2010 (6) TMI 516 - AT - Income Tax

Carry forward or set off of unabsorbed depreciation - whether depreciation for assessment years 1997-98 to 1999-2000 which could not be absorbed, can be set off against Income from other sources in assessment years 2003-2004 and 2004-2005 - Section 32(2) deeming the unadjusted depreciation allowance of the current year as the current depreciation allowance of the following year, is subject to the provisions of section 72(2) and section 73(3) - It is this clarification by the Finance Minister that sealed the fate of the unadjusted brought forward depreciation upto the end of the first period as available for set off against taxable profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years - it is obvious that section 32(2) is a deeming provision and by the legal fiction, the amount of depreciation allowance u/s.32(1) which is not fully absorbed against income for that year is deemed to be the part of depreciation allowance for the succeeding year - As the assessee is seeking to claim the set off of such brought forward unabsorbed depreciation allowance against income under the head Income from other sources , that cannot be accepted - Accordingly decided against the assessee

Issues Involved:
1. Treatment of unabsorbed depreciation from assessment years 1997-1998 to 1999-2000.
2. Set off of unabsorbed depreciation against income from other sources.
3. Applicability of law as amended on the first day of the relevant assessment year.
4. Interpretation of Section 32(2) of the Income Tax Act.

Detailed Analysis:

1. Treatment of Unabsorbed Depreciation from Assessment Years 1997-1998 to 1999-2000:
The primary issue was whether unabsorbed depreciation from assessment years 1997-1998 to 1999-2000 should be governed by the provisions of Section 32(2) as applicable during those years or by the provisions as applicable for assessment years 2003-2004 and 2004-2005. The Tribunal concluded that the unabsorbed depreciation for assessment years 1997-1998 to 1999-2000 should be dealt with as per the provisions of Section 32(2) applicable during those years. The Tribunal emphasized that the law prevailing as on the first day of the relevant assessment year is applicable unless expressly stated otherwise.

2. Set Off of Unabsorbed Depreciation Against Income from Other Sources:
The Tribunal examined whether the unabsorbed depreciation could be set off against income from other sources. It was held that the unabsorbed depreciation from assessment years 1997-1998 to 1999-2000 could not be set off against income from other sources in assessment years 2003-2004 and 2004-2005. The Tribunal noted that the provisions applicable from assessment year 2002-2003 onwards restricted the set off of unabsorbed depreciation to income under the head "Profits and gains of business or profession."

3. Applicability of Law as Amended on the First Day of the Relevant Assessment Year:
The Tribunal reiterated that the law as existing on the first day of the relevant assessment year is applicable. This principle was supported by judgments from the Hon'ble Supreme Court and various High Courts. The Tribunal observed that the substantive provisions of Section 32(2), as amended by the Finance Act, 2001, were prospective and applicable from assessment year 2002-2003 onwards.

4. Interpretation of Section 32(2) of the Income Tax Act:
The Tribunal provided an in-depth interpretation of Section 32(2) across three periods:
- First Period (up to A.Y. 1996-97): Current depreciation could be set off against income under any head. Unabsorbed depreciation was treated as current depreciation in the following years.
- Second Period (A.Y. 1997-98 to 2001-02): Unabsorbed depreciation could be set off against business income and then against income under any other head. However, such unabsorbed depreciation was to be carried forward for a maximum of eight years.
- Third Period (A.Y. 2002-03 onwards): Current depreciation could be set off against income under any head, and unabsorbed depreciation was to be carried forward indefinitely as current depreciation.

The Tribunal concluded that unabsorbed depreciation from the second period (A.Y. 1997-98 to 2001-02) could not be treated as current depreciation in the third period (A.Y. 2002-03 onwards) and could only be set off against business income. The Tribunal rejected the argument that the unabsorbed depreciation from the second period could be set off against income from other sources in the third period.

Conclusion:
The Tribunal vacated the order of the CIT(A) and restored the action of the Assessing Officer, holding that the unabsorbed depreciation relating to assessment years 1997-98 to 1999-2000 should be dealt with according to the provisions of Section 32(2) as applicable during those years. The appeals were allowed in favor of the Revenue.

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