2013 (3) TMI 349 - HC - Income Tax

Jurisdiction power u/s 263 by CIT(A) - as per CIT(A) the set off of unabsorbed depreciation and investment allowance is to be restricted to 2/3rd of such allowance and it is not permissible to be set off against any head of income other than the income from business and profession - ITAT set aside the order under section 263 of CIT(A) - Held that - Section 71(2) contemplates a situation where in respect of any assessment year, the net result of computation under any head of income, other than capital gains Capital gains , is a loss and the assessee has income assessable under the head Capital gains , In such a situation, such loss may, subject to the provisions of this Chapter, be set off for and from assessment years 1992-1993, against assessee's income if any, assessable for that assessment year under any head of income including the head Capital gains . The brought forward unabsorbed depreciation and brought forward investment allowance shall be added in the current depreciation and investment allowance be set off against the income from capital gains. The business income is a loss. The view taken by the Tribunal is therefore, fully justified proceeded to decide the appeal on the footing that the law provides to give full effect to the unabsorbed depreciation and investment allowance as per provisions of Section 32(2)/Section 32A (3) whereas under Section 34A it is 2/3rd of. It held that the view taken by the CIT that set off to 2/3rd of the unabsorbed depreciation and investment allowance is permissible only against the income from the business and profession and not from the income under the head income from other sources. No merit in the argument of the appellant which proceeds on the footing that business loss and unabsorbed depreciation and unabsorbed investment allowance are one and the same thing. In this view of the matter, the Commissioner of Income Tax was not justified in invoking the jurisdiction under section 263 of the Income Tax Act or not allowing the unabsorbed depreciation against income from capital gains to the extent of admissibility to Rs.66.67 %.

Summary

Issues Involved:
1. Validity of the revisional proceedings under Section 263 of the Income Tax Act.
2. Interpretation of Section 34-A of the Income Tax Act.
3. Set-off of unabsorbed depreciation and investment allowance against income from capital gains.
4. Applicability of Section 72(1)(i) and its impact on set-off provisions.
5. Distinction between unabsorbed depreciation and carried forward loss.

Issue-wise Detailed Analysis:

1. Validity of the Revisional Proceedings under Section 263 of the Income Tax Act:
The appeal arises out of revisional proceedings initiated by the Commissioner of Income Tax by invoking Section 263 of the Income Tax Act. The Commissioner revised the original assessment order, which allowed the set-off of unabsorbed depreciation against income from capital gains, by restricting the set-off to 2/3rd of such allowances. The Tribunal set aside this revisional order, leading to the current appeal.

2. Interpretation of Section 34-A of the Income Tax Act:
Section 34-A was introduced by the Finance Act 1992 to provide that in case of domestic companies, only 66 and 2/3rd of unabsorbed depreciation and investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income. The High Court emphasized that Section 34-A does not prescribe the set-off of unabsorbed depreciation and investment allowance against the income from capital gains.

3. Set-off of Unabsorbed Depreciation and Investment Allowance Against Income from Capital Gains:
The Tribunal allowed the set-off of unabsorbed depreciation against income from capital gains, contrary to the Commissioner's revised order. The High Court upheld the Tribunal's decision, stating that unabsorbed depreciation can be set off against income under any head, including capital gains, as per the provisions of Section 32(2) and Section 71(2) of the Income Tax Act.

4. Applicability of Section 72(1)(i) and Its Impact on Set-off Provisions:
The Department argued that under Section 72(1)(i), unabsorbed depreciation and investment allowance cannot be set off against income from capital gains. The High Court, however, clarified that Section 71(2) allows for the set-off of losses under any head of income, including capital gains, and that the provisions of Section 34-A do not override this.

5. Distinction Between Unabsorbed Depreciation and Carried Forward Loss:
The High Court highlighted the distinctions between unabsorbed depreciation and carried forward loss, as detailed in N.A. Palkhivala's commentary. These distinctions include the ability to set off unabsorbed depreciation against any income, the absence of a time limit for carrying forward unabsorbed depreciation, and the non-applicability of certain restrictive provisions to unabsorbed depreciation.

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's decision to allow the set-off of unabsorbed depreciation against income from capital gains. The Court held that the Commissioner of Income Tax was not justified in invoking Section 263 to revise the original assessment order. The judgment clarified the interpretation of Section 34-A and reinforced the distinctions between unabsorbed depreciation and carried forward loss.