1976 (12) TMI 43 - HC - Income Tax

Assessment Year, Deemed Income, Income Tax Act, Set Off, Unabsorbed Depreciation, Written Down Value

Summary

Issues:
Whether the assessee is entitled to set off unabsorbed depreciation against income for the assessment year 1967-68.

Analysis:
The case involves the assessment year 1967-68 concerning a private limited company that sold its assets and ceased business operations. Initially, the Income-tax Officer rejected the claim for unabsorbed depreciation set off due to the cessation of business before the assessment year. The Appellate Assistant Commissioner, following a Supreme Court decision, allowed the set off of unabsorbed depreciation. The department appealed to the Appellate Tribunal, arguing that unabsorbed depreciation incurred in the year the business ceased cannot be set off. However, the Tribunal dismissed the appeal, leading to the reference question.

The judgment delves into the provisions of section 41(2) and section 32(2) of the Income-tax Act, 1961. Section 41(2) deals with the treatment of assets sold or destroyed, creating a deeming fiction for the business's existence. The Explanation to this section extends the deeming fiction even if the business no longer exists. On the other hand, section 32(2) allows for the carry-forward of unabsorbed depreciation without limitation to specific sections, unlike section 41(5).

The court emphasized that section 41(5) is beneficial to the assessee, ensuring the continuity of the deeming fiction under section 41(2). It clarified that unabsorbed depreciation from previous years can be set off against any income source in subsequent years. Referring to decisions from other High Courts, the judgment reinforced the interpretation that unabsorbed depreciation should be given full effect despite the provisions of section 41(5.

The judgment highlighted a Bombay High Court decision explaining the treatment of unabsorbed depreciation and its adjustment against profits and gains. It rejected the revenue's reliance on a different Bombay High Court case, emphasizing the correct interpretation of the deeming fiction under section 32(2) post the Supreme Court's decision in a specific case.

Ultimately, the court upheld the Tribunal's decision, ruling in favor of the assessee's entitlement to set off unabsorbed depreciation against the computed income for the assessment year 1967-68. The court directed the Commissioner of Income-tax to bear the costs of the reference to the assessee.