ITO 13(2)(2), MUMBAI vs. SEAROCK ENTERPRIES P. LTD, MUMBAI

This appeal by the Revenue is arising out of the order of CIT(A)-21, Mumbai, in appeal No. CIT(A)-21/ITO-9(3)(1)/I.T.-146/2014-15 dated 28- 12-2015. The Assessment was framed by ITO Ward 9(3)(2), Mumbai for the A.Y. 2006-07 vide order dated 21.03.2014 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).

1. Whether on the facts and circumstances of the case & in law, the ld. CIT(A) is correct in directing Assessing Officer to allow the adjustment of unabsorbed depreciation and carry forward of unabsorbed depreciation claimed for AY 2001-02 and earlier years by assessee of ₹ 57,22,613/- as current depreciation and allowed to be set off against the income of current year i.e. AY 2006-07.”

“4.3 I have considered the facts of the Assessing Officer, the submissions of the appellant and case laws cited carefully. The first issue is whether unabsorbed depreciation for AY 2001-02 and earlier years can be carried forward and adjusted as part of current depreciation in AY 2006-07. No doubt the special bench of the ITAT in the case of Times Guarantee Ltd. (2010) 40 SOT 14 (Mum) held that the unabsorbed depredation for A? 2001-02 anu earlier years are governed by the extant law and cannot be carried forward beyond 8 years. the same was over ruled by the Gujarat High Court. The view that it can be carried forward without this restriction has now been followed in several decisions, some of which are listed below. General Motors India Pvt. Ltd. vs. DCIT (354 ITR 244)

Abacus Distribution (India) (P) Ltd. vs. DCIT 159 TTJ 156 (MUM) Confidence Petroleum India Ltd. vs. DCIT (ITA No. 1937/Mum/2012) (Mum I TAT) Hindustan Unilever Ltd. vs. ACIT 22 ITR (Trib.) 737 (Mum) Arch Fine Chemicals v. SCIT (IT Appeal Nos. 2414 & 2415/Mum/2012) (Mum ITAT)

4.4 In the case of Confidence Petroleum, the Hon’ble ITAT Mumbai Bench in their order dated 24- 07-2013 held as under:-

2.2.Before us, Authorised Representative(AR) submitted that provisions of section 32(2) were amended by Finance Act 2001w.e.f. 1st April 2002, that by the said amendment position as existed prior to 01.04.1997 was restored, that upto AY 1996-97 unabsorbed depreciation of the previous year was treated as current years depreciation,that same was allowed to be set off against the income from any other head,that only a limited period the carrying forward was restricted to eight years,that assessee was entitled to set off unabsorbed depreciation as mentioned in the application filed u/s.154 of the Act.He relied upon the orders of the Hon’ble High Court of Madras delivered in the case of Craigmore Plantations India Limited(253ITR447).He also relied upon the order of the Hon’ble High Court of Gujarat delivered in the case of General Motors India Pvt. Ltd. dated 23.08.2012.Departmental Representative (DR) supported the order of the AO and FAA.He relied upon the order of Special Bench of ITAT in the case of Times Guaranty Ltd. (ITA No. 4917 & 4918/Mum/2008-AY 2003-04 & 2004-05 (131 TTJ) (Mum) (S.B. 257). 2.3.We have heard the rival submission and perused the material before us.We have heard the rival submissions and perused the material on record.It appears that while deciding the issue of un-absorbed depreciation, AO and the FAA have not considered the amended provisions of the Sec.32(2) of the Act in right perspective. Perusal of provisions of section 32 show that prior to 01- 04- 1997,un-absorbed depreciation of the previous year used to be claimed as current depreciation and would be allowed to be set-off against income from any other head. By an amendment to the provisions of Section 32(2) of the Act, w.e.f. 01-04- 1997,treatment of un-absorbed depreciation underwent a change-because as per the amended provisions un-absorbed depreciation was no longer deemed to be part of current depreciation and the period available for set-off of such unabsorbed depreciation from profits of subsequent years was restricted to eight years. It is noteworthy that during earlier period(up to 31.03.1997) no such time limit was prescribed.Vide finance Act,2001 the provisions of Section 32(2)were once again amended and a result the position as it existed prior to 01-04-1997 was restored back. From the amendments to Finance Act,2001 it is clear that legislative intent was to allow un-absorbed depreciation to be carried forward beyond period of eight years. For the AY under consideration,correct law applicable was the law that prevailed as on the first day of April of that AY.In our opinion during the assessment year under consideration, amended provisions were applicable and AO was supposed to calculate the un-absorbed depreciation as required by the Act. In our opinion, there was no bar to allow the un-absorbed depreciation of the earlier years in the AY 2007-08. We find that similar issue has been discussed and decided by the Hon’ble High Court of Gujarat on 23.08.2012.,in the case of General Motors India Pvt. Ltd. in following manner :

