2013 (7) TMI 226 - HC - Income Tax

Benefit u/s 32(2)(iii) - Partial cessation of business - set off of unabsorbed depreciation - Held that - The provision mandates that business or profession for which the allowance was originally computed should be continued by the Assessee in the previous year - It nowhere mandates that business should continue for the entire year - In the present case, the Assessee did continue business up to 30.09.1998 - Legislature by not using the word entire clearly showed its intention that it was not necessary that the business should be carried on for the entire year - Proviso does not prevent the Assessee from taking advantage of section 32(2)(iii), if the other conditions are satisfied - Decided in favour of Assessee. Unabsorbed depreciation - Set off only against the profits and gains of any business or profession - Held that - In calculating the income under a head, certain deductions can also be made - These deductions are provided in that particular head itself - Normally, loss under one head can be set off only against the profit in that head, unless it is so provided under any provision of the Act - Section 32(2)(i) provided that it could be set off against profits and gains, if any, of any business or profession carried on by the assessee and in case it could not be done then it could be set off from the income of the Assessee under any other head under section 32(2)(ii) of the Act - The unabsorbed depreciation allowance that could not be so set off, was to be carried forward for the next eight years under section 32(2)(iii)(b) - In section 32(2) (ii), any other income is specifically mentioned, but it is not so mentioned in section 32(2)(iii). This clearly shows the intention of the legislature that the carried forward unabsorbed depreciation allowance cannot be set off against income other than the income from profits and gains of business or profession - Decided against assessee. Intention of legislature - Whether speech of the Finance Minister be taken into account, while interpreting a clear and unambiguous section - Held that - Following decision of P.V. Narsimha Rao v. State 1998 (4) TMI 503 - SUPREME COURT , The intention of the legislature is to be seen from the use of the words in the statute. The question is not what might be intended but what has been said - it is the language of the statute that determines the legislative intention - Speech of a minister cannot be taken into account to interpret a provision that is clear and unambiguous. Short-term capital gains as business income - Set Off of carried forward depreciation with short term capital gain from sale of depreciable assets - Held that - Section 41(2) provides that in some cases of sale of buildings, machinery, plant or furniture, if the money payable exceeds the written down value of those assets, then it would be treated as income of the business of the previous year - Assessee was not engaged in generation or generation and distribution of power. It was manufacturing straw boards. In the present case, depreciation was not claimed under section 32(1)(i) of Act, but it was claimed under section 32(1)(ii) of the Act. Section 32(1)(i) as well as section 41(2) of the Act is not applicable here - Short term capital gain on sale of depreciable assets is not profits and gains of any business or profession - Carried forward unabsorbed depreciation cannot be set off with short-term capital gain - Only current unabsorbed depreciation can be set off against the Profits and gains of business or profession as section 32(2)(ii) of the Act provides that it (current unabsorbed depreciation) can be set off with any other income. - Decided in favor of revenue.

Issues Involved:
1. Whether the benefit of set-off can be availed under section 32(2)(iii) of the Income Tax Act, 1961, even if the business was not carried on for the entire year.
2. Whether the carried forward unabsorbed depreciation can be set off only against the profits and gains of any business or profession carried on by the assessee or against income under any other head.
3. Whether the short-term capital gain on the sale of depreciable assets is an income under the head of 'profits and gains of any business or profession' or not.

Detailed Analysis:

1. Whether the benefit of set-off can be availed under section 32(2)(iii) of the Act, even if the business was not carried on for the entire year:
The court held that it is not necessary for the business to be carried on for the entire year to claim the set-off under section 32(2)(iii). The provision mandates that the business or profession for which the allowance was originally computed should be continued by the assessee in the previous year. It does not mandate that the business should continue for the entire year. The court emphasized that the legislature did not use the word 'entire' in the proviso, indicating that it was not necessary for the business to be carried on for the entire year. Therefore, an assessee is entitled to claim set-off even if the business was carried on for part of the year.

2. Whether the carried forward unabsorbed depreciation can be set off only against the profits and gains of any business or profession carried on by the assessee or against income under any other head:
The court analyzed Chapter IV of the Act, which provides for the computation of total income under different heads. Section 32(2) was examined, which explains the concept of unabsorbed depreciation. The court noted that while section 32(2)(i) and (ii) allow current unabsorbed depreciation to be set off against any income, section 32(2)(iii) specifically restricts the set-off of carried forward unabsorbed depreciation to the profits and gains of any business or profession. The court disagreed with the decisions of the Madras High Court and various Tribunal benches that allowed set-off against income from any other head, stating that the clear and unambiguous language of the statute should prevail. Therefore, carried forward unabsorbed depreciation can only be set off against the profits and gains of any business or profession.

3. Whether the short-term capital gain on the sale of depreciable assets is an income under the head of 'profits and gains of any business or profession' or not:
The court examined section 50 of the Act, which creates a legal fiction by deeming certain income from the transfer of depreciable assets as short-term capital gains. The court held that this legal fiction should be given full effect, meaning that the short-term capital gain should be treated as income under the head 'E- Capital gains' and not under 'D- Profits and gains of business or profession'. The court rejected the argument that section 41(2) applies to the assessee, as it pertains to assets of undertakings engaged in power generation or distribution, which was not the case here. Consequently, carried forward unabsorbed depreciation cannot be set off against short-term capital gains.

Conclusions:
1. It was not necessary to carry on the business for the entire previous year to claim set-off; carrying on the business for part of the year suffices.
2. Carried forward unabsorbed depreciation allowance for depreciable assets can only be set off against the profit and gains of business or profession and not against any other income.
3. Short-term capital gain on the sale of depreciable assets is not considered profits and gains of any business or profession.
4. Carried forward unabsorbed depreciation allowance cannot be set off from short-term capital gain on the sale of depreciable assets.

Final Decision:
The appeal by the Department was allowed. The order of the Tribunal dated 19.04.2006 was set aside, and the order of the Commissioner of Income Tax (Appeals) dated 26.09.2005 was upheld.

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