2015 (5) TMI 590 - SC - Income Tax

Unabsorbed depreciation - whether unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income when the assessee had not claimed the unabsorbed depreciation in its income-tax return though it had claimed depreciation for the current year as held by ITAT? - Held that - By legal fiction unabsorbed depreciation becomes depreciation of the year in question and gets added to the depreciation of the current year. If that be so, is it the right of the assessee to partly invoke the provisions of Section 32 when it comes to depreciation of the current year and still claim that it has right not to claim unabsorbed depreciation allowance? On a plain reading of Section 32, it does not appear to be the position. Once the entire depreciation, namely, unabsorbed depreciation allowance of the previous year gets merged into the depreciation of the current year, it would become an integral part thereof. Legal fiction makes it one whole thereby making it possible to the assessee to claim set off of unabsorbed carried forward depreciation as well. A fortiorari, bifurcation thereof with option to claim depreciation of current year only and contending at the same time that portion of unabsorbed carried forward depreciation is not to be thrusted upon him as it is not claimed, would not be permissible. Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to the assessee to bifurcate the two again and exercising its choice to claim the depreciation of the current year under Section 32(1) of the Act and take a position that since unabsorbed depreciation of the previous years is not claimed, it cannot be thrusted upon the assessee. The position would have been different if the assessee had not claimed any depreciation at all. However, once the depreciation is claimed and while giving deductions the depreciation is to be set off against the profits of the current year prior to the unabsorbed carried forward investment allowance, it is the entire depreciation, namely, the depreciation of the current year as well as the unabsorbed carried forward depreciation, which is to be taken into account as by virtue of the fiction created under Section 32(2) of the Act, carried forward depreciation also partakes the character of depreciation of the current year. This scrambled egg cannot be unscrambled now. Otherwise, it would amount to negating the legal fiction that is created by the said provision, even to the limited extent. In fact, the case falls within the ambit of the said limited extent of legal fiction and gets covered by it. - Decided in favour of the Revenue.

Summary

Issues Involved:
1. Whether the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing the income of the assessee for the Assessment Year 1991-1992.

Detailed Analysis:

Issue 1: Priority of Unabsorbed Depreciation over Unabsorbed Investment Allowance

The central issue revolves around the priority of unabsorbed depreciation versus unabsorbed investment allowance in the computation of income for the Assessment Year 1991-1992. The appellant/assessee, a public limited company engaged in manufacturing paper, filed its return declaring 'Nil' income after claiming set off of unabsorbed investment allowance to the extent of Rs. 2,87,15,912. The Assessing Officer, however, adjusted the unabsorbed depreciation of earlier years first, leading to the acceptance of 'Nil' income but on a different basis.

The assessee's appeal was dismissed by the Commissioner (Appeals) and subsequently by the Income Tax Appellate Tribunal and the High Court, all of which upheld that unabsorbed depreciation should be set off before unabsorbed investment allowance.

The Supreme Court analyzed the provisions of Section 32 of the Income Tax Act, 1961, which deals with depreciation. Sub-section (2) of Section 32 allows unabsorbed depreciation to be carried forward and deemed as part of the depreciation allowance for the following previous year. This legal fiction means that unabsorbed depreciation from previous years becomes part of the current year's depreciation.

The Court noted that the consistent judicial view has been that unabsorbed depreciation should be allowed before unabsorbed investment allowance. This precedence is supported by the combined effect of Sections 32, 32A, 33, 33A, and 72 of the Act. The Supreme Court also referred to the CBDT Circular No. 202, which outlines the order of deductions where profits are insufficient to absorb all allowances.

The Court acknowledged the principle established in *Commissioner of Income-Tax v. Mahendra Mills* that depreciation is a benefit for the assessee and cannot be forced upon them if not claimed. However, the Court clarified that this principle applies when the assessee does not claim any depreciation at all. In the present case, the assessee claimed current year depreciation but chose not to claim unabsorbed depreciation from previous years.

The Supreme Court held that once unabsorbed depreciation is carried forward, it merges with the current year's depreciation due to the legal fiction created by Section 32(2). Therefore, the assessee cannot bifurcate and selectively claim only the current year's depreciation while ignoring the unabsorbed depreciation. The entire depreciation, including unabsorbed depreciation from previous years, must be set off first before considering unabsorbed investment allowance.

The Court concluded that the High Court correctly prioritized unabsorbed depreciation over unabsorbed investment allowance, aligning with the statutory provisions and judicial precedents. The appeals were dismissed with costs, and the question was decided against the assessee and in favor of the Revenue.