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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: Shri Joginder Singh, & Shri N.K. Pradhan
Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated
20/01/2016 of the Ld. First Appellate Authority, Mumbai.
Grounds number 1 to 4 pertains to not allowing current year
depreciation by erroneously interpreting the provisions of section 32(2) and section 71(2) and 72(1) of the Income Tax
Act, 1961 (hereinafter the Act) against the current years
income from ‘capital gain’.
During hearing, the ld. counsel for the assessee,
Shri Vinay Deshmane, claimed that the impugned ground is covered in favour of the assessee by the decision of the Mumbai Bench of the Tribunal in the case of Suresh
Industries Pvt. Ltd. vs ACIT (2012) 54 SOT 450; (2012) 27
taxmann.com 203 (Mum.), order dated 10/10/2012. Shri V.
Justin, ld. DR, did not controvert the claim of the assessee
that the issue in hand is covered by the aforesaid decision of the Tribunal.
We have considered the rival submissions and perused the material available on record. In view of the above,
3 Stainless India P. Ltd. (now known as Stainless India Ltd. we are reproducing hereunder the aforesaid order of the Tribunal dated 10/10/2012 for ready reference and analysis:-
“This appeal by the assessee is directed against the order of Ld. CIT(A)-13, Mumbai dt. 7.4.2011 pertaining to assessment year 2007-
The assessee has raised two substantive grounds of appeal as under:
"
The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in not allowing current year's depreciation of Rs. 2,32,059/- while determining the Business loss. The action is unjustified and unwarranted and against the provisions of Sec. 32(1) of the I.T. Act.
The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in not allowing set off of unabsorbed loss of Rs. 6,42,208/- against the current year's Long Term Capital Gain. The action is unjustified and unwarranted."
The sum and substance of the above mentioned grievance of the assessee suggests that (a) the Ld. CIT(A) should have allowed current year's depreciation at Rs. 2,32,059/- as set off from the capital gains and (b) the unabsorbed depreciation brought forward from the earlier year's at Rs. 6,42,208/- should have also been allowed as set off against current year's Long Term Capital Gain.
The facts giving rise to the grievance of the assessee show that for the year under consideration, during the course of the assessment proceedings, the Assessing Officer observed that the assessee company had incurred loss of Rs. 17,48,195/-. The assessee company also had a Long Term capital gains to the tune of Rs. 1,30,00,000/-. The assessee claimed set off of business loss from Long Term capital gains. This fact is not in dispute. What has been questioned by the AO is the set off claimed by the assessee of Current year's depreciation at Rs. 2,32,059/- at the brought forward depreciation at Rs. 6,432,20/-. The AO sought explanation from the assessee for its claim of set off of current year's and brought forward depreciation. The assessee filed a detailed reply to substantiate its claim. The claim of the assessee was rejected by the AO as the AO was of the opinion that the set off of current year's business loss against the income under the other heads of income does not include unabsorbed depreciation as it is not a part of business loss. The AO further observed that Sec. 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business. The other reason for rejecting assessee's claim was that the Act treats business loss separately from the depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for unlimited period. While rejecting the claim of set off of depreciation in totality, the AO
4 Stainless India P. Ltd. (now known as Stainless India Ltd. concluded that the assessee has not claimed the amount in return and also no revised return was filed. The AO completed the assessment after disallowing the claim of the assessee for set off of current year's depreciation as well as brought forward depreciation.
The assessee agitated the matter before the Ld. CIT(A) but without any success. The Ld. CIT(A) considered the provisions of I.T. Act 1922 vis-à-vis 1961 Act. The sum and substance for rejecting the assessee's appeal as enumerated by the Ld. CIT(A) in his order suggests that the Ld. CIT(A) was of the opinion that the set off can be claimed only from profits or gains and profits or gains are specifically confined to profits and gains of business only. The Ld. CIT(A) also distinguished the facts of the assessee's case with those of (a) CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555(SC) (b) Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777(SC) and (c) CIT v. Virmani Indus. (P.) Ltd. [1995] 216 ITR 607/ 83 Taxman 343(SC). The Ld. CIT(A) held that the current years' depreciation is not allowed to be set off against the income under the head Long Term capital gains. Further the claim of the assessee for allowing the unabsorbed depreciation of earlier year's was also not allowed for the reason that the assessee has not claimed in its computation of income while filing the return.
