DCIT 8(2), MUMBAI vs. KHANNA HOTEL P.LTD, MUMBAI

आयकर आयकर अपीलीय आयकर आयकर अपीलीय अपीलीय अिधकरण अपीलीय अिधकरण अिधकरण “ए” �यायपीठ अिधकरण �यायपीठ �यायपीठ मुंबई �यायपीठ मुंबई मुंबई म�। मुंबई म�। म�। म�। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI सव�ी राजे��, लेखा सद�य एवं संजय गग� ,�याियक सद�य Before S/Shri Rajendra, A.M. and Sanjay Garg,J.M. आयकर अपील सं./ITA No.1705/Mum/2013,िनधा�रण िनधा�रण वष�ष�ष�ष� /Assessment Year: 2004-05 िनधा�रण िनधा�रण DCIT -8(2) M/s. Khanna Hotels Pvt.Ltd. Room No.209/216A, 2nd Floor, 197, D.N. Nahar Vs. Aayakar Bhavan, M.K.Road Andheri (W),Mumbai-400 053. Mumbai-400 020. PAN: AAACK 0075 E (अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: Dr. Kailash Gaikwad Assessee by: Shri Apurv Gandhi सुनवाई क� तारीख / Date of Hearing: 30.01.2017 घोषणा क� तारीख / Date of Pronouncement: 10 .02.2017 आयकर आयकर अिधिनयम आयकर आयकर अिधिनयम अिधिनयम,1961 क� अिधिनयम क� क� धारा क� धारा धारा 254(1)केकेकेके अ�तग�त धारा अ�तग�त अ�तग�त आदेश अ�तग�त आदेश आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य,राजे�� राजे�� केकेकेके अनुसार अनुसार -Per Rajendra,AM: लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 11/12/2012,of the CIT(A)-17,Mumbai the Assessing Officer (AO) has filed the present appeal.Assessee-company,filed original return of income on 04/04/ 2008,declaring total income at Rs.97.40 lakhs.Subsequently, a revised return was filed on 29/12/2008, declaring income of Rs. 87.38 lakhs.The AO completed the assessment u/s.143 (3) r.w.s.153A of the Act,on 21/12/2010,determining its income at Rs.1.01 Crores. 2.During the assessment proceedings,the AO found that the assessee had shown unabsorbed depreciation of current-year at Rs.1.45 crores in its competition of income,that it had earned Short-Term Capital Gains (STCG) of Rs. 61.92 lakhs and Long-Term Capital Gain (LTCG) of Rs.1.70 crores respectively,that it had first set off STCG and LTCG.The CIT,Central-III, passed revisionary order and directed the AO examine the issue of setting off of unabsorbed depreciation.In pursuance of the directions, he issued notices u/s.143 (2)and 142 (1) of the Act to the assessee.After considering the submission of the assessee,about setting off of unabsorbed depreciation, the held that contention of the assessee with regard to section 71 permitting setting off of business loss against STCG and LTCG was incorrect, that provisions of section 71 (3)did not allow set off of capital loss against business income,that the intention of the legislature was that assessee should not get benefit of paying taxes at lower rate. After considering the above,the AO held that income of the assessee would remain same but the heads of income could change.He computed the gross total income of the assessee as under:

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Business loss as per computation Rs.1,34,52,074/- Less: disallowance as per order dated 31.12.08 Rs. 3,64,907/- (-) Rs.1,30,87,167/- Less:Long Term Capital Gain without index (-) Rs.1,30,87,167/- Long Term Capital Gain without index Rs. 39,65,307/- Short Term Capital Gain Rs. 61,92,192/- Gross Total Income Rs.1,01,57,499/- Less: deduction under chapter VI Rs. 2,850/- Total Income Rs.1,01,54,649/- Rounded off Rs.1,01,54,650/- 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee filed a table chart and refer to the provisions of section 71 of the Act.It made elaborate submissions and relied upon certain case laws as well CBDT circular no.26 of 07/07/1955. 3.1.After considering the available material, the FAA reproduced the provisions of section 32 (2). He analysed the amendments made to the provisions of the said section with effect from 01/04/1997 and from AY.2002-03.He observed that post year 2002-03 era the pre-1997 position was restored as regards carry forward and set off of unabsorbed depreciation.He referred to the cases of Times Guarantee Ltd.(2010 TPI 173)and Suresh Industries Private Ltd. (27 taxman.com. 203) and held that first unadjusted depreciation allowance could be set off up to AY.2004-05,that the second unabsorbed depreciation allowance could be set off only against the income under the head profit and gains of business and profession within a period of eight assessment years succeeding the AY.for which it was first computed, that the assessee had not done anything wrong in setting of STCG first and then the LTCG. Finally,he allowed the appeal, filed by the assessee.

