THE COMMISSIONER OF INCOME TAX vs. M/S BRINDAVAN ALLOYS LTD

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ITA/855/2008HC KarnatakaKAHC01035638200807 October 2014Bench: B.MANOHAR,N.KUMAR8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the amendment to Section 32(2) of the Income Tax Act, 1961, by the Finance Act, 1996, which limited the carry forward of unabsorbed depreciation to 8 years, was intended to be prospective. The Finance Minister's assurance on the floor of Parliament indicated that the cumulative unabsorbed depreciation brought forward as on April 1, 1997, could be set off against taxable business profits or income under any other head for assessment year 1997-98 and the subsequent seven assessment years, meaning the change would effectively take effect only after 8 years. Crucially, it was also noted that even before the expiry of this 8-year period, the amended provision was deleted and the original provision was restored. Therefore, the amended provision never came into force. Consequently, the denial of the benefit of set-off to the assessee by the Assessing Authority was incorrect. The High Court found no merit in the Revenue's appeal, answering the substantial questions of law in favour of the assessee and against the Revenue. The appeal was dismissed.

What were the facts?

The Revenue appealed against an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2000-01. The assessee, M/s. Brindvan Alloys Ltd., had sold part of its plant, machinery, factory shed, and building, debiting Rs. 68,09,458/- as loss on sale of fixed assets. The Assessing Officer (AO) determined the sale consideration at Rs. 3,04,97,900/- and disallowed the set-off of unabsorbed depreciation against other income. The appellate authority allowed the set-off of unabsorbed depreciation and business loss against short-term capital gains. The ITAT upheld the appellate authority's order, leading to the present appeal by the Revenue.

What were the issues?

1. Whether the Appellate Authorities were correct in holding that earlier years' business loss and unabsorbed depreciation should be set off against profits on sale of capital assets, thereby reducing short-term capital gains? (Question of law and fact, concerning Sections 71 and 72 of the Income Tax Act, 1961). 2. Whether the Tribunal was correct in holding that, as a result of the amendment by the Finance Act of 1996, unabsorbed depreciation not set off in the year of arising is carried forward for 8 years and can be set off against business income of succeeding years? (Question of law, concerning Section 32(2) of the Income Tax Act, 1961). 3. Whether the appellate authorities were right in holding that Section 32(2) of the Act cannot prevail over Sections 71 and 72 of the Act, especially after the amendment to Section 32 by the Finance Act, 1996, effective from 1.4.1997? Assessee's contentions: The assessee argued that the amendment to Section 32(2) by the Finance Act, 1996, which limited the carry forward of unabsorbed depreciation to 8 years, was prospective and its effect was postponed by an assurance from the Finance Minister to come into effect only after 8 years. Furthermore, this amended provision was subsequently deleted, meaning it never truly came into force. The AO failed to follow the Finance Minister's assurance and the subsequent Board Circular. Revenue's contentions: The Revenue's appeal was admitted to consider these substantial questions of law. No specific arguments for the Revenue were recorded in the judgment beyond their appeal against the ITAT's decision.

Which sections of the Income-tax Act were involved?

Section 32,Section 32(2),Section 71,Section 72

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 7th DAY OF OCTOBER 2014

PRESENT

THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MR. JUSTICE B. MANOHAR

I.T.A. No.855/2008

BETWEEN :

1.

The Commissioner of Income-tax, C.R.Building, Queens Road, Bangalore.

2.

The Deputy Commissioner of Income-Tax, Circle-2(2), C.R.Building, Queens Road, Bangalore. ...APPELLANTS

(By Sri. Jeevan J. Neeralgi, Adv.)

AND :

M/s. Brindvan Alloys Ltd., 4th Phase, Peenya Industrial Area, Off: Tumkur Road, Peenya, Bangalore.

… RESPONDENT

(By Sriyuths. A.Shankar, Adv. and M. Lava, Adv.,) . . . .

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This I.T.A. is filed under Section 260A of the Income Tax Act, 1961, arising out of the order dated 30.04.2008 passed by the Income Tax Appellate Tribunal, Bangalore Bench, in ITA No.582/Bang/2006 for the assessment year 2000-01 praying that this Hon`ble Court may be pleased to (i). formulate the substantial questions of law stated above and (ii). allow the appeal and set aside the orders passed by the Income Tax Appellate Tribunal, Bangalore, in ITA No.582/Bang/2006 dated 30.04.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle -2(2), Bangalore, in the interest of justice and equity.

