“unabsorbed depreciation”
The decision most relied on for unabsorbed depreciation is Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT (340 ITR 477), cited in 213 judgments on BharatTax.
Leading authorities on unabsorbed depreciation
If unabsorbed depreciation or losses from years prior to the initial assessment year for Section 80-IA claim have already been set off against other income, they cannot be notionally carried forward again to reduce the profits of the eligible unit for computing deduction under Section 80-IA. The notional carry forward provision under Section 80-IA(5) applies only to unabsorbed depreciation or losses that have not yet been absorbed.
Unabsorbed depreciation from Assessment Year 1997-98 to 2001-02, carried forward to AY 2002-03, is governed by Section 32(2) as amended by the Finance Act, 2001, allowing its unlimited carry forward and set off against income of subsequent years. Reassessment proceedings under Section 148 challenging such set-off require valid reasons and new tangible material.
Additional depreciation is allowable under section 32(1)(iia) for new machinery or plant even when put to use for less than 180 days, with the unabsorbed balance available for claim in the subsequent year.
Deduction under Section 10A of the Income-tax Act is to be allowed only after setting off unabsorbed depreciation and brought forward business losses against the profits of the business.
Depreciation, including unabsorbed depreciation, should not be reduced from the profits of an undertaking eligible for deduction under Section 10A of the Income-tax Act, 1961, when computing the deduction amount.
The lower of unabsorbed depreciation or business loss is deductible from book profits under Clause (iii) of Explanation 1 to Section 115JB. Capital receipts, such as forfeiture of share warrants, which do not have the character of income, are not liable for book profits tax under Section 115JB.
The higher tax rate under Section 115BBE, increased to 60% effective from April 1, 2017, is not applicable to transactions that occurred prior to this date.
In a scenario involving amalgamation, the accumulated losses and unabsorbed depreciation of an undertaking can be carried forward by the amalgamating company if it continues the business of the undertaking.
