Loading judgment…
Facts
The assessee's case was selected for scrutiny, and the AO made additions for Long-Term Capital Gain and disallowed business expenditure/loss. A key contention was the denial of set-off for brought forward unabsorbed depreciation of Rs.2,46,533/- from AY 2015-16, on the grounds that no business activity was carried out in the current year. The CIT(A) upheld this disallowance.
Held
The Tribunal, relying on Supreme Court and High Court precedents, held that unabsorbed depreciation, by operation of Section 32(2) of the Income-tax Act, becomes current year's depreciation and can be set off against income under any head, including "Income from other sources," irrespective of whether business activity was carried on in the current year. The CIT(A)'s order confirming disallowance was set aside.
Key Issues
Can brought forward unabsorbed depreciation be set off against current year's income even if the assessee did not carry on any business activity during the relevant previous year?
Sections Cited
143(3), 142(1), 10(15)(iv)(h), 271(1)(c), 69C, 32(2), 72(2), 58(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Asstt.Year : 2016-17 Parshwanath Land Organisers LLP The ITO, Ward-3(1)(2) 8, Shantiniketan Society Vs. Ahmedabad. Ellisbridge Current Jurisdiction: Ahemdabad. The ITO, Ward-1(3)(1) PAN : AASFP 6630 K Ahmedabad. (Applicant) (Responent) : Shri Sanjay R. Shah, AR Assessee by : Shri Umesh Kumar Agrawal, Sr.DR Revenue by सुनवाई क� तारीख/Date of Hearing : 24/07/2025 घोषणा क� तारीख /Date of Pronouncement: 29/07/2025 आदेश/O R D E R आदेश आदेश आदेश PER MAKARAND V.MAHADEOKAR, AM: This appeal by the assessee is directed against the order passed by the Learned Additional / Joint Commissioner of Income Tax from the Office of the Commissioner of Income Tax (Appeals), Panchkula [hereinafter referred to as “CIT(A)”] dated 16.01.2025 for the assessment year 2016–17, arising from the assessment order passed under section 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the ITO, Ward 3(1)(2), Ahmedabad[hereinafter referred to as “Assessing Officer or AO”] dated 17.12.2018.
Facts of the Case 2.1 The assessee, Parshwanath Land Organisers Pvt. Ltd., filed its return of income for the year under consideration on 25.09.2016, declaring total income at ‘Nil’. The assessee was converted into Parshwanath Land Organisers LLP vide Certificate of Registration on Conversion issued by Registrar pursuant to section 58(1) of the LLP Act, 2008 on 01-06-2016. The case was selected for scrutiny under the Computer-Assisted Scrutiny Selection (CASS) and notices under sections 143(2) and 142(1) were duly issued and served.
2.2 During the assessment proceedings, the Assessing Officer noted that the assessee had disclosed exempt income of Rs.27,82,796/-, which included Rs. 17,15,768/- as interest income claimed exempt under section 10(15)(iv)(h), and Rs.10,67,028/- as gain on sale of Tax Saver Bonds, which the assessee erroneously claimed as exempt. Upon verification, the Assessing Officer held that the gain on sale of Tax Saver Bonds was liable to be taxed as Long-Term Capital Gain (LTCG) and added the same to the total income under normal provisions. The assessee, upon confrontation, accepted the taxability and offered the income to tax, but the AO treated it as concealed income, initiating penalty proceedings under section 271(1)(c). It was further noticed by the AO that the assessee had not undertaken any business activity during the year, there being no purchases, sales or opening/closing stock, yet claimed business expenditure of Rs.3,47,024/-. Upon being confronted, the assessee admitted that no business was carried on and offered the entire business loss of Rs.4,08,933/- for disallowance.
2.3 However, the AO, instead of merely disallowing the net loss, separately disallowed the business loss of Rs.4,08,933/- and again added Rs.3,47,024/- under section 69C as unexplained expenditure, which the assessee claimed amounted to double disallowance. The AO further denied the set-off of brought forward unabsorbed depreciation of Rs.2,46,533/- from A.Y. 2015–16 on the ground that no business was carried out during the year. The assessment was completed under section 143(3) on 17.12.2018, assessing total income at Rs.14,14,052/- and initiating penalty proceedings separately.
2.4 In first appeal, the Ld. CIT(A) partly allowed the assessee’s appeal. The CIT(A) agreed with the assessee’s contention that disallowance of Rs.3,47,024/- under section 69C in addition to the business loss of Rs.4,08,933/- already disallowed resulted in double taxation. Accordingly, he deleted the addition of Rs.3,47,024/- under section 69C. However, the Ld. CIT(A) confirmed the disallowance of set-off of unabsorbed depreciation of Rs.2,46,533/-, holding that in the absence of business activity during the year, such set-off was not allowable under section 32(2).
Being aggrieved by the partial relief granted by the CIT(A), the assessee has filed the present appeal before us raising the following solitary ground:
Your Appellant, being aggrieved by the order passed by Addl/JCIT(A), Panchkula, presents this appeal on the following grounds of appeal, which are without prejudice to each other. The learned CIT(Appeals) erred in confirming the non-allowance of unabsorbed depreciation of Rs.2,46,533/- from Asst. Year 2015-16 against current year's assessed income on the ground that the Appellant did not carry out any business activities during the year under consideration. It is submitted that the set off of unabsorbed depreciation of earlier year has to be allowed against income of the current year as per the provision of section 32(2) as the unabsorbed depreciation of earlier year becomes current year's depreciation. It is submitted that it be so held now and the claim of the Appellant for allowance of unabsorbed depreciation of Rs.2,46,533/- brought forward from Asst. Year 2015-16 be allowed to be set off against current year's income computed by the learned Assessing Officer.
The Learned Authorised Representative (AR) reiterated the facts already on record and submitted that the sole dispute arising in the present appeal relates to the non-allowance of set-off of unabsorbed depreciation of Rs.2,46,533/- brought forward from A.Y. 2015–16 against the total income assessed for A.Y. 2016–17. It was submitted that the disallowance sustained by the CIT(A) was based on an erroneous and narrow interpretation of section 32(2) of the Act. The AR invited the Bench’s attention to the return of income and computation statement filed for A.Y. 2016–17 wherein the assessee had specifically disclosed the brought forward depreciation of Rs.2,46,533/- in the appropriate schedule. The AR demonstrated that the depreciation was neither disputed in quantum nor disallowed in A.Y. 2015–16, and therefore its set-off in the current year was rightly claimed.
4.1 The AR strongly contended that the CIT(A) erred in holding that the absence of business activity during the year disentitled the assessee from claiming set-off of unabsorbed depreciation, which, in law, becomes part of the current year’s depreciation by virtue of the statutory fiction under section 32(2). He submitted that such a view was directly contrary to well- settled law. In support of the assessee’s claim, the AR placed reliance on the binding judicial precedent of Hon’ble Supreme Court in case of CIT v. Virmani Industries Pvt. Ltd. - [TS-7-SC-1995-O], (1995) 129 CTR 0189, (1995) 216 ITR 0607, (1995) 83 TAXMAN 0343 (SC)] where it was held that the unabsorbed depreciation allowance stands on the same footing as current year’s depreciation and is available for set-off against income under any head, even if the assessee is not carrying on the same or any business in the current year. Similar view was taken by the Hon’ble Apex court in case of CIT v. Jaipuria China Clay Mines (P) Ltd. [TS-10-SC-1965-O], (1966) 59 ITR 0555 ]. The AR also placed reliance of judgement of Hon’ High Court of Madras in case of CIT v. SPEL Semiconductor Ltd. [(2012) 27 taxmann.com 242 (Mad) / 212 Taxman 506 (Mad)] where after combined reading of sections 32(2) and 72(2) Hon’ble High Court, referring the judgements of Hon’ble Apex Court in case of Virmani Industries Pvt. Ltd.(supra) and Jaipuria China Clay Mines (P) Ltd.(supra) held that unabsorbed depreciation, once carried forward, assumes the character of current year’s depreciation and can be set off against income under any head, including ‘income from other sources’, even in the absence of business activity during the year. It was further held that section 72(2) merely lays down the priority of set-off between business loss and depreciation but does not restrict the operation of section 32(2).
Accordingly, the AR prayed that the set-off of unabsorbed depreciation of Rs.2,46,533/- brought forward from A.Y. 2015–16 be directed to be allowed against the total income assessed for the year under appeal.
5. The Learned Departmental Representative (DR), on the other hand, relied upon the findings recorded by the lower authorities and supported the disallowance of set-off of unabsorbed depreciation.
We have carefully considered the rival submissions and perused the material available on record, including the judicial precedents cited by the learned Authorised Representative. The core issue for adjudication is whether the assessee is entitled to set off the brought forward unabsorbed depreciation amounting to Rs.2,46,533/- from A.Y. 2015–16 against the assessed income for the year under consideration, despite the admitted fact that no business activity was carried out during the relevant previous year. The legislative framework governing the carry forward and set-off of business loss and unabsorbed depreciation is contained in sections 72(2) and 32(2) of the Income-tax Act, 1961. Section 72(2) provides that where in any assessment year the assessee is entitled to a set-off of both brought forward business loss and unabsorbed depreciation, the business loss shall be set off first. However, the scope of section 32(2) is materially broader. It provides that if the full effect cannot be given to the depreciation allowance under section 32(1), the unabsorbed portion shall be added to the depreciation allowance of the following year and deemed to be part of that year’s depreciation.
6.1 The legal fiction created under section 32(2) has been authoritatively interpreted by the Hon’ble Supreme Court in CIT v. Virmani Industries Pvt. Ltd. (supra) and CIT v. Jaipuria China Clay Mines (P) Ltd. (supra). In Virmani Industries (supra), the Apex Court unequivocally held that unabsorbed depreciation becomes part of current year’s depreciation and is not dependent upon the assessee carrying on the same business or any business in the year of set-off. Similarly, in Jaipuria China Clay Mines (supra), the Supreme Court clarified that such depreciation can be adjusted against total income, and not merely business income, due to the deeming provision. The legal proposition was further affirmed by the Hon’ble Madras High Court in 2012 in case of CIT v. SPEL Semiconductor Ltd.(supra). For the sake of clarity, we reproduce the relevant paras below:
A combined reading of the above said sections shows that while carried forward of loss could be adjusted as against the profits and gains of business or profession of the year, the set off of unabsorbed depreciation allowance as per Section 32(2) could be given effect to only after giving relief on the carried forward loss. Given the fact that the carried forward of business loss could be adjusted only as against the business income, if there is no other income available, then as per Section 72(2) of the Act, unabsorbed depreciation has to wait for further years subject to the limitation of eight years for absorbing the same in the business income of the assessee. However, in a case of assessee as one before us, when the assessee has income both from business as well as from other sources, that after having set off of the business loss as against the current year income from business, there existed no further business income, the carried forward business loss remaining still unabsorbed could only be carried forward for the next year. However, given the fact that the assessee has income under the other heads, Section 32(2) provides the relief.
6. Thus, as far as the income from other sources are concerned, given the fact that under Section 32(2) of the Act, there is a provision of set off of unabsorbed depreciation allowance as against the income from other sources, it is not necessary that one should wait for the assessee to earn income from business so as to exhaust the carried forward loss to be set off as against the business income and then apply the unabsorbed depreciation. A reading of Section 32(2) thus makes it clear that if the unabsorbed depreciation allowance could not be wholly set off under clause (i) and clause (ii), the amount of depreciation not so set off can be set off from income from other head, if any, available for that assessment year. The language of Section 32(2) is very clear and there is hardly anything contained in Section 72(2) to prevent such set off of carried forward depreciation being given to the assessee under the head of income from business or income from other sources. The Revenue does not deny the fact that as far as the income from other sources are concerned, there could be no set off of business loss or carried forward loss. However, what is contended by the Revenue is that Section 72(2) controls the operation of Section 32(2) to have the set off of unabsorbed depreciation against the income from other sources. We do not agree with this line of reasoning. What is spoken to under Section 72(2) is as regards set off of business loss as against the income from profits and gains of business or profession and if there is loss as well as unabsorbed depreciation, the set off shall be first on the business loss as against the business income and then on unabsorbed depreciation. What is spoken to under Section 32(2) is as regards set off of unabsorbed depreciation as per clause (ii) of sub-section (1) and when the unabsorbed depreciation could not be set off as against the income from business or profession by reason of there being no income available under the said heads and where there is income from other sources, effect must be given to Section 32(2) of the Act for that assessment year.
7. In the light of the clear provisions, we have no hesitation in rejecting the Revenue's plea, there by confirming the order of Tribunal. The above Tax Case (Appeal) is dismissed. No costs.
6.2 In light of the above, it is well settled that unabsorbed depreciation, by virtue of section 32(2), becomes current year’s depreciation and can be set off against income under any head, including "Income from other sources". The requirement that business must be carried on during the relevant previous year is not a condition precedent for invoking section 32(2), nor does the absence of business income restrict such adjustment. Therefore, the interpretation adopted by the lower authorities in denying the set-off solely on the ground of non-carrying on of business is contrary to the scheme of the Act and judicially settled law.
6.3 Respectfully following the binding decisions of the Hon’ble Supreme Court and the Hon’ble High Courts, and applying the same to the facts of the present case, we hold that the assessee is entitled to set off the brought forward unabsorbed depreciation of Rs.2,46,533/- against the income assessed for the year under consideration. The action of the CIT(A) in confirming the disallowance is, accordingly, not sustainable in law and is liable to be reversed. The order of the learned CIT(A) sustaining the disallowance is hereby set aside. Accordingly, the Assessing Officer is directed to allow the set-off of brought forward unabsorbed depreciation of Rs.2,46,533/- pertaining to the Assessment Year 2015–16 against the total income assessed for the year under appeal.
In the result the appeal of the assessee is allowed.
Order pronounced in the Court on 29th July, 2025 at Ahmedabad.