2000 (2) TMI 789 - AT - Income Tax

Summary

Issues Involved:

1. Whether the Assessing Officer is correct in treating the current year's unabsorbed depreciation as 'loss' for the purpose of computation of undisclosed income under section 158BB of the Income-tax Act, 1961.
2. Whether block assessment can be framed where aggregated total income (including undisclosed income) determined under section 158BC for each assessment year and assessed/returned income is loss and whether tax under section 113 can be charged on the difference between the loss determined under section 158BC for each assessment year and loss assessed for each year under section 143(3) or returned by the assessee where assessment is not completed.
3. Whether unabsorbed depreciation which cannot be absorbed for want of profit while framing the regular assessment under section 143(3) for the assessment years 1991-92 and 1995-96, can be considered and allowed deduction out of the income for the relevant years, i.e., 1991-92 and 1995-96 while computing the income for the block period consisting of ten years under section 158BC of the Act.

Issue-wise Detailed Analysis:

1. Treatment of Current Year's Unabsorbed Depreciation as 'Loss':

The assessee argued that the unabsorbed depreciation of the current year should not be treated as a 'loss' for the purpose of computing undisclosed income under section 158BB. The Assessing Officer, however, treated the unabsorbed depreciation as 'loss' based on the decision of the Supreme Court in Garden Silk Wvg. Factory v. CIT [1991] 189 ITR 512, which held that depreciation is a species of the genus of business loss. The Judicial Member disagreed, stating that current year's depreciation exceeding business income should be carried forward to the next year as per section 32(2), resulting in nil income for the current year. The Accountant Member upheld the Assessing Officer's view, citing that the format of the return in Form No. 2B does not provide a separate column for depreciation, implying that depreciation is included in the loss figures. The Third Member agreed with the Accountant Member, noting that the method adopted by the Assessing Officer already allowed for the set-off of current depreciation against undisclosed income.

2. Block Assessment and Tax under Section 113:

The Judicial Member held that there could be no undisclosed income to be taxed under section 113 if the aggregate of the total income of the previous years falling within the block period is a loss. He reasoned that the intention of the Legislature was to levy taxes only on positive incomes unearthed by search. The Accountant Member disagreed, stating that the reduction in aggregate losses due to the inclusion of undisclosed income should be treated as undisclosed income. The Third Member supported the Accountant Member's view, explaining that the difference between the two aggregates as specified in section 158BB(1) should be considered, and even a reduction in aggregate losses constitutes undisclosed income liable to tax under section 113.

3. Deduction of Unabsorbed Depreciation in Block Assessment:

The Judicial Member opined that current year's unabsorbed depreciation should be allowed as a deduction against undisclosed income, as section 32(2) only restricts the set-off of carried forward unabsorbed depreciation. The Accountant Member, however, noted that the method adopted by the Assessing Officer already accounted for the set-off of current depreciation against undisclosed income. The Third Member clarified that the Assessing Officer's computation method did allow for the deduction of current depreciation, and thus, the issue was somewhat misconceived.

Conclusion:

The Third Member agreed with the Accountant Member's view that the undisclosed income of Rs. 1,46,02,752 computed by the Assessing Officer should be brought to tax under section 113. The computation method adopted by the Assessing Officer, which included the set-off of current depreciation against undisclosed income, was upheld. The case was referred back to the Bench for an order to be passed in terms of section 255(4) of the Income-tax Act.