The assessee is aggrieved by this finding of the Ld. CIT(A) and is before us. The Ld. Counsel for the assessee submitted that the assessee is a private limited company engaged in the business of manufacturing automotive parts such as gear cover, hand chain wheel, round washer etc. The Ld. Counsel further submitted that the assessee company filed a return of income claiming business loss as well as current year's depreciation to be allowed as set off against the Long Term capital gains. The Ld. Counsel further pointed out that the assessee company has also unabsorbed depreciation of Rs. 6,42,208/- of earlier years . The Counsel strongly objected to the observation of the lower authorities that assessee has not shown /claimed unabsorbed depreciation brought forward in its return of income. To substantiate, the Ld. Counsel drew our attention to pages 1 & 2 of the Paper Book which are the statement of income for the year under consideration. The Ld. Counsel continued arguing that the assessee has filed profit and loss account and balance sheet and has claimed current year's depreciation at Rs. 2,32,059/-. It is the contention of the Ld. Counsel for the assessee that though the AO has accepted the figure of business loss but has denied current year's depreciation to be set off against the profit under the head Long Term capital gains. The Ld. Counsel further pointed out that a copy of the depreciation statement was filed along with Tax Audit Report and therefore the depreciation was legally allowable as per the provisions of Sec. 32(1) of the Act as part of the business loss. The Ld. Counsel further drew our attention to the provisions of Sec. 32(2) of the Act which provides that the unabsorbed depreciation is deemed to be merged with current year's depreciation and accordingly the assessee company is entitled to set off of unabsorbed depreciation relating to earlier assessment year's with the income under the head Long Term capital gains. The Ld. Counsel concluded that the assessee's claim of set off of current year's as well as brought forward depreciation is as per the provisions of law
5 Stainless India P. Ltd. (now known as Stainless India Ltd. and should be allowed to be set off against the income under the head Long Term capital gains.
Per contra, Ld. Departmental Representative strongly relied upon the findings of the lower authorities.
We have heard the rival submissions and perused the orders of the lower authorities and have carefully considered the relevant provisions of the Act and the Paper Book submitted by the assessee. A perusal of the statement of income for the year under consideration show that the assessee has shown Long Term capital gains at Rs. 1,30,00,000/- after claiming exemption u/s. 54EC of the Act. The assessee has also shown net loss from business before depreciation at Rs. 17,48,195/-. To this, the assessee added current year's depreciation at Rs. 2,32,059/- and unabsorbed depreciation brought forward from assessment years 1999-2000 and 2002-03 at Rs. 6,42,208/- and claimed set off amounting to Rs. 26,22,462/- from the Long Term capital gains at Rs. 1,30,00,000/-. Profit and gains of business or profession are computed in accordance with the provisions contained in Sec. 30 to 43 of the Act. Depreciation is allowed as per the provisions of Sec. 32(1) of the Act. Section 32(2) of the Act contains provisions relating to unabsorbed depreciation which is as under:
"Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (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-section (2) of section 72 and sub-section (3) of section 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.]
A perusal of the aforementioned section shows that Sec. 32(2) has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act. Before discussing the provisions of Sec. 72(2) let us first analyze the provisions of Sec. 32(2) of the Act prior to this amendment w.e.f. 1.4.2002
"Substituted by the Finance Act, 2001, w.e.f. 1-4-2002. Prior to its substitution, sub-section (2), as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1-4-1988, Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and Finance Act, 1992, w.e.f. 1-4-1993, substituted by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997 and further amended by the Finance Act, 2000, w.e.f. 1-4-2001, read as under :
'(2) Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (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 being less than the 6 Stainless India P. Ltd. (now known as Stainless India Ltd. allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,—
(i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;
(ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year;
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and—
(a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;
(b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed :
Provided that the time limit of eight assessment years specified in sub- clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses."
A comparative study of pre-amendment and post amendment provisions of Sec. 32(2) suggests that prior to the amendment, the set off was restricted to the profits and gains, if any, of any business or profession whereas post amendment (i.e. the law applicable for the year under consideration) the set off is available from profits or gains chargeable for the previous year. The claim of the lower authorities that profits or gains so mentioned should be restricted to profits or gains of business or profession cannot be accepted because had that been the intention of the legislature it would not have deleted phrase "of any business or profession in the post amended provisions of Sec. 32(2). The law regarding set off of unabsorbed depreciation upto 1.4.1996 was very liberal and set off was allowable against any income. This was also upheld by the Hon'ble Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra). However, the law regarding such set off was changed by the Finance Act No. 2 of 1996 and from A.Y. 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s.
