2014 (11) TMI 108 - HC - Income Tax

Entitlement to set off of unabsorbed depreciation of earlier years Effect of amendment to section 32(2) w.e.f. 01.04.1997 - Held that - The Tribunal rightly holding that the assessee is entitled to set off of unabsorbed depreciation of earlier years in order to arrive at the total income - Prior to the amendment, assessee was entitled to set off of unabsorbed depreciation - It is only by way of this amendment, it was denied the said benefit - even before the expiry of 8 years period, the amended provision was deleted and the original provision was restored - In other words, this amended provision never came into force at all - When that being the case, the question of denying the benefit to the assessee did not arise thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Entitlement to set off unabsorbed depreciation against total income.
2. Interpretation of amendments to Section 32(2) of the Income Tax Act, 1961.

Issue 1: Entitlement to set off unabsorbed depreciation against total income:
The appeal in this case revolves around the entitlement of the assessee to set off unabsorbed depreciation against other income. The Tribunal had allowed the set off, which was challenged by the Revenue. The Assessing Officer did not accept the claim initially, leading to subsequent appeals. The Appellate Authority upheld the assessee's right to set off unabsorbed depreciation and business loss against income from short-term capital gains. The key contention was whether the earlier years' business loss and unabsorbed depreciation could be set off against profits from the sale of capital assets, reducing short-term capital gains. The Tribunal's decision was based on the Finance Act of 1996, allowing for the carry-forward and set off of unabsorbed depreciation for up to 8 years. Ultimately, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the Revenue.

Issue 2: Interpretation of amendments to Section 32(2) of the Income Tax Act, 1961:
The controversy in this case stemmed from the amendment to Section 32(2) of the Income Tax Act, 1961, effective from 01.04.1997. Prior to this amendment, the assessee was entitled to set off unabsorbed depreciation. The amendment restricted this benefit, causing concerns within the industry. The Finance Minister assured that the amendment would only come into effect after 8 years, providing a transition period for industry adjustment. However, before the 8-year period lapsed, the amended provision was deleted, reverting to the original provision. As a result, the amended provision never became enforceable. The Assessing Authority failed to consider the Minister's assurance and Circular issued by the Board, relying on a previous Tribunal decision that was subsequently set aside by the High Court. The High Court found no merit in the Revenue's appeal, ruling in favor of the assessee based on the Minister's assurance and the non-enforcement of the amended provision.

In conclusion, the High Court of Karnataka upheld the Tribunal's decision, affirming the assessee's entitlement to set off unabsorbed depreciation against total income. The interpretation of the amendments to Section 32(2) of the Income Tax Act, 1961, played a crucial role in determining the outcome of the case. The Court's ruling favored the assessee, emphasizing the importance of considering legislative intent and the proper application of tax laws in such matters.