2012 (2) TMI 649 - AT - Income Tax

Summary

Issues involved: Appeal against order allowing set off of unabsorbed depreciation for A.Y. 2001-02 against "Income from Other Sources" u/s 32(2), 72(2) & 73(3) of the I.T. Act, 1961.

Issue 1: Set off of unabsorbed depreciation against "Income from Other Sources"

The appellant, a Private Limited Company, engaged in the business of manufacture and sale of M.S. Ingots, filed a return declaring Nil income for A.Y. 2009-2010. Following a survey u/s 133A during F.Y. 2008-09, the company surrendered an amount of Rs. 15 lakh in addition to business income, which was shown in the return of income. The Assessing Officer noted that the company set off the income of the year, including the surrendered amount, against brought forward losses of earlier years. The AO questioned the treatment of the surrendered amount as business income and the set off against brought forward depreciation losses. The AO held that the amounts of Rs. 15 lakhs and Rs. 4,94,620/- (interest income) were not eligible for set off against brought forward business depreciation losses as per section 73 of the I.T. Act. The CIT(A) allowed the appeal, citing the decision in the case of CIT vs. Virmani Industries, stating that unabsorbed brought forward depreciation can be set off against current year's income even if it falls under "income from other sources." The department contended that the CIT(A) did not consider the Special Bench decision in the case of DCIT vs. Times of Guaranty (Mum.) (SB), which outlined the legal position of unabsorbed depreciation allowances in different periods.

Issue 2: Legal position of unabsorbed depreciation allowances in different periods

The Special Bench decision summarized the legal position of unadjusted/unabsorbed depreciation allowances in three periods:
- In the first period (upto A.Y. 1996-97), current depreciation could be set off against any income within the same year.
- In the second period (A.Y. 1997-98 to 2001-02), brought forward unadjusted depreciation allowances could be carried forward for set off against any income for a maximum of eight A.Ys. Current depreciation could be set off against business income first and then against any other head of income.
- In the third period (A.Y. 2002-03 onwards), different rules applied for set off of unabsorbed depreciation allowances against various heads of income within specific timeframes.

Conclusion:

The matter was restored to the AO to reexamine the issue of carry forward unabsorbed depreciation in light of the Special Bench decision. The appeal was allowed for statistical purposes.