However the status quo have been 7 Stainless India P. Ltd. (now known as Stainless India Ltd. restored from A.Y. 2003-04 and therefore the ratio laid down by the Hon'ble Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra) once again hold good and so now unabsorbed depreciation can be set off against any income. Thus, the claim of current year's depreciation of Rs. 2,32,059/- is directed to be set off against the income under the head "Capital gains". Accordingly, ground No. 1 of the appeal is allowed.
Having considered the provisions of Sec. 32(2), it is also clear that if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act. However, this fiction has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act.
Let us first consider the provisions of Sec. 72(2) of the Act which provides as under:
"Whether any allowance or part thereof is, under sub-section 2 of Sec. 32 or sub section (4) of Sec. 35, to be carried forward, effect shall first be given to the provisions of this section.
A simple reading of this section suggests that in case of set off of business loss vis-a-vis depreciation, the first preference shall be given to the business loss as per the provisions of Sec. 72(1) of the Act for the simple reason that the business loss can be carried forward only upto 8 assessment years whereas the depreciation can be carried over upto unlimited period. As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore the treatment given to the current year's depreciation is equally applicable to brought forward depreciation after the application of Finance Act, 2001. 14. We have already held that current year's depreciation is to be allowed as set off from the Long Term Capital Gains and brought forward depreciation is to be treated as current year's depreciation as per the legal fiction of section 32(2), the same is also to be allowed to be set off from the Long Term Capital Gains. Accordingly, ground No. 2 of the appeal is also allowed.
In the result, the appeal filed by the assessee is allowed.”
We find that in the aforesaid order, the issue was with respect to not allowing current years depreciation, while
determining the business loss against the provisions of section 8 Stainless India P. Ltd. (now known as Stainless India Ltd. 32(1) of the Act and not allowing set off of unabsorbed loss
against the current years long term capital gain. Identical is the issue before us in the present appeal, therefore, we are reproducing hereunder the provisions of section 32 of the Act
for ready reference:-
(1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed— (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed31; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed32: Provided that no deduction shall be allowed under this clause in respect of— (a) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used— (i) in a business of running it on hire for tourists ; or (ii) outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42 : Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :
9 Stainless India P. Ltd. (now known as Stainless India Ltd. Provided also that where an asset referred to in clause (iia)or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia)for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia)shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset: Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation.—For the purposes of this proviso,— (a) the expression "commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi- cab", "motor-cab", "tractor" and "road-roller"; (b) the expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988): Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991: Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv)of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or 10 Stainless India P. Ltd. (now known as Stainless India Ltd. the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation 2.—For the purposes of this sub-section "written down value of the block of assets" shall have the same meaning as in clause* (c) of sub- section† (6) of section 43. Explanation 3.—For the purposes of this sub-section, the expression "assets" shall mean— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. Explanation 4.—For the purposes of this sub-section, the expression "know- how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto). Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing 33[or in the business of generation, transmission or distribution] of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia)shall have effect, as if for 11 Stainless India P. Ltd. (now known as Stainless India Ltd. the words "twenty per cent", the words "thirty-five per cent" had been substituted : Provided further that no deduction shall be allowed in respect of— (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year; (iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of the assessee. Explanation.—For the purposes of this clause,— (1) "moneys payable" in respect of any building, machinery, plant or furniture includes— (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso; (2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949
12 Stainless India P. Ltd. (now known as Stainless India Ltd. (10 of 1949) with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution. (iv) [***] (v) [***] (vi) [***] (1A) [***] (2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (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-section (2) of section 72 and sub- section (3) of section 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.
We are also reproducing hereunder the provisions of section 72 & 73 of the Act.
(1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and— (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ; (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on : Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried
13 Stainless India P. Ltd. (now known as Stainless India Ltd. forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and— (a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and (b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding. (2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section. (3) No loss (other than the loss referred to in the proviso to sub-section (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
Section:-73
(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and— (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation.—Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a 14 Stainless India P. Ltd. (now known as Stainless India Ltd. company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
A perusal of the aforementioned section shows that Sec. 32(2) has been subjected to the provisions of Sec. 72(2)
and 73(3) of the Act. Before discussing the provisions of Sec.
72(2) let us first analyze the provisions of Sec. 32(2) of the Act
prior to this amendment w.e.f. 01/04/2002
"Substituted by the Finance Act, 2001, w.e.f. 1-4-2002. Prior to its substitution, sub-section (2), as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1-4-1988, Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and Finance Act, 1992, w.e.f. 1-4-1993, substituted by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997 and further amended by the Finance Act, 2000, w.e.f. 1-4-2001, read as under :
'(2) Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (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 being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred
15 Stainless India P. Ltd. (now known as Stainless India Ltd. to as unabsorbed depreciation allowance), as the case may be,—
(i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;
(ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year;
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and—
(a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;
(b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed :
16 Stainless India P. Ltd. (now known as Stainless India Ltd. Provided that the time limit of eight assessment years specified in sub-clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses."
