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2005 (2) TMI 63 - HC - Income TaxSet off and carry forward of unabsorbed depreciation - carry forward of unabsorbed business losses - distinction between unabsorbed depreciation and unabsorbed business loss for the purposes of set off and carry forward - Tribunal was right in holding that the assessee is entitled to get unabsorbed depreciation of the earlier years 1984-85 and 1985-86 set off in 1987-88 even if no valid return for the assessment year 1986-87 had been filed by the assessee - the appeal is partly allowed and it is held that in the absence of the assessee s filing a valid return and consequently, no order being passed by the Assessing Officer for set off and carry forward of business losses, for the assessment year 1986-87, the assessee could not be held entitled to set off and carry forward business loss during the assessment year 1987-88. However, the unabsorbed depreciation of the assessment years 1984-85 and 1985-86 is to be set off from the business income of the assessment year 1987-88 and the unabsorbed depreciation is to be carried forward to subsequent assessment years.
Issues Involved:
1. Whether the Income-tax Appellate Tribunal (ITAT) was right in granting relief on the carry forward of unabsorbed losses, which was not raised before the Commissioner of Income-tax (Appeals) (CIT(A)). 2. Whether ITAT was right in allowing the carry forward of business losses and depreciation when no valid return was filed for the assessment year 1986-87. 3. Whether ITAT was right in allowing the carry forward of business losses when section 80 and section 139(3) of the Income-tax Act, 1961, were not complied with. Detailed Analysis: Issue 1: Relief on Carry Forward of Unabsorbed Losses The court examined whether ITAT could grant relief on the carry forward of unabsorbed losses, which was not raised before the CIT(A). The Tribunal had allowed the carry forward of unabsorbed depreciation and losses, which the Revenue contended was not raised before the CIT(A). The Tribunal, however, noted that the issue of unabsorbed business losses was indeed raised before the CIT(A), and thus it had the jurisdiction to adjudicate on the matter. The court, therefore, did not find it necessary to delve deeper into this issue as it became academic once the primary issue was resolved. Issue 2: Valid Return for Assessment Year 1986-87 The court scrutinized whether ITAT was right in allowing the carry forward of business losses and depreciation when no valid return was filed for the assessment year 1986-87. The relevant provisions, including sections 72, 80, 139(3), and 157 of the Income-tax Act, were analyzed. Section 72 allows for the carry forward of business losses, but section 80 mandates that losses must be determined in a return filed within the time allowed under section 139(1) or as extended by the Income-tax Officer. Section 139(3) specifies that a return must be filed to claim the carry forward of losses. Section 157 requires the Assessing Officer to notify the assessee of the amount of loss computed for carry forward purposes. The court concluded that since no valid return was filed for the assessment year 1986-87, the business losses could not be carried forward to the assessment year 1987-88. The Tribunal erred in allowing the set-off of business losses for earlier assessment years during the assessment year 1987-88. Issue 3: Compliance with Sections 80 and 139(3) The court examined whether ITAT was right in allowing the carry forward of business losses when sections 80 and 139(3) were not complied with. The court reiterated that a business loss cannot be carried forward unless it has been determined in pursuance of a return filed under section 139. Since no valid return was filed for the assessment year 1986-87, the business losses were not determined, and thus could not be carried forward. Unabsorbed Depreciation The court also addressed the issue of unabsorbed depreciation. Section 32(2) allows for the carry forward of unabsorbed depreciation without any time limit. The court referred to the Supreme Court's ruling in CIT v. Virmani Industries Pvt. Ltd. [1995] 216 ITR 607, which held that unabsorbed depreciation could be set off against the income of subsequent years. The court rejected the view of the Madras High Court in Sri Rajarathinam Transports' case [1993] 199 ITR 203, which required specific orders for determining unabsorbed depreciation for carry forward purposes. The court concluded that unabsorbed depreciation of earlier years forms part of the current year's depreciation and can be set off against the current year's income. Conclusion The appeal was partly allowed. The court held that in the absence of a valid return and no order by the Assessing Officer for the set-off and carry forward of business losses for the assessment year 1986-87, the assessee could not be entitled to set off and carry forward business losses during the assessment year 1987-88. However, the unabsorbed depreciation of the assessment years 1984-85 and 1985-86 could be set off against the business income of the assessment year 1987-88 and carried forward to subsequent assessment years. The substantial questions of law were answered accordingly.
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