes. It was amended by Finance Act, 2000, w.e.f. 1.4.2001 and as applicable to the assessment year 2001-02 i.e. the assessment year in question, the first proviso and the word ‘further’ in the second proviso were deleted. The proviso so omitted reads thus: “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.”

The effect of omission of the aforesaid proviso was enumerated by the Central Board of Direct Taxes, vide circular No. 794 dated 9.8.2000 [(2000) 245 ITR (Statute)] 21 that the unabsorbed depreciation allowance could be set off against the income under any other head even where the business was not carried on. Clause 22 of the said circular which is relevant is as under:

The CIT(A) and the Tribunal, thus, rightly allowed unabsorbed depreciation relevant to the assessment year 1996-97 to be set off