2016 (6) TMI 931 - AT - Income Tax

Revision u/s 263 - Determination of loss to be carried forward - loss represented unabsorbed depreciation which was to be carried forward to the subsequent assessment year along with the earlier year s unabsorbed depreciation - CIT(A) held that unabsorbed depreciation cannot be carried forward without set off beyond a period of 8 years and AO ought to have held that unabsorbed depreciation which remained without set off ought to have been treated by the AO as not eligible for carry forward - Held that - From the language of the sub-s. (2) of s. 32 it is manifest that it is a substantive provision and not a procedural one. It is settled legal position that the amendment to substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. In the light of the judicial precedents on the issue especially that of the Hon ble Gujarat High Court in the case of General Motors India Pvt.Ltd. (2012 (8) TMI 714 - GUJARAT HIGH COURT )wherein held that unabsorbed depreciation from AY. 1997-98 up to AY. 2001-02 got carried forward to AY. 2002-03 and became part thereof and it came to be governed by the provisions of sec. 32(2) as amended by the Finance Act, 2001 and were available for carry forward and set off against income of subsequent years without any limit and which has the effect of overruling the decision of the Special Bench in the case of Times Gurantee (2010 (6) TMI 516 - ITAT, MUMBAI ) as relied upon by CIT(A) and also on the basis of other decisions referred by the Assessee before us, the order of the CIT cannot be sustained. Section 263 requires the satisfaction of two conditions viz. (i) the order sought to be revised is erroneous; and (ii) it is prejudicial to the interests of Revenue. If one of them is absent i.e. if the order sought to be revised is erroneous but not prejudicial to the interest of Revenue or if it is not erroneous but is prejudicial to the interests of Revenue, the provisions of section 263(1) of the Act are not attracted as the phrase prejudicial to the interests of Revenue is to be read in conjunction with an erroneous order passed by the Assessing Officer. When an Assessing Officer adopts one of the courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of Revenue. Every loss of Revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of Revenue. This was the view held by the Hon ble Apex Court in the case of Malabar Industrial Co. Ltd. (2000 (2) TMI 10 - SUPREME Court ). - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the CIT's order under Section 263 of the Income Tax Act.
2. Interpretation and application of Section 32(2) of the Income Tax Act regarding the carry forward and set off of unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Validity of the CIT's Order under Section 263 of the Income Tax Act:

The Assessee appealed against the CIT's order dated 28.03.2013, which was passed under Section 263 of the Income Tax Act for the Assessment Year (AY) 2008-09. The CIT had directed the disallowance of carry forward of unabsorbed depreciation amounting to ?125,47,07,925/- from AYs 1996-97, 1997-98, 1998-99, and 2000-01, arguing that as per the law applicable to those years, unabsorbed depreciation could not be carried forward beyond eight years.

The Tribunal noted that for the CIT to exercise jurisdiction under Section 263, two conditions must be satisfied: (i) the order sought to be revised is erroneous, and (ii) it is prejudicial to the interests of Revenue. The Tribunal referred to the Supreme Court's decision in Malabar Industrial Co. Ltd. (243 ITR 83), which held that if an Assessing Officer (AO) adopts one of the permissible courses in law, it cannot be treated as erroneous merely because the CIT does not agree with it. The Tribunal concluded that the AO's view was a possible one and thus, the CIT's exercise of jurisdiction under Section 263 was not justified.

2. Interpretation and Application of Section 32(2) of the Income Tax Act:

The core issue was the interpretation of Section 32(2) of the Income Tax Act concerning the carry forward and set off of unabsorbed depreciation. The Tribunal examined the provisions of Section 32(2) as they existed at different points in time:

- First Period (up to AY 1996-97): Unabsorbed depreciation could be carried forward indefinitely and set off against income under any head.
- Second Period (AYs 1997-98 to 2001-02): Unabsorbed depreciation could be carried forward for a maximum of eight assessment years and set off only against business income.
- Third Period (from AY 2002-03 onwards): The law reverted to the provisions of the first period, allowing indefinite carry forward and set off against income under any head.

The Tribunal referred to the Gujarat High Court's decision in General Motors India Pvt. Ltd. (354 ITR 244), which held that unabsorbed depreciation from AY 1997-98 to 2001-02, carried forward to AY 2002-03, would be governed by the amended provisions of Section 32(2) as per the Finance Act, 2001. This meant that the unabsorbed depreciation could be carried forward and set off without any time limit.

The Tribunal also noted similar rulings by the Gujarat High Court in CIT vs. Gujarat Themis Biosyn Ltd. and the Kolkata Tribunal in Bengal Tea & Fabrics Limited, which supported the Assessee's position.

Given these judicial precedents, the Tribunal concluded that the CIT's order was not sustainable. The AO's decision to allow the carry forward of unabsorbed depreciation was in line with the prevailing legal interpretations, and thus, the CIT's revision under Section 263 was unwarranted.

Conclusion:

The Tribunal quashed the CIT's order under Section 263 and allowed the Assessee's appeal, affirming that the unabsorbed depreciation from AYs 1996-97 to 2000-01 could be carried forward and set off without the eight-year limitation, in accordance with the amended provisions of Section 32(2) of the Income Tax Act. The appeal by the Assessee was allowed, and the order was pronounced on 01.06.2016.