2020 (3) TMI 679 - AT - Income Tax

Disallowances of set off of unabsorbed depreciation allowances against income under the head salary - Whether the provision of section 32(2) has not made any distinction between current year deprecation and unabsorbed depreciation? - HELD THAT - From the language used in provisions of section 71(2A) and the explanatory memorandum to Finance Act, 2004, it is very clear that any losses under the head income from business or profession cannot be allowed to set off against income assessable under the head salaries. Therefore, we are of the considered view that the Ld. AO, as well as the Ld.CIT(A) were right in disallowed set off of unabsorbed depreciation allowances against income under the head salaries. This legal position has been strengthened by the decision of ITAT, Mumbai in the case of DCIT vs Time Guaranty Limited 2010 (6) TMI 516 - ITAT, MUMBAI where the law has been explained, in light of provision of section 32(2) and held that losses under the head income from business or profession cannot be set off against income under the head income from other sources. In this view of the matter and respetfully following case laws considered hereinabove, including the decision of ITAT, Mumbai, in the case of DCIT vs Time Guaranty Ltd. (surpa), we are of the considered view that losses under the head income from business or profession, including unabsorbed depreciation, if any cannot be set off against income assessable under the head salaries. The Ld.CIT(A) after considering relevant facts has rightly confirmed disallowances of unabsorbed depreciation losses against income under the head salaries and hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the assessee. Assessee made an alternate argument that if at all unabsorbed depreciation loss ise not allowed to be set off against salary income, and then said unabsorbed depreciation allowances may be allowed to carry forward to subsequent years. We find that there is no restriction, as per the provisions of section 72 to carry forward unabsorbed deprecation to subsequent years. