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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Ravish Sood & Shri N.K. Pradhan
O R D E R
PER RAVISH SOOD, JM
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-8, Mumbai, dated 12.02.2018, which in turn arises from the order passed by the A.O under Sec. 143(3) r.w.s 147 of the Income Tax Act, 1961 (for short „Act‟), dated 30.11.2016. The assessee has assailed the impugned order on the following grounds of appeal :
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in directing the A.O to allow set off of unabsorbed depreciation against Income from House Property and Income from Other Sources and further to set off of earlier years' business losses against business income of current year following the decision of the Hon‟ble Bombay High Court in the case of CIT vs. Estate & Finance Ltd. [1978] 111 ITR 119 (Born) dated 16/11/1976 which is as per the provisions laid down in Income TaxAct, 1922?
P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd.
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in relying on a decision which was based on the provisions of the Income Tax Act, 1922 when in the impugned matter the provisions of the Income Tax act, 1961 applies? 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in directing the AO to allow the set off of unabsorbed depreciation against Income from House Property and Income from Other Sources and further to set off of earlier years business losses against business income of current year disregarding the decision of the Hon‟ble Kerala High Court in the case of Malabar Agricultural Co. Ltd. (229 ITR 548) wherein it is held that the assessee did not engage in any manufacturing or processing, nor was there any trading activity and hence, as per the provisions of Sec.72(1) of the Income Tax Act, 1961, since there is no business activity carried on by the assessee during the year, the losses of earlier years as well as the unabsorbed depreciation of earlier years cannot be set off? 4. The appellant craves leave to amend, alter, delete or add grounds which may be necessary.” 2. Briefly stated, the assessee company which is engaged in the business of manufacturing of textile garments had e-filed its return of income for A.Y. 2011-12 on 30.09.2011, declaring its total income at Rs. Nil. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was reopened under Sec. 147 of the Act.
During the course of the assessment proceedings it was observed by the A.O that the „business income‟ of Rs.17,96,914/- shown by the assessee in its return of income was „set off‟ by the assessee against the brought forward „business losses‟ of the earlier years. Also, it was observed by him that the assessee had „set off‟ its entire „Income from house property‟ of Rs. 2,15,72,559/- and „Income from other sources‟ of Rs. 5,66,579/- against the brought forward „unabsorbed depreciation‟ of the earlier years. The A.O held a conviction that as the assessee had admittedly discontinued its business activities in A.Y. 2010-11, therefore, it was not entitled to claim „set off‟ of losses of earlier years against its income for the current year. On being confronted with the aforesaid observation of the A.O, it was submitted by the assessee that the „unabsorbed depreciation‟ under Sec. 32(2) could be carried forward P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. by it for an indefinite period and „set off‟ against any head of income. In order to drive home its aforesaid contention the assessee had drawn support from the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Jaipuria China Clay wins (P) Ltd. (1966) 59 ITR 555 (SC). However, the A.O was not persuaded to accept the aforesaid claim of the assessee, and was of the view, that as the judicial pronouncement relied upon by the assessee was rendered in context of the Income Tax Act, 1922, therefore, the same would not be relevant for adjudicating the issue involved in the case before him. On the basis of his aforesaid conviction the A.O disallowed the assesses claim for „set off‟ of „business losses‟ of earlier years against its current years „business profits‟ of Rs.17,96,914/-. Also, the claim for „set off‟ of „unabsorbed depreciation‟ of the earlier years against the current years „Income from house property‟ of Rs. 2,15,72,559/- and the „Income from other sources‟ of Rs. 5,66,579/- was also declined by him. Accordingly, the A.O on the basis of his aforesaid observations assessed the income of the assessee at an amount of Rs. 2,39,36,050/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) not finding favour with the view taken by the A.O, vacated his order to the extent he had declined to allow „set off‟ of the brought forward „business losses‟ and „unabsorbed depreciation‟ as was claimed by the assessee in its return of income. Accordingly, the CIT(A) finding the claim of the assessee for „set off‟ of the brought forward losses/unabsorbed depreciation as being in order, therefore, allowed the appeal. 5. The revenue being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. the judicial pronouncements relied upon by them. We find that our indulgence in the present appeal has been sought by the revenue for adjudicating two issues viz. (i) that, as to whether the CIT(A) is justified in allowing „set off‟‟ of the brought forward „business losses‟ of Rs.17,96,914/- of the earlier years against the current year „business income‟; and (ii) that, as to whether the CIT(A) is justified in allowing the „set off‟ of the brought forward „unabsorbed depreciation‟ against the current year „Income from house property‟ of Rs.2,15,72,559/- and „Income from other sources‟ of Rs. 5,66,579/.
We shall first advert to the claim of the ld. D.R that the CIT(A) is in error in allowing „set off‟ of the brought forward „business losses‟ of the earlier years against the current years „business income‟ of Rs.17,96,914/- shown by the assessee in its return of income. It is submitted by the ld. Departmental Representative (for short „D.R‟), that admittedly as the business of the assessee company was discontinued in the immediately preceding year viz. A.Y. 2010-11 and there was no business activity carried out by it during the year under consideration, therefore, the „set off‟ of the brought forward „business losses‟ of the earlier years against the „business income‟ for the year under consideration was not justified. We have given a thoughtful consideration to the aforesaid contention of the ld. D.R and are unable to persuade ourselves to subscribe to the same. As is discernible from a perusal of Sec.72(1) of the Act, where a loss suffered by an assessee under the head “Profit or gains of business or profession”, not being a loss sustained in a speculation business, cannot be or is not wholly „set off‟ against income under any head of income in accordance with the provisions of Sec.71, then so much of the loss as had not been so „set off‟ shall be carried forward to the following assessment year and be „set off‟ against the profit or gains, if any, of any business or profession carried on by him and assessable for that assessment year.
P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. Further, in case the „business loss‟ cannot be wholly so „set off‟, then the amount of loss not so „set off‟ shall be carried forward to the following assessment year, and so on, for a period of eight assessment years immediately succeeding the assessment year for which the loss was first computed. Accordingly, as per the mandate of the aforesaid statutory provision, it can safely be gathered that a „business loss‟ (other than a speculation loss) which cannot be „set off‟ against the income under any head of income in accordance with the provisions of Sec. 71 during the year itself is to be carried forward and to be „set off‟ against the profit or gains, if any, of any business or profession carried on by him and assessable for that assessment year.
Admittedly, at the first blush the contention of the ld. D.R appeared to be very convincing and we were persuaded to subscribe to his view that in the absence of any “business or profession carried on by the assessee” during the year, the requisite condition envisaged in clause (i) of sub-section (1) of Sec. 72 was not satisfied, and resultantly the claim of “set off” of the brought forward „business losses‟ raised by the assessee could not be accepted. However, a careful perusal of clause (i) of sub-section (1) of Sec. 72 reveals that what is required for “set off” of the brought forward „business losses‟ is “...the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year”. In fact, there is nothing therein provided that such business or profession must be carried on by the assessee during the year in which „set off‟ of the brought forward „business losses‟ is claimed by the assessee. We are of the considered view that unlike Sec. 28(i) which emphasises the carrying on of the business or profession by the assessee any time during the previous year, the requirement envisaged in Sec. 72(1)(i) as a precondition for „set off‟ of brought forward „business losses‟ is that there is profits and gains of any business or profession carried on by P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. the assessee and assessable for that assessment year. Accordingly, there is nothing provided in Sec. 72(1)(i) which mandates that the business or profession should be carried on by the assessee during the previous year. In our considered view, if during the year there are profits and gains of any business or profession carried on by the assessee and assessable for that assessment year, then, the assessee would be entitled for „set off‟‟ of its brought forward „business losses‟ against the same. Accordingly, Sec. 72(1)(i) does not mandate that the business or profession should have been carried on by the assessee during the previous year as a precondition for „set off‟ of the „brought forward‟ business losses. In fact, if there are profits and gains of any business or profession carried on by the assessee, which are assessable in its hands during the year, it would be entitled to „set off‟ its brought forward „business losses‟ against the same. Say, for instance, sum received by the assessee after discontinuance of its business and chargeable to tax as its „business income‟ u/s 176(3A) in the year of receipt, would irrespective of the fact that the assessee was not carrying on any business in the said year of receipt will be available for „set off‟ of the brought forward „business losses‟ of the assessee during the said year.
It is in the backdrop of the aforesaid position of law that we shall now adjudicate as to whether the claim of „set off‟ of the brought forward „business loss‟ by the assessee during the year under consideration is in order, or not. As is discernible from the assessment order, it is an admitted fact that the assessee had during the year shown its „business income‟ at Rs.17,96,914/-. In fact, the said „business income‟ had been accepted by the A.O while computing the total income of the assessee for the year under consideration. Accordingly, the assessing of the „business income‟ by the A.O while framing the assessment, as such, in itself satisfies the precondition P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. envisaged in clause (i) of sub-section (1) of Sec. 72, as had been deliberated at length by us hereinabove. In the backdrop of the aforesaid facts, we are of the considered view that the „set off‟ of the brought forward „business losses‟ against the „business income‟ of Rs.17,96,914/- as claimed by assessee is well in order. We thus not finding any infirmity in the order of the CIT(A) to the extent he had upheld the claim of the assessee as regards „set off‟ of the brought forward business losses of Rs.17,96,914/-, uphold the same.
We shall now advert to the claim of the revenue that the CIT(A) had erred in allowing the „set off‟ of the brought forward „unabsorbed depreciation‟ of earlier years against the current years „Income from house property‟ of Rs. 2,15,72,559/-and „Income from other sources‟ of Rs. 5,66,579/-. The controversy involved in context of the present issues lies in a narrow compass i.e as to whether the brought forward „unabsorbed depreciation‟ could be „set off‟ against income other than that shown under the head „business income‟, or not. It is the claim of the assessee that „unabsorbed depreciation‟ under Sec. 32(2) can be carried forward indefinitely and „set off‟ against any head of income. On the contrary, the revenue is of the view that in the absence of any business activity carried on by the assessee during the year, the unabsorbed loss and also the unabsorbed depreciation of the earlier years cannot be „set off‟ against the income shown by the assessee under the other heads. We have given a thoughtful consideration to the aforesaid issue and are unable to persuade ourselves to subscribe to the view taken by the A.O. As per Sec.32(2) of the Act (as was applicable to the year under consideration), where in the assessment of the assessee, full effect cannot be given to any allowance under sub- section (i) in any previous year, owing to their 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 P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. provisions of sub-section (2) of Sec. 72 and sub-section (3) of Sec.73, the allowance or 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 in for the succeeding previous years. A perusal of the aforesaid statutory provision reveals that in a case where the claim of depreciation as worked out under sub-section (1) of Sec.32 cannot be fully adjusted against the profits or gains chargeable for that year, then such „unabsorbed depreciation‟ shall be carried forward to the succeeding years and shall be added to the amount of the claim for depreciation of the assessee for the said succeeding year and deemed to be part of such claim of depreciation for the said year. Further, in case if there is no claim of depreciation in the said succeeding year, then the brought forward claim of „unabsorbed depreciation‟ shall be deemed to be claim of depreciation of the assessee for the said year, and so on. In sum and substance, as per the mandate of law the brought forward „unabsorbed depreciation‟ would take the colour and character as that of the claim of depreciation of the assessee for the succeeding year, and so on. Accordingly, the brought forward claim of „unabsorbed depreciation‟ of the assessee which is deemed to be the claim of the assessee for the current year shall be eligible for being „set off‟ against his income, if any, assessable for that assessment year under any other head (other than income assessable under the head “Salaries”).
We have perused the observations of the A.O and are unable to persuade ourselves to subscribe to the same. Admittedly, as per the provisions of Sec. 32(2) of the Act prior to their amendment by the Finance Act, 2000 w.e.f 01.04.2001 the „set off‟ of the „unabsorbed P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. depreciation‟ was restricted to the profits and gains from business or profession. However, post-amendment of Sec. 32(2) the „set off‟ of unabsorbed depreciation is no more restricted to the profits and gains of business or profession. In fact, pursuant to the amendment made available on the statute vide the Finance Act, 2001, w.e.f 01.04.2002 the liberal regime prior to A.Y 1997-98 had been restored from A.Y 2002-03 onwards. In our considered view, the observations of the A.O as regards the limited scope of „set off‟ of „unabsorbed depreciation‟ appears to be guided by the pre-amended provisions of Sec. 32(2) of the Act i.e as had remained available on the statute during the period A.Y 1997-98 to A.Y 2000-01. Our aforesaid view that existence of any business in the year in which the „unabsorbed depreciation‟ is sought to be „set off‟ by the assessee is not required is fortified by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Virmani Industries Pvt. Ltd. (1995) 216 ITR 607 (SC). The Hon‟ble Apex Court in its aforesaid judgment had observed as under:
“Yet another question which has to be answered before we can answer the question concerned in this appeal is whether it is necessary that in the following year the assessee must carry on business, i.e., some or other business, to avail of the benefit of the said sub-section ? Two views are possible in this behalf, viz., (1) since the sub-section speaks of unabsorbed depreciation being carried forward to the next year and "added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance" the sub-section necessarily contemplates existence of a business in the following year, and (2) inasmuch as the sub-section not only speaks of adding the unabsorbed depreciation to the depreciation allowance allowed in the following year but also says that in the absence of such allowance, the carried forward depreciation allowance shall be the allowance for that year, it means that in the following year the assessee need not carry on any business or profession for availing the benefit of sub-s. (2) of s.
We are inclined to adopt the second of the above two views having regard to the decisions of this Court in Jaipuria China Clay Mines (P) Ltd. (supra) and Rajapalayam Mills Ltd. (supra).” At this stage, we may herein observe that as the aforesaid judgment was rendered by the Hon‟ble Apex Court in context of a case pertaining to A.Y 1965-66, therefore, we feel it necessary to cull out Sec. 32(2) as was then available on the statute, which we find as was then available on the statute, read as under:
P a g e | Dy. CIT-3(3)(1) Vs. M/s Regency Property Investments Pvt. Ltd. "32(2) where, in the assessment of the assessee or, if the assessee is a registered firm (or an unregistered firm assessed as a registered firm, in the assessment of its partners) full effect cannot be given to any allowance under cl. (i) or cl. (ii) or cl. (iv) or cl. (v) of 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 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." As is discernible from a perusal of the aforesaid statutory provision i.e Sec. 32(2), it can safely be concluded that as the same in substance had remained the same as in context to that applicable to the case of the assessee before us, therefore, the aforesaid view arrived at by the Hon‟ble Apex Court seizes the issue under consideration. Accordingly, we are of the considered view that as the „set off‟ of the „unabsorbed depreciation‟ cannot be bridled with a condition that the business should be continued by the assessee in the said year, therefore, the claim of „set off‟‟ of the brought forward „unabsorbed depreciation‟ by the assessee against its current year „Income from house property‟ of Rs.2,15,72,559/- and „Income from other sources‟ of Rs.5,60,579/- is found to be in conformity with the mandate of law. We thus not finding any infirmity in the order of the CIT(A), who had rightly vacated the incorrect view taken by the A.O, therefore, uphold his order.
The appeal filed by the revenue is dismissed.