This I.T.A. coming on for hearing, this day, N.Kumar J., delivered the following:

JUDGMENT

The Revenue has preferred this appeal against the order passed by the Tribunal holding that the assessee is entitled to set off of unabsorbed depreciation of earlier years in order to arrive at the total income.

2.

The assessee has sold part of plant and machinery, factory shed and building and debited an amount of Rs.68,09,458/- in the profit and loss account

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on account of the loss in sale of fixed assets. Assessing Officer determined the sale consideration at Rs.3,04,97,900/-. The Assessing Officer did not accept the case of the assessee that he is entitled to set off of unabsorbed depreciation against other income. Aggrieved by the said order, assessee preferred an appeal. The appellate authority held that the assessee is entitled to set off of unabsorbed depreciation and business loss against the income from short-term capital gains of sale of assets. Aggrieved by the said order, Revenue preferred an appeal to the Tribunal, which appeal came to be dismissed upholding the orders of the Appellate Commissioner. Aggrieved by the said order, the Revenue is in appeal.

3.

This appeal was admitted on 01.09.2009 to consider the following substantial questions of law:

“1. Whether the Appellate Authorities were correct in holding that earlier years business

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loss and unabsorbed depreciation should be set off against the profits on sale of capital assets and consequently the short terms capital gains worked out should be reduced?

2.

Whether the Tribunal was correct in holding that as a result of amendment made by Finance Act of 1996, unabsorbed depreciation which cannot be set off in the year in which it arises is to be carried forward to the following assessment year and could be set off against the business income of the succeeding year, which would be permissible for 8 such years ?

3.

Whether the appellate authorities were right in holding that the provisions of sub section (2) of Section 32 of the Act cannot prevail over the provisions of Section 71 and 72 of the Act, particularly, in the wake of amendment to the provisions of Section 32 of the Finance Act, 1996, w.e.f. 1.4.1997 and as applicable to the facts of the assessee`s case? ’’

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4.

This controversy arose because of amendment to Section 32(2) of the Income Tax Act, 1961, (for short, hereinafter referred to as ‘the Act’), which came into effect on 01.04.1997. It is not in dispute that prior to the amendment, assessee was entitled to set off of unabsorbed depreciation. It is only by way of this amendment, it was denied the said benefit. This amendment gave rise to an agitation even at the time of moving the said amendment before the Parliament. The Finance Minster on the floor of the Parliament gave an assurance that this amendment will come into effect only 8 years after it became the law. The relevant extract reads as under:

“4. Clause 11 of the Bill seeks to amend Section 32 of the Income-tax Act, 1961, relating to depreciation. During the course of discussion on the General Budget, a number of Hon`ble members have expressed their apprehension that the proposed amendment limiting carry forward

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of unabsorbed depreciation to 8 years will adversely affect the growth of industry. Similar apprehensions have been raised in a large number of post-budget memoranda. I would like to allay these fears. The proposed amendment is only prospective in as much as the cumulative unabsorbed depreciation brought forward as on 1st April, 1997, can still be set off against taxable business profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years. Therefore, the proposed change will have effect only after 8 years and there is no cause for immediate concern about its likely impact on industry. Eight years is a period long enough for industry to adjust itself to the new dispensation and provide for depreciation accordingly. A number of Hon`ble members have brought to my notice that the proposed amendment may adversely affect sick companies.

I accept the suggestions made by them. I, therefore, propose to provide that the time limit of 8 years shall not apply to sick companies,

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during the period the company is treated as a “sick company” under the Sick Industrial Companies (Special Provisions) Act, 1985. ”

(emphasis supplied)

5.

It is also not in dispute that even before the expiry of 8 years period, the amended provision was deleted and the original provision was restored. In other words, this amended provision never came into force at all. When that being the case, the question of denying the said benefit to the assessee did not arise. The Assessing Authority, without properly appreciating the speech of the Finance Minister, which found expression in the form of Circular issued by the Board, failed to follow the same on the pretext that the Tribunal in the case of Kampli Co-operative Sugar Factory Limited Vs. Joint CIT (70 TTJ 874) has taken a contrary view. It is submitted that the said order was also set aside by this Court in I.T.A. No.22/2001 and the matter was remanded back to the Tribunal. In

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these circumstances, we do not find any merit in this appeal. The substantial questions of law as framed are answered in favour of the assessee and against the Revenue. No merits.

The appeal is dismissed.

Sd/- JUDGE

Sd/- JUDGE

sma

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