2008 (6) TMI 376 - AT - Income Tax

Interpretation of the Statutes - Unabsorbed depreciation - Set off brought forward - short-term capital gains - AO disallowed the claim of set off b/f unabsorbed depreciation against STCG by relying on the provisions of section 32(2) as applicable from AY 1997-98 to AY 2000-01 - CIT(A) directed the AO to allow the claim. HELD THAT - The Hon ble Supreme Court in the case of Kerala State Industrial Development Corporation v. CIT 2002 (11) TMI 8 - SUPREME COURT held - That the Finance Minister s speech can be relied upon to throw light on the object and purpose of the particular provisions introduced by the Finance Bill has been recognized by this Court in K.P. Varghese v. ITO 1981 (9) TMI 1 - SUPREME COURT . Having regard to the clarification given by the Finance Minister in his Speech delivered while moving the Finance (No. 2) Bill, 1996 in the Lok Sabha and giving harmonious meaning and reasoning to the amended section 32(2) brought into effect on and from 1-4-1997, we are of the considered view that the depreciation allowance allowed to the assessee up to and inclusive AY 1996-97 which remained unabsorbed and is brought forward to the AY 1997-98 and subsequent assessment years up to assessment year 2004-05 can be set-off as per pre-amended section 32(2) and, consequently, it can, be set-off against taxable business profits or income under any other head for assessment year 1997-98 and seven subsequent assessment years. Therefore, the assessee s claim, to set- off unabsorbed depreciation brought forward from (AY 1995-96 and 1996-97 against income under House Property for the AY 1998-99 is to be allowed, and, we order accordingly. Consequently, the issue involved in the Gross Objection filed by the assessee is decided in favour of the assessee. Before parting with the issue, we may put it on record that we have noticed a decision where a similar view has been taken by the ITAT in the case of ITO v. Selchem Engineers (P.) Ltd. 2004 (4) TMI 273 - ITAT DELHI-A . ITAT in the case of Jt. CIT v. India Steamship Co. Ltd. 2002 (7) TMI 226 - ITAT CALCUTTA-E , which was later followed by ITAT, in the case of Poddar Udyog Ltd. 2004 (10) TMI 266 - ITAT CALCUTTA-A , has also taken the similar view. Therefore, we are of the view that the order of learned CIT(A) has to be upheld. Accordingly, the same is upheld and the appeal by the revenue is dismissed.

Summary

Issues Involved:
1. Set-off of brought forward unabsorbed depreciation against short-term capital gains.
2. Interpretation of section 50 of the Income-tax Act, 1961 regarding set-off.
3. Application and relevance of CBDT's Circular No. 762 dated 18-2-1998.

Issue-wise Detailed Analysis:

1. Set-off of brought forward unabsorbed depreciation against short-term capital gains:

The primary issue in this case is whether the brought forward unabsorbed depreciation of Rs. 11,89,099 can be set off against short-term capital gains arising from the sale of depreciable assets. The assessee, a company engaged in the manufacture of Cold Rolled Steel Strips, filed a return of income declaring Nil income after setting off the carried forward unabsorbed depreciation against the short-term capital gain. The Assessing Officer disallowed this set-off based on the provisions of section 32(2) applicable from assessment year 1997-98 to 2000-01. However, the CIT(A) directed the Assessing Officer to allow the claim, leading to the revenue's appeal before the Tribunal.

2. Interpretation of section 50 of the Income-tax Act, 1961 regarding set-off:

The Tribunal examined the provisions of section 32(2) as they stood before and after the amendments made by the Finance (No. 2) Act, 1996 and the Finance Act, 2001. The pre-amendment provision allowed unabsorbed depreciation to be carried forward indefinitely and set off against income from any source. The amendment by the Finance (No. 2) Act, 1996, effective from 1-4-1997, restricted the set-off to profits and gains of any business or profession and limited the carry forward to eight assessment years. However, the Finance Act, 2001, effective from 1-4-2002, restored the pre-amendment position, allowing unabsorbed depreciation to be carried forward indefinitely and set off against income from any source.

3. Application and relevance of CBDT's Circular No. 762 dated 18-2-1998:

The Tribunal referred to CBDT Circular No. 762, which clarified that the unabsorbed depreciation allowance of assessment year 1996-97 would be added to the allowance for assessment year 1997-98 and deemed to be part of that allowance, with the eight-year limitation starting from assessment year 1997-98. This circular supported the CIT(A)'s view that the assessee's claim should be allowed. The Tribunal also considered several judicial decisions, including those in Southern Travels v. Asstt. CIT, CIT v. Pioneer Asia Packing (P.) Ltd., and ITO v. Keshwa Enterprises (P.) Ltd., which held that unabsorbed depreciation from periods before assessment year 1997-98 could be set off against income from any head, including capital gains.

Conclusion:

The Tribunal upheld the CIT(A)'s order, allowing the set-off of brought forward unabsorbed depreciation against short-term capital gains. The appeal by the revenue was dismissed, affirming that the unabsorbed depreciation from earlier years could be set off against income from any source, including short-term capital gains, in line with the provisions of section 32(2) as they stood before the amendment by the Finance (No. 2) Act, 1996, and as restored by the Finance Act, 2001.