4.Before us, the Departmental Representative (DR) supported the order of the AO and stated that he had rightly set off LTCG first and STCG later on.The Authorised Representative (AR) relied upon the order of the FAA and stated that matter stands covered by the order of the Tribunal in case of Times Guarantee Ltd.(4 ITR (Trib) 210 (ITAT[Mum]).

5.We have heard the rival submissions and perused the material before us. We find that in this case initially order u/s.143 (3)r.w.s.153A was completed,that later in pursuance of the revisionary order of the CIT, the AO passed further order, that while passing the second order he changed the order of setting off.We find that the issue of carry forward of unabsorbed depreciation has been deliberated upon in length by the Tribunal in the case of Times

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Guarantee Limited.(supra).We would like to reproduce the relevant portion of the order and it reads as under: “Under section 32(2) of the Income-tax Act, 1961, prior to its substitution by the Finance (No. 2) Act, 1996 with effect from April 1, 1997 the current depreciation under section 32(1) could be adjusted against income under any head including "Capital gains" and "Income from house property" in the same year. If there remained some unadjusted depreciation allowance, that was carried forward in the following year(s) for set off against income under any other heads just like current depreciation allowance under section 32(1) pertaining to such year. Under sub-section (2) of section 32 as substituted by the Finance (No. 2) Act, 1996, with effect from April 1, 1997, the scope of set-off of the brought forward unabsorbed depreciation allowance was restricted to the income under the head "Profits and gains of business or profession". Under clause (i) of substituted sub-section (2), the unabsorbed depreciation allowance could be set off against "profits and gains" of any business or profession carried on by the assessee for that assessment year. Under clause (ii) of sub- section (2) if the unabsorbed depreciation allowance could not be wholly set off under clause (i), the amount not so set off could be set off from the "income under any other head", if any, assessable for that assessment year. The provision for carry forward and set-off of unabsorbed depreciation for any number of years against income under any head, was further diluted by way of clause (iii)(b) to section 32 (2) restricting the right to set-off of unabsorbed depreciation for a period of not more than eight assessment years succeeding the assessment year in which the allowance was first computed. This part of the provision did not deal with the treatment of unadjusted brought forward depreciation allowance for and up to the assessment year 1996-97. The Finance Minister clarified the amendment as prospective inasmuch as the cumulative unabsorbed depreciation brought forward as on April 1, 1997, could be set off against taxable profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years. In other words, the period of eight years under clause (iii)(b) of section 32(2) came to be reckoned from assessment year 1997-98 irrespective of the fact that the unadjusted brought forward depreciation arose in an earlier assessment year. Thus, on the strength of the clarification given by the Finance Minister, the unadjusted depreciation brought forward up to April 1, 1997 became eligible for set off not only against the business income but also against income under other heads in eight assessment years. Two like expressions are used in sub-section (2), viz, firstly, "profits or gains" in the main part of sub-section (2) and then, "profits and gains" in clause (i). The expression "profits and gains" as used in clause (i) or (iii)(a) refers only to income under the head "Profits and gains of business or profession". Section 32(2) was again substituted by the Finance Act, 2001 with effect from April 1, 2002 restoring the provision as prevailing prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1, 1997. Sub-section (2) of section 32 is a substantive provision and not a procedural one. It is settled legal position that the amendment to a substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere seen either from the Notes on Clauses or Memorandum explaining the provision of the Finance Bill 2001, that substitution of sub-section (2) of section 32 is retrospective. Therefore, the substantive provision contained in section 32(2) as substituted by the Finance Act, 2001 with effect from April 1, 2002, is prospectively applicable to the assessment year 2002-03 onwards. Section 32(2) is a deeming provision and by a legal fiction, the amount of depreciation allowance under section 32(1) which is not fully absorbed against income for that year is deemed to be part of the depreciation allowance for the succeeding year(s). A deeming provision cannot be extended beyond the purpose for which it is intended. Section 32(1) 3

