2015 (2) TMI 1039 - HC - Income Tax

Set off the brought forward depreciation loss against capital gains - whether unabsorbed depreciation loss of earlier years cannot be adjusted against short term capital gains arising on sale of business assets? - Held that - In the present case, the Tribunal came to hold that the depreciation for set off relates to the assessment year 1997-1998 and the business is still continuing. In such a situation, the Tribunal went on to hold that Section 32(2) (i) and 32(2) (ii) do not get attracted. This is not the case of the appellant/assessee. The only plea is that if Section 32(2) (iii) provides that unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and it shall be set off against profit and gains, if any, of any business or profession carried on by him and assessable for that assessment year in terms of Section 32(2)(iii)(a) of the Income Tax Act. The following assessment year in this case is 1999-2000. Unfortunately, the Tribunal has not addressed the issue in the light of the said provision Section 32(2)(iii)(a) of the Income Tax Act. Tribunal says in paragraph 9 of the order is that, though it is abundantly clear that Section 32(2)(iii) is operational in the case of the assessee, it only says that unabsorbed depreciation can be carried forward to the successive years. That is not the issue raised in the appeal. Furthermore, the decisions of the Supreme Court in the case of CIT Vs Cocanada reported in 1965 (4) TMI 11 - SUPREME Court raised in the grounds of appeal by the assessee have also not been adverted to. Thus remand the matter back to the Tribunal to consider and pass orders on the entire issues raised by the assessee. - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Whether it is possible to set off the brought forward depreciation loss against capital gains under Section 32(2)(iii) of the Income Tax Act.
2. Interpretation and application of Section 32(2) of the Income Tax Act, both pre and post-amendment.
3. Consideration of Supreme Court decisions in similar contexts.

Detailed Analysis:

1. Set-off of Brought Forward Depreciation Loss Against Capital Gains:
The primary issue in this case is whether the brought forward depreciation loss from earlier assessment years can be set off against capital gains, specifically short-term capital gains arising from the sale of depreciable business assets. The appellant argued that under Section 32(2) of the Income Tax Act, the carried forward depreciation should be set off against income from profits and gains of business, which includes gains from the sale of business assets, even if they are taxed under a different head due to the deeming provisions of Section 50.

2. Interpretation and Application of Section 32(2):
The court examined the provisions of Section 32(2) as they stood before and after the amendment by the Finance Act (No.2) Act, 1996. The pre-amendment provision allowed unabsorbed depreciation to be added to the depreciation allowance for the following year and deemed it part of that allowance. The post-amendment provision specified that unabsorbed depreciation could be set off against profits and gains of any business or profession or income under any other head, and if not wholly set off, it could be carried forward to subsequent years, subject to certain conditions.

3. Consideration of Supreme Court Decisions:
The appellant relied on the Supreme Court decisions in CIT Vs. Cocanada Radhaswami Bank Limited (57 ITR 306) and CIT Vs. Ramanath Goenka (259 ITR 26), which held that income arising from business activities, though taxed under different heads, constitutes business income. The court noted that the Tribunal had not adequately addressed these precedents in its decision.

Judgment Summary:
The court found that the Tribunal did not properly address whether the capital gains from the sale of depreciable assets could be set off against the profits and gains of business for the assessment year 1999-2000. The Tribunal's focus was on the carry forward of unabsorbed depreciation rather than its set-off against capital gains. The court emphasized that the core issue was whether Section 32(2)(iii) allowed for such a set-off.

The court also noted that the Tribunal failed to consider the relevant Supreme Court decisions cited by the appellant, which could provide guidance on the matter. Consequently, the court set aside the Tribunal's order and remanded the case back to the Tribunal for a fresh consideration of all issues raised by the assessee, including the applicability of Section 32(2)(iii) and the relevant Supreme Court decisions.

Conclusion:
The appeal was disposed of with the direction to the Tribunal to reconsider the issues afresh, ensuring that all relevant legal provisions and precedents are adequately addressed. No costs were awarded.