“30. The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to AY. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by Section 32 as amended by Finance Act 2001? The reason given by the Assessing Officer under section 147 is that Section 32(2) of the Act was amended by Finance Act No.2 of 1996 w.e.f. AY. 1997-98 and the unabsorbed depreciation for the A.Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A.Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A.Y.1997-98 for being carried forward and set off against the income for the A.Y. 2005-06. But the assessee was not entitled for unabsorbed depreciation of Rs.43,60,22,158/- for A.Y. l997-98, which was not eligible for being carried forward and set off against the income for the A.Y. 2006- 07.

32.So, the unabsorbed depreciation allowance of A.Y. 1996-97 would be added to the allowance of A.Y. 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from A.Y. l997-98.

X X X X X X X X X X X X X 36.The purpose of this amendment has been clarified by Central Board of Direct Taxes in the Circular No.14 of 2001. The relevant portion of the said Circular reads as under:- “Modification of provisions relating to depreciation

30.1 Under the existing provisions of section 32 of the Income-tax Act, carry forward and set off of unabsorbed depreciation is allowed for 8 assessment years. 30.2 With a view to enable the industry to conserve sufficient funds to replace plant and machinery, specially in an era where obsolescence takes place so often, the Act has dispensed with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The Act has also clarified that in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. 30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside in the assessee’s business or profession in another country. 30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1 st April, 2001. 30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years.”

37.The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of Apr1, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under Section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the A.Y. 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the A.Y. 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years.

38.Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which it relates. If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A.Y.2001- 02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever.” (Emphasis Supplied)

Therefore, reversing the order of the FAA, effective Ground of appeal is decided in favour of the assessee-company.

4.5 Same view was taken by the Hon’ble ITAT Mumbai Bench in their order dated 9-10-2013 in the case of Arch Fine Chemicals Pvt Ltd. In these decisions, the Hon'ble ITAT followed the decision of the Gujarat High Court decision in the case of General Motors India Pvt. Ltd, and did not follow the ITAT SpI Bench Mumbai decision in the case Times Guaranty Ltd on this issue.

4.6 The Gujrat High Court in the case of General Motors has held that any unabsorbed depreciation available to assessee on lit day of April 2002 will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act 2001. Thus, the restriction of carry forward to 8 years and restriction of adjustment against only business income is not applicable after 1.04.2002 even in respect of brought forward unabsorbed depreciation on that date. Since the recent decisions of [TAT Mumbai on this issue is in favour of the appellant, the grounds of appeal in this regard is allowed and the AO is directed to allow the adjustment of unabsorbed depreciation and carry forward of unabsorbed depreciation claimed for AY 2001-02 and earlier years by assesse of Rs57,22.6131-as current depreciation and allowed to be set off against the income This disposes ground 6 and additional ground B which is allowed.”

Aggrieved, Revenue came in second appeal before Tribunal.

Order pronounced in the open court on 21-03-2018.