ACIT, CHENNAI vs. MANALI PETROCHEMICALS LIMITED, CHENNAI

आयकर अपील�य अ�धकरण, “ए” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member I.T.A. Nos. 1272 and 1273/Mds/2017 �नधा�रण वष�/Assessment Year:2006-07 & 2007-08 & C.O. No.107 & 108/Mds/2017 [In I.T.A. Nos. 1272 and 1273/Mds/2017] The Assistant Commissioner of M/s. Manali petrochemicals Limited, Income Tax, Large Taxpayer Unit I, Vs. Ponneri High Road, Chennai 600 101. Manali 600 068. [PAN: AAACM3404D] (Appellant) (Respondent/Cross Objector) Department by : Shri D. Prabhu Mukunth Arun Kumar, Jr. Standing Counsel Assessee by : Shri R. Vijayaraghavan, Advocate सुनवाई क� तार�ख/ Date of hearing : 04.01.2018 घोषणा क� तार�ख /Date of Pronouncement : 23.01.2018 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: Both the appeals preferred by the Revenue pertaining to same assessee are directed against different orders of the ld. Commissioner of Income Tax (Appeals) 17, Chennai both dated 28.02.2017 for the assessment years 2006-07 and 2007-08. The Revenue has raised the following grounds:

2 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 “1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2. The learned CIT(A) has erred in relying on the decision of the jurisdictional Tribunal in the case of M/s. KMC Speciality Hospitals India v. ACIT [2014] since the case has been contested by revenue in the Hon’ble High Court of Chennai vide TCA No. 62/2015. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer be restored.” 2. Brief facts of the case are that the assessee is a public limited company, engaged in the manufacture of chemical products like Propylene Oxide, Propylene Glycol and Polyols that are being used in various industries. The assessee filed its return of income on 25.10.2007 declaring 'NIL' income under the normal provisions of the Act after set off of brought forward unabsorbed depreciation pertaining to assessment year 1994-95 to assessment year 2003-04. By making various disallowances and set off the brought forward unabsorbed depreciation relating to assessment year 1994- 95 to assessment year 2003-04, the Assessing Officer arrived at the total income of the assessee at ₹.48,35,480/- under the normal provisions of the Act and taxable book profit under section 115JB of the Act at ₹. 23,36,11,818/- and completed the assessment under section 143(3) of the Act. Further, after giving effect to the order of ld. CIT (Appeals), LTU, Chennai, vide order dated 24.02.2012, the taxable income under normal computation was determined at ₹.22,91,32,370/-, vide order dated 14.11.2013. Subsequently, the Assessing Officer reopened the assessment

3 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 by issue of notice under section 148 dated 15.03.2013. In response to the said notice, the assessee filed the return of income on 19.04.2013. The assessee sought for the reasons for reopening of assessment. While furnishing the reasons, the Assessing Officer stated that as per the amended provisions of section 32(2) of the Act from 01.04.1997 (i.e. from assessment year 1997-98) onwards, the unabsorbed depreciation can be set off only upto eight assessment years starting from assessment year 1997-98. In the assessee’s case the set off period of eight years had expired by assessment year 2005-06 itself and therefore, the Assessing Officer held that the assessee is not eligible for set off of such unabsorbed depreciation in the above mentioned assessment year. After considering the objections of the assessee, the Assessing Officer completed the assessment under section 143(3) r.w.s 147 dated 28.02.2014 disallowing the set off of the unabsorbed depreciation from assessment year 1992-93 to assessment year 1994-95 of ₹.43.75 crores and set off the brought forward unabsorbed depreciation for assessment year 1998-99 to assessment year 2003-04 and assessed the total income at ₹.28.98 crores under the normal provisions of the Act. Similarly, for the assessment year 2007-08, the Assessing Officer assessed the total income of the assessee at ₹.21,94,42,526/- under normal provisions of the Act

4 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 3. The assessee carried the matter in appeal before the ld. CIT(A) for both the assessment years and raised the grounds with regard to reopening of assessment as well as disallowance of balance unabsorbed depreciation. While sustaining the reassessment order passed by the Assessing Officer, by following various decisions including the decision of the Tribunal in the case of KMC Speciality Hospitals India Ltd. v. ACIT [2014] taxmann.com 534 (Chennai – Trib], the ld. CIT(A) allowed the ground with regard to set off of unabsorbed depreciation for both the assessment years.

5 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 depreciation beyond the period of eight years by relying on the decision of the Special Bench of the Mumbai Tribunal in the case of DCIT Vs. Times Guaranty Limited in ITA No.4917 & 4918/Mum/2008 dated 30.06.2010. By following various decisions including the decision in the case of General Motors India P. Ltd. v. DCIT [2013] 354 ITR 244 and also decision of the Coordinate Benches of the Tribunal in the case of KMC Speciality Hospitals India Ltd. v. ACIT (supra), the ld. CIT(A) allowed the ground raised by the assessee. We have gone through the orders of the Tribunal as well as the decision in the case of General Motors India P. Ltd. v. DCIT (supra), wherein, the Hon’ble Gujarat High Court has observed as under: “30. The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to A.Y. 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. A.Y. 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. 1997-98, which was not eligible for being carried forward and set off against the income for the A.Y. 2006-07. 31. Prior to the Finance Act No.2 of 1996 the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the A.Y.1997-98. Circular No.762 dated 18.2.1998 issued by the Central Board of Direct Taxes (CBDT) in the form of Explanatory

6 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. 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. 1997- 98. 33. We may now examine the provisions of section 32(2) of the Act before its amendment by Finance Act 2001. The section prior to its amendment by Finance Act, 2001, read as under:- “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 owning 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 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:

7 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17

Provided that the time limit of eight assessment years specified in sub clause (b) shall not apply in 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 Company (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. Explanation.- For the purposes of this clause, “net worth” shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985.” 34. The aforesaid provision was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. 35. Section 32 (2) of the Act was amended by Finance Act, 2001 and the provision so amended reads 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 for that previous year, 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 allowance of that previous year, and so on for the succeeding previous years.” 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.

