2015 (12) TMI 1682 - AT - Income Tax

Entitlment to carry forward the unabsorbed depreciation - whether such adjustment of non-granting of set off of such losses could be made in an order u/s 154? - Held that - We find that the section 32(2) of the Act pursuant to the amendment in Finance Act 1996 curtailed the benefit of carry forward of unabsorbed depreciation loss to a period of 8 years and brought the said provision at par with the unabsorbed business losses. This provision was in force till Asst Year 2001-02. Again the Finance Act 2001 with effect from Asst Year 2002-03 amended Section 32(2) of the Act and restored back to the original version of the section as it stood prior to amendment by Finance Act 1996, allowing the benefit of carry forward of losses to an infinite period and treating the same different from that of unabsorbed business losses The purposive and harmonious interpretation has to be taken keeping in view the intention of the amendment of section 32(2) of the Act by Finance Act 2001. We hold that while construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of the assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied We find that this particular issue has been the subject matter of huge debate and dispute and also gave rise to the creation of special bench by the tribunal to adjudicate this issue which goes to prove that the issue is highly debatable and hence cannot be the subject matter of rectification proceedings u/s 154 of the Act. In our opinion, what could be rectified u/s 154 of the Act is a mistake which must be obvious and patent and not something which can be established by a long drawn process of reasoning as has been held by the Hon ble Supreme Court in the case of T.S.Balaram, ITO vs Volkart Bros (1971 (8) TMI 3 - SUPREME Court ). Thus AO clearly erred in adjudicating this highly debatable issue under rectification proceedings u/s 154 of the Act which is not permissible and accordingly we quash the said order. - Decided in favour of assessee.

Summary

Issues Involved:
1. Entitlement to carry forward unabsorbed depreciation from Assessment Year (AY) 1996-97 and earlier.
2. Legality of adjusting unabsorbed depreciation under Section 154 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Entitlement to Carry Forward Unabsorbed Depreciation:
The core issue is whether the assessee can carry forward unabsorbed depreciation of Rs. 2,61,32,164/- from AY 1996-97 and earlier years. The assessee filed the return for AY 2007-08 declaring income under "profits and gains from business or profession" and sought to set it off against brought forward business losses from AY 1999-2000. The Assessing Officer (AO) initially allowed the set-off of unabsorbed depreciation from AY 1983-84 to 1992-93 but later, in a rectification order under Section 154, disallowed the carry forward of unabsorbed depreciation up to AY 1996-97, citing an 8-year limit for set-off starting from AY 1997-98.

The CIT(A) allowed the appeal of the assessee, relying on the decision of the Gujarat High Court in General Motors India Pvt Ltd vs DCIT, which held that unabsorbed depreciation as of April 1, 2002, should be governed by the amended Section 32(2) of the Act, allowing indefinite carry forward. The Tribunal upheld this view, emphasizing the legislative intent behind the Finance Act 2001 amendment, which aimed to enable indefinite carry forward of unabsorbed depreciation to conserve funds for asset replacement.

2. Legality of Adjusting Unabsorbed Depreciation under Section 154:
The AO issued a notice under Section 154, claiming a mistake in the set-off of unabsorbed depreciation. The assessee argued that the AO should have prioritized setting off brought forward business losses from AY 1997-98 onwards. The AO, however, disallowed the carry forward of unabsorbed depreciation for AYs 1996-97 and earlier, and for AYs 1997-98 to 1999-2000, allowing it only for AYs 2000-01 and 2001-02.

The Tribunal noted that the issue of unabsorbed depreciation carry forward is highly debatable and not suitable for rectification under Section 154, which is meant for obvious and patent mistakes. Citing the Supreme Court's decision in T.S. Balaram, ITO vs Volkart Bros, the Tribunal held that the AO erred in using Section 154 for this issue.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to allow the carry forward of unabsorbed depreciation for an indefinite period as per the amended Section 32(2) of the Act by the Finance Act 2001. The Tribunal also quashed the AO's rectification order under Section 154, deeming the issue too debatable for such proceedings.

Order Pronounced:
The order was pronounced in the open court on December 4, 2015.