2014 (4) TMI 1001 - AT - Income Tax

Revision u/s 263 of the Act Rectification of mistake u/s 154 of the Act - Carry forward and set off of unabsorbed depreciation Calculation of interest u/s 234B of the Act Held that - The revision order passed by the CIT u/s 263 of the Act is not only confusing but reveals non application of mind - the CIT has sought to revise the rectification order dated 18/08/2010 passed u/s 154 of the Act by the AO, but, actually the CIT has ended up revising the consequential order - The CIT has failed to substantiate with proper reasoning why the amendment made to the provision of section 32(2) of the Act by the Finance Act, 2001 removing time limit of 8 years, would not be applicable to the carry forward of unabsorbed depreciation pertaining to AY 1997-98 - The decision in GENERAL MOTORS INDIA PVT. LTD Versus DEPUTY COMMISSIONER OF INCOME-TAX 2012 (8) TMI 714 - GUJARAT HIGH COURT followed - Current depreciation is deductible in the first place from the income of the business to which it relates - If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee - If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year - In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 - once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 up to the A.Y.2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever - the order passed by the AO u/s 154 of the Act cannot be said to be erroneous and prejudicial to the interests of the revenue so as to empower the CIT to revise it u/s 263 of the Act - the CIT has committed an error in revising the order passed u/s 154 of the Act - Even the CIT in the order passed u/s 263 has not mentioned that the issue being contentious one cannot be rectified u/s 154 of the Act thus, the order u/s 263 of the Act is set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Validity of the rectification order under Section 154 of the IT Act.
2. Applicability of the amendment to Section 32(2) of the IT Act regarding the carry forward and set off of unabsorbed depreciation.
3. Legitimacy of the CIT's order under Section 263 of the IT Act.

Issue-wise Detailed Analysis:

1. Validity of the rectification order under Section 154 of the IT Act:
The assessee filed a return for the assessment year 2006-07, declaring income and agricultural income. The initial assessment determined a higher total income. The assessee appealed and filed an application under Section 154 for rectification, which the Assessing Officer (AO) addressed by allowing the carry forward and set off of unabsorbed depreciation. The CIT later deemed this rectification erroneous and prejudicial to the revenue's interests, issuing a notice under Section 263. The Tribunal found that the CIT's revision order was confusing and revealed non-application of mind. The rectification order dated 18/08/2010 allowed the carry forward of unabsorbed depreciation from AY 1997-98, but the CIT's revision order mistakenly referenced a different amount. The Tribunal concluded that the rectification order had lost relevance after the AO's consequential order dated 31/01/2011, making the CIT's revision under Section 263 unsustainable.

2. Applicability of the amendment to Section 32(2) of the IT Act regarding the carry forward and set off of unabsorbed depreciation:
The CIT argued that the amendment to Section 32(2) by the Finance Act, 2001, which removed the 8-year limit for carrying forward unabsorbed depreciation, was not applicable to AY 1997-98. The assessee contended that the amendment allowed for unlimited carry forward and set off from AY 2002-03 onwards, supported by the Gujarat High Court's decision in General Motors India Pvt. Ltd. The Tribunal agreed with the assessee, noting that the CIT failed to provide proper reasoning for his conclusion and did not apply or distinguish the Gujarat High Court's ratio. The Tribunal emphasized that the Finance Act, 2001, intended to allow unabsorbed depreciation from AY 1997-98 to be carried forward indefinitely from AY 2002-03, aligning with the legislative intent and CBDT Circular No. 14 of 2001.

3. Legitimacy of the CIT's order under Section 263 of the IT Act:
The Tribunal found the CIT's order under Section 263 flawed, as it did not properly address the amendment's applicability and relied on incorrect figures. The CIT's failure to consider the Gujarat High Court's decision and the legislative intent behind the amendment further weakened the order. The Tribunal concluded that the AO's rectification order under Section 154 was neither erroneous nor prejudicial to the revenue, rendering the CIT's revision under Section 263 invalid. The Tribunal also distinguished the case from the Fenoplast Ltd. decision, noting that the Gujarat High Court's ruling was available during the revision proceedings, which the CIT ignored.

Conclusion:
The Tribunal quashed the CIT's order under Section 263, allowing the assessee's appeal and affirming the validity of the AO's rectification order under Section 154, in line with the legislative intent and judicial precedents regarding the carry forward and set off of unabsorbed depreciation. The appeal was allowed, and the order was pronounced in the open court on 17/04/2014.