8 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17

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 1st 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 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 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

9 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 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.” 6.1 The above decision of the Hon’ble Gujarat High Court has been duly followed by the Tribunal in the case of M/s. Venkateshwara Leathers Pvt. Ltd. v. ACIT in I.T.A. No. 2161/Mds/2015 vide order dated 23.03.2016. The

10 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 only contention raised by the ld. DR is that the above decision of the Hon’ble Gujarat High Court has not been attained its finality since the Department preferred SLP before the Hon’ble Supreme Court. Keeping the question of law open, the Hon’ble Supreme Court dismissed the SLP filed by the Department against the decision of the Hon’ble Gujarat High Court on the ground of limitation.

6.2 Further, while following the decision in the case of General Motors India P. Ltd. v. DCIT (supra), in the case of CIT v. Arunoday Mills Ltd. in Tax Appeal Case No. 210 of 2015 vide order dated 07.04.2015, the Hon’ble Gujarat High Court has observed and held as under: "Whether the ITAT is justified in law as well on facts in holding that unabsorbed depreciation is covered by the provisions of Section 32(2) of the Act, as amended by the Finance Act, 2001 and therefore, the assessee is entitled to carry forward and set off against profit and gains of subsequent year?" 2. Shri Pranav Desai, learned advocate appearing on behalf of the Revenue has made only one submission that against the decision of the Division Bench of this Court in the case of General Motors India Pvt. Ltd. (supra), upon which, the reliance has been placed by the learned Tribunal, the Revenue preferred appeal/Special Leave Petition before the Hon'ble Supreme Court and the Hon'ble Supreme Court has dismissed the said Special Leave Petition on the ground of limitation, however, keeping the question of law open and, therefore, we may admit the present appeal and consider the question of law. 2.1. The aforesaid cannot be accepted. It is required to be noted that, as such, Shri Desai, learned advocate appearing on behalf of the Revenue has failed to pursued us to take a contrary view than the view taken by the Division Bench of this Court in the case of General Motors India Pvt. Ltd. (supra). Unless and until we are persuaded to take a contrary view than the view taken by the Division Bench of this Court in the case of General Motors India Pvt. Ltd. (supra) and the matter is referred to the larger Bench and the larger/full Bench takes a contrary view than the view taken by the Division Bench of this Court in the case of General Motors India Pvt. Ltd. (supra), the

11 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 decision of the co-ordinate Bench in the case of General Motors India Pvt. Ltd. (supra) is binding to this Court being a co-ordinate Bench. It is true that against the aforesaid decision of the Division Bench of this Court, the Revenue did prefer Special Leave Petition before the Hon'ble Supreme Court and the Hon'ble Supreme Court dismissed the said Special Leave Petition, however, keeping the question of law open. However, in future, the question of law is kept open and to be considered by the Hon'ble Supreme Court. So far as this Court is concerned, this Court is bound by the decision of the co- ordinate Bench in the case of General Motors India Pvt. Ltd. (supra). 3. Under the circumstances, when the proposed question of law is squarely covered by the decision of the Division Bench of this Court in the case of General Motors India Pvt. Ltd. (supra) and when the learned Tribunal has, as such, followed the binding decision of the High Court i.e. this Court in the case of General Motors India Pvt. Ltd. (supra), there is no substance in the present appeal and no substantial question of law arises to be considered by this Court in the present appeal following the aforesaid decision of the Division Bench of this Court by which, it is held that the provisions under Section 32(2) as amended by the Finance Act, 2001 would allow the unabsorbed depreciation allowance available to be carried forward to the succeeding years and if any unabsorbed depreciation or part thereof could not be set off till A.Y. 2002-2003 then it would be carried forward till the time it is set off against the profits and gains of subsequent years. Therefore, we dismiss the present appeal.” 6.3 Under the above facts and circumstances, since no contrary decision against the decision of the Hon’ble Gujarat High Court in the case of General Motors India P. Ltd. v. DCIT (supra) was brought on record, respectfully following the decision of the Coordinate Benches of the Tribunal in the case of M/s. Venkateshwara Leathers Pvt. Ltd. v. ACIT (supra), wherein, the decision in the case of General Motors India P. Ltd. v. DCIT (supra) has been followed, we find no infirmity in the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue for both the assessment years stands dismissed.

12 I.T.A. Nos. 1272 & 1273/M/17 & C.O. Nos. 107 & 108/M/17 6.4 So far as Cross Objections filed by the assessee are concerned, the assessee has raised objection with regard to reopening of assessment under section 147 of the Act. We find that the assessee has not filed any appeal against the order of the ld. CIT(A) with regard to reopening of assessment under section 147 of the Act. Moreover, by following various decisions of various Courts, the ld. CIT(A) has rightly upheld the reopening of assessment. Thus, the Cross Objections filed by the assessee for both the assessment years are dismissed.

Sd/- Sd/- (A.MOHAN ALANKAMONY) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 23.01.2018 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.