2016 (5) TMI 1138 - AT - Income Tax

Carried forward depreciation and loss - CIT(A) allowing the business loss to set off against the income of assessment year 2001-02 i.e. beyond eight years without appreciating the provisions of section 72(3) of the Act - whether the mistake committed by the auditor in the assessment year 2000-01 can be rectified in the assessment year 2001-02? - Held that - AO while framing the assessment on the assessee should apply the provisions of the income tax act correctly. The assessee should not be deprived from the benefit of the provisions of the income tax act on account on the mistake committed by the auditor of the company. In this connection we are also putting our reliance in the decision of Hon ble Supreme Court in the case of CIT v. Manmohan Das (1965 (11) TMI 33 - SUPREME Court ) wherein has held whether the loss in any year may be carried forward to the following year and set off against the profits and gains of the subsequent year under section 24(2) has to be determined by the Income-tax Officer who deals with the assessment of the subsequent year. A decision recorded by the Income-tax Officer who computes the loss in the previous year that the loss cannot be set off against the income of the subsequent year is not binding on the assessee. Relying on the aforesaid judgments, we have no hesitation in upholding the order of learned CIT(A). Whether unabsorbed depreciation up to the Assessment Year 1996-97 will be added to the depreciation allowance of 1997-98 and that such unabsorbed depreciation could be carried forward for set off for a maximum period of eight years from the Assessment year 1997- 98 - Held that - 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. And 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 assessment year 1997-98 up to the assessment year 2001- 02 got carried forward to the assessment year2002-03 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 yeas, without any limit whatsoever.

Issues Involved:
1. Set off of business loss beyond eight years under Section 72(3) of the Income Tax Act.
2. Correct sequence and priority of set off for brought forward business loss and unabsorbed depreciation.
3. Carry forward and set off of unabsorbed depreciation up to the assessment year 1996-97.

Detailed Analysis:

Issue 1: Set off of Business Loss Beyond Eight Years

The Revenue argued that the CIT(A) erred in allowing the business loss of ?45,53,906 to be set off against the income of the assessment year 2001-02, which is beyond the eight-year limit prescribed under Section 72(3) of the Income Tax Act. The AO observed that the assessee had adjusted the taxable profit for the AY 2000-01 against unabsorbed depreciation instead of the business loss of ?96,02,352 for AY 1992-93, which was the last year for set off. This adjustment led to the lapse of the business loss for AY 1992-93 as per Section 72(3).

The CIT(A) deleted the addition made by the AO, observing that the correct position of carry forward of depreciation and business loss from AY 2000-01 should be decided in the appeal for AY 2001-02. The CIT(A) relied on the Supreme Court's decision in CIT vs. Manmohan Das (59 ITR 699), which held that the allowability of carry forward of losses has to be decided in the subsequent year's assessment.

The Tribunal upheld the CIT(A)'s order, stating that the AO should apply the provisions of the Income Tax Act correctly, and the assessee should not be deprived of the benefits due to the auditor's mistake. The Tribunal relied on the Supreme Court's decision in Manmohan Das, confirming that the correct position of carry forward of losses and depreciation can be rectified in the subsequent year.

Issue 2: Correct Sequence and Priority of Set Off

The AO and the CIT(A) both highlighted the sequence for set off as per the Income Tax Act:
1. Depreciation for the Current Year
2. Unabsorbed business loss of the earlier years
3. Unabsorbed depreciation of the earlier years

The AO noted that the assessee had a taxable profit of ?1,34,40,624 for AY 2001-02, which was adjusted against the brought forward losses and unabsorbed depreciation of ?3,26,47,911. The AO disallowed the set off of ?2,29,94,020 pertaining to AYs 1989-90 to 1992-93, as it was beyond the eight-year limit.

The CIT(A) corrected the sequence of set off and allowed the carry forward of depreciation and business loss, observing that the mistake by the auditor in AY 2000-01 should not affect the correct application of the law in AY 2001-02. The Tribunal agreed with the CIT(A)'s findings and dismissed the Revenue's appeal.

Issue 3: Carry Forward and Set Off of Unabsorbed Depreciation up to AY 1996-97

The assessee contended that the CIT(A) erred in holding that unabsorbed depreciation up to AY 1996-97 could only be carried forward for a maximum of eight years from AY 1997-98. The Tribunal relied on the Gujarat High Court's decision in General Motors India Pvt. Ltd. vs. DCIT (25 taxmann.com 364), which clarified that unabsorbed depreciation for AY 1996-97 would be added to the depreciation allowance of AY 1997-98, with the eight-year limit starting from AY 1997-98.

The Tribunal noted that the Finance Act, 2001, amended Section 32(2) to allow indefinite carry forward of unabsorbed depreciation from AY 2002-03 onwards. Therefore, unabsorbed depreciation from AY 1997-98 to AY 2001-02 could be carried forward without any time limit.

Based on the Gujarat High Court's decision, the Tribunal allowed the assessee's ground, confirming that unabsorbed depreciation from AY 1997-98 onwards could be carried forward indefinitely.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The Tribunal upheld the CIT(A)'s decision regarding the correct sequence of set off and the rectification of the auditor's mistake in subsequent years. It also confirmed that unabsorbed depreciation from AY 1997-98 onwards could be carried forward indefinitely, aligning with the Gujarat High Court's ruling in General Motors India Pvt. Ltd. vs. DCIT.

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