1705/M/13 (04-05), Khanna Hotels Pvt.Ltd.

deals with depreciation allowance for the current year. It is only when the assessment of the assessee from assessment year 2002-03 onwards is made in which depreciation allowance for the current year under section 32(1) cannot be given full effect, owing to the inadequacy of profits, that the directive of the deeming provision under section 32(2) shall apply. Wherever there is mention of loss under a particular head for the current year which is sought to be set off against the income under the same head or other heads of the income for that very year, the words "cannot be" and "has not been" have been brought into play. The words, "cannot be" and "has not been" used in the present tense in section 32(2) suggest that the reference to depreciation allowance under section 32(1), which could not be adjusted due to inadequacy of profits, is for the current year alone starting from assessment year 2002-03 onwards. The brought forward unabsorbed depreciation of earlier years cannot be included within the scope of section 32(2). In section 32(2) the depreciation allowance for the current year to which full effect cannot be given due to the paucity of profits, has been referred to as "unabsorbed depreciation allowance". Such unabsorbed depreciation allowance for the assessment years 1997-98 to 2001-02 strictly comes under section 32(2) as "unabsorbed depreciation allowance". As the language of this deeming provision does not talk of any brought forward "unabsorbed depreciation allowance" or depreciation allowance which could not be given effect to in the earlier years that resultantly became part of section 32(2), there is no question of expanding the scope of the legal fiction. The purpose of a legal fiction in section 32(2) is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year. In other words the object of the provision is to treat the whole or part of the depreciation allowance under section 32(1), which could not be adjusted in the first year, as the current depreciation under section 32(1) in the second year. In the second year, such depreciation of first year becomes part and parcel of depreciation under section 32(1) of the second year. If again in the second year, the total of depreciation under section 32(1) (including the amount of allowance which came from first year and became depreciation under section 32(1) in the second year) cannot be absorbed, it shall become current depreciation for the third year to be dealt with in the same manner as the amount of depreciation in the third year and so on. Once the unabsorbed depreciation for the first year is given the character of current depreciation in the second year, the purpose of section 32(2) is fulfilled. The "unabsorbed depreciation allowance" of the period after substitution by the Finance (No. 2) Act, 1996 cannot be given the character of current depreciation in the assessment years after substitution with effect from April 1, 2002. Therefore, the law prevailing as on the 1st April of the assessment year 2002-03 and subsequent years does not permit the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 to assume the character of depreciation under section 32(1) in these assessment years. If there is both repeal of the old provision and simultaneous insertion of a new provision in its place, it is called "substitution". But for the relaxation given by the Finance Minister in Parliament, the brought forward unadjusted depreciation of the period prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1, 1997 would have elapsed. There is no such concession given by the Finance Minister while substituting the provisions of section 32(2) with effect from April 1, 2002. Therefore, the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 cannot be treated as the current depreciation in the assessment years under consideration. The position can be summed up as follows :

1705/M/13 (04-05), Khanna Hotels Pvt.Ltd.

For the assessment years 1997-98 to 2001-02 brought forward unadjusted depreciation allowance for and up to assessment year 1996-97 (the "first unadjusted depreciation allowance"), which could not be set off up to assessment year 1996-97, shall be carried forward for set off against income under any head for a maximum period of eight assessment years starting from assessment year 1997-98. Current depreciation for the year under section 32(1) (for each year separately starting from assessment years 1997-98 up to 2001-02) can be set off firstly against business income and then against income under any other head. The amount of current depreciation for assessment years 1997-98 to 2001-02 which cannot be so set off, the "second unabsorbed depreciation allowance", shall be carried forward for a maximum period of eight assessment years from the assessment year immediately succeeding the assessment year for which it was first computed, to be set off only against the income under the head "Profits and gains of business or profession". For the assessment year 2002-03 onwards the "first unadjusted depreciation allowance" can be set off up to assessment year 2004-05, that is, the remaining period out of maximum period of eight assessment years against income under any head. The "second unabsorbed depreciation allowance" can be set off only against the income under the head "Profits and gains of business or profession" within a period of eight assessment years succeeding the assessment year for which it was first computed. Current depreciation for the year under section 32(1), for each year separately, starting from assessment year 2002-03 can be set off against income under any head. The amount of depreciation allowance not so set off (the "third unadjusted depreciation allowance") shall be carried forward to the following year. The "third unadjusted depreciation allowance" shall be deemed depreciation under section 32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation, in perpetuity. If a Departmental representative has rightly or wrongly argued an issue before any Bench of the Tribunal, other Departmental representatives across the country cannot be inhibited from arguing what they feel correct notwithstanding the earlier submission made by the Departmental representative in some different case at some different Bench. The principle of favourable interpretation cannot be expanded beyond its reasonable limits and applies only where there is a doubt as regards the interpretation of the provision. If however the provision is unambiguous albeit ticklish, the legislative intention, as reflected from its language, has to be given its true meaning notwithstanding the fact that it goes against the assessee. The head under which interest income would fall needs to be tested by considering the cumulative effect of several factors, such as the nature of business, nature and source of interest income, circumstances in which the funds were parked. However if the surplus funds are deposited in a bank, the interest income will partake of the character of income from other sources irrespective of the nature of the assessee's business. The assessee derived income from the business of merchant banking activity. Against assessments for the assessment years 2003-04 and 2004-05, the assessee preferred appeals before the Commissioner (Appeals) urging that unabsorbed depreciation determined in the assessment years 1997-98 to 1999-2000 should be set off against income under the head "Income from other sources" for these years. The Assessing Officer had neither discussed the plea of the assessee about such set off nor had given any reason as to why such set off was not allowed. The Commissioner (Appeals) held that unabsorbed depreciation was available to an assessee perpetually for set off against the gross total income and accepted the assessee's claim. On appeal : Held accordingly, (i) that interest was earned on fixed deposits from banks. It was never the case of the assessee before the authorities below that the funds were required to be 5

1705/M/13 (04-05), Khanna Hotels Pvt.Ltd.

deposited in the bank necessarily for carrying on its business. The Commissioner (Appeals) had recorded a finding that the assessee was not continuously engaged in the activity of money lending during the year. The assessee accepted the treatment given by the Assessing Officer to the interest income as falling under the head "Income from other sources". Therefore, the interest income could not be considered as falling under the head "Profits and gains of business or profession". (ii) That the unabsorbed depreciation allowance arose in the assessment years 1997-98 to 1999-2000 could not be set off against income under any head other than "Profits and gains of business or profession" in the years 2003-04 and 2004-05. The assessee was not entitled to set off such brought forward unabsorbed depreciation allowance against income under the head "Income from other sources". The Commissioner (Appeals) erred in not correctly interpreting the law in this regard. His order was to be vacated and the action of the Assessing Officer restored for both years. “ Respectfully,following the above order of the Special Bench of the Tribunal,we hold that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming the same, we decide the effective ground of appeal against the AO. As a result, appeal filed by the AO stands dismissed. फलतः िनधा�रती अिधकारी �ारा दािखल क� गई अपील नामंजूर क� जाती है. Order pronounced in the open court on 10th February, 2017. आदेश क� घोषणा खुले �यायालय म� �दनांक 10 फरवरी, 2017 को क� गई । Sd/- Sd/- (संजय गग� /Sanjay Garg) (राजे�� / RAJENDRA) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; �दनांक/Dated : 10.02.2017. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ� 2. Respondent /��यथ� 3.The concerned CIT(A)/संब� अपीलीय आयकर आयु , 4.The concerned CIT /संब� आयकर आयु 5.DR “ A” Bench, ITAT, Mumbai /िवभागीय �ितिनिध, खंडपीठ,आ.अ.�याया.मुंबई 6.Guard File/गाड� फाईल स�यािपत �ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.