2012 (8) TMI 415 - AT - Income Tax

Carry forward of unabsorbed depreciation Held that - The assessee having claimed the set off and carry forward of allowance of depreciation unadjusted against the profits of the current previous year cannot be denied such set off or carry forward of the unabsorbed depreciation allowance as the provisions of section 139(3) of the Act are not applicable. The assessee having filed return of income, though belatedly but within the extended period allowed under the Statute is entitled to the benefit of carry forward and set off of unabsorbed depreciation allowance as part of depreciation of the succeeding year in view of the provisions of section 32(2) of the Act and section 72(2) of the Act. The provisions of sections 80 and 139(3) of the Act are applicable to business losses and not to unabsorbed depreciation governed by section 32(2) of the Act.

Issues Involved:
1. Computation and carry forward of unabsorbed depreciation.
2. Applicability of sections 139(3) and 72(1) of the Income-tax Act.
3. Distinction between business loss and unabsorbed depreciation.
4. Conditions for carry forward of unabsorbed depreciation under section 32(2) of the Act.

Detailed Analysis:

Issue 1: Computation and Carry Forward of Unabsorbed Depreciation
The assessee filed the return of income declaring a net loss of Rs. 12,11,410/-, primarily due to unabsorbed depreciation. The Assessing Officer (AO) disallowed the carry forward of this loss, citing the late filing of the return and invoking sections 139(3) and 72(1) of the Income-tax Act. The CIT (Appeals) upheld this decision. The Tribunal examined the provisions of section 32(2), which allows unabsorbed depreciation to be carried forward and treated as part of the depreciation for the succeeding year. The Tribunal concluded that the assessee is entitled to carry forward the unabsorbed depreciation despite the late filing of the return.

Issue 2: Applicability of Sections 139(3) and 72(1) of the Income-tax Act
The AO and CIT (Appeals) relied on sections 139(3) and 72(1) to deny the carry forward of the unabsorbed depreciation, arguing that these sections apply to business losses and require timely filing of the return. The Tribunal clarified that section 139(3) pertains to business losses and capital gains, not unabsorbed depreciation. The provisions of section 32(2) specifically address unabsorbed depreciation, which can be carried forward without the constraints imposed by section 139(3).

Issue 3: Distinction Between Business Loss and Unabsorbed Depreciation
The Tribunal emphasized the distinction between business loss and unabsorbed depreciation. Business losses are governed by sections 72(1) and 139(3), which require timely filing for carry forward. In contrast, unabsorbed depreciation, governed by section 32(2), does not have the same filing constraints and is treated as part of the depreciation for the succeeding year. This distinction was supported by various judicial precedents, including CIT v. Haryana Hotels Ltd. and Govind Nagar Sugar Ltd.

Issue 4: Conditions for Carry Forward of Unabsorbed Depreciation under Section 32(2)
The Tribunal noted that section 32(2) allows unabsorbed depreciation to be carried forward automatically, without additional conditions. This is supported by the decision in Mehsana District Co-op. Milk Producers Union Ltd., which stated that unabsorbed depreciation becomes part of the depreciation for the subsequent year and does not require the fulfilment of conditions applicable to business losses. The Tribunal concluded that the assessee's claim for carry forward of unabsorbed depreciation is valid and directed the AO to allow it.

Conclusion:
The Tribunal allowed the appeal, directing the AO to permit the carry forward of unabsorbed depreciation as per section 32(2) of the Income-tax Act. The provisions of sections 139(3) and 72(1) were deemed inapplicable to unabsorbed depreciation, which stands on a different footing from business losses. The decision underscores the automatic nature of carrying forward unabsorbed depreciation, irrespective of the timely filing requirements applicable to business losses.

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