A comparative study of pre-amendment and post
amendment provisions of Sec. 32(2) suggests that prior to the amendment, the set off was restricted to the profits and gains,
if any, of any business or profession whereas post amendment
(i.e. the law applicable for the year under consideration) the set off is available from profits or gains chargeable for the previous year. The claim of the lower authorities that profits or gains so mentioned should be restricted to profits or gains of business or profession cannot be accepted because had that been the intention of the legislature it would not have deleted
phrase "of any business or profession in the post amended
provisions of Sec. 32(2). The law regarding set off of unabsorbed depreciation upto 1.4.1996 was very liberal and 17 Stainless India P. Ltd. (now known as Stainless India Ltd. set off was allowable against any income. This was also upheld
by the Hon'ble Supreme Court in the case of Virmani Indus.
(P.) Ltd. (supra). However, the law regarding such set off was changed by the Finance Act No. 2 of 1996 and from A.Y. 1997-
98 to 2002-03 the unabsorbed depreciation was put at par
with business losses u/s.
However the status quo have been restored from A.Y. 2003-04 and therefore the ratio laid
down by the Hon'ble Supreme Court in the case of Virmani
Indus. (P.) Ltd. (supra) once again hold good and so now
unabsorbed depreciation can be set off against any income.
Thus, the claim of current year's depreciation of Rs.
2,32,059/- is directed to be set off against the income under the head "Capital gains". Accordingly, ground No. 1 of the appeal is allowed.
Having considered the provisions of Sec. 32(2), it is also clear that if the current year's depreciation cannot be set
off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and 18 Stainless India P. Ltd. (now known as Stainless India Ltd. deemed to be part of the allowance which means that brought
forward depreciation merges with the current year's
depreciation because of the legal fiction created by provisions
of Sec. 32(2) of the Act. However, this fiction has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act.
Let us first consider the provisions of Sec. 72(2) of the Act which provides as under:
"Whether any allowance or part thereof is, under sub- section 2 of Sec. 32 or sub section (4) of Sec. 35, to be carried forward, effect shall first be given to the provisions of this section.”
A simple reading of this section suggests that in case of set off of business loss vis-a-vis depreciation, the first
preference shall be given to the business loss as per the provisions of Sec. 72(1) of the Act for the simple reason that the business loss can be carried forward only upto 8
assessment years whereas the depreciation can be carried over
upto unlimited period. As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current
years' depreciation because of the legal fiction, therefore the treatment given to the current year's depreciation is equally
19 Stainless India P. Ltd. (now known as Stainless India Ltd. applicable to brought forward depreciation after the application of Finance Act, 2001. In the light of this observation, we have already observed/held that current years
depreciation is to be allowed as set off of from the long term
capital gain and brought forward depreciation and is to be treated as current years depreciation as per the legal fiction of section 32(2) and same is also allowed to be set off from the long term capital gains. Thus, the impugned grounds (grounds
number 1 to 4) are allowed.
The next ground pertains to disallowing a sum of Rs.3,08,061/- on account of sundry balances written off. The Ld. counsel for the assessee filed the sundry balances written
off (ledger account) from 01/04/2010 to 31/03/2011. The Ld.
DR contended that these details were not filed before the Assessing Officer. Considering the factual matrix, we find that this account was not filed before the Ld. Assessing Officer,
therefore, we deem it appropriate to remand this issue to the file of the Ld. Assessing Officer to examine the claim of the assessee and decide afresh in accordance with law. The assessee be given opportunity to substantiate its claim and 20 Stainless India P. Ltd. (now known as Stainless India Ltd. further to furnish evidence/necessary details, if any. Thus,
this ground is allowed for statistical purposes.
Finally, the appeal of the assessee is partly allowed for statistical purposes.
This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 28/05/2018. (N.K. Pradhan) (Joginder Singh) लेखा सद"य / ACCOUNTANT MEMBER "या"यक सद"य / JUDICIAL MEMBER मुंबई Mumbai; "दनांक Dated : 29/05/2018 f{x~{tÜ? P.S /"नजी स"चव
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. आयकर आयु"त(अपील) / The CIT, Mumbai. 4. आयकर आयु"त / CIT(A)- , Mumbai
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड" फाईल / Guard file.
आदेशानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt.