2004 (8) TMI 80 - HC - Income Tax

Allowance of unabsorbed depreciation and Deemed income u/s 41(1) - Whether, Tribunal erred in law in allowing the assessee s claim that the unabsorbed depreciation of ₹ 20,392 brought forward from the assessment year 1976-77 should revert back in the case of the firm and it should be set off against the income of the firm in view of the provisions of section 32(2) of the Income-tax Act, 1961? - Whether, Tribunal erred in law in holding that the amount of ₹ 5,29,332 was liable to tax as deemed income under sub-section (1) of section 41 of the Income-tax Act, 1961?

Summary

Issues:
1. Allowance of unabsorbed depreciation for assessment year 1977-78.
2. Taxability of remitted amount under section 41(1) for assessment year 1977-78.

Issue 1: Allowance of unabsorbed depreciation for assessment year 1977-78

The court addressed the question of whether the unabsorbed depreciation of Rs. 20,392 from the assessment year 1976-77 should revert back to the firm and be set off against the income of the firm for the assessment year 1977-78. The Income-tax Officer rejected the assessee's claim for this set off, but the Tribunal allowed it based on section 32(2) of the Income-tax Act, 1961. The court referred to the precedent set in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 (SC), where a similar issue was settled against the Revenue. Consequently, the court ruled in favor of the assessee, allowing the set off of unabsorbed depreciation for the assessment year 1977-78.

Issue 2: Taxability of remitted amount under section 41(1) for assessment year 1977-78

The court examined whether the amount of Rs. 5,80,884, remitted by creditors to the assessee during the assessment year 1977-78, was liable to tax as deemed income under section 41(1) of the Income-tax Act, 1961. The assessee argued that the remitted amount could only be treated as income under section 41(1) if the allowance or deduction had been made in the assessment for earlier years regarding the trading liability incurred. The court analyzed the provisions of section 41(1) and concluded that the remission of trading liability in the subsequent year should be treated as income if the expenditure had been allowed as a deduction in any earlier assessment year. Since the deduction for trading liability had been allowed in the assessment year 1976-77, the court upheld the Tribunal's decision that the remission of Rs. 5,80,884 was taxable under section 41(1). Therefore, the court ruled in favor of the Revenue and against the assessee on this issue.

This comprehensive analysis of the judgment highlights the court's reasoning and conclusions on the two main issues involved in the case, providing a detailed understanding of the legal aspects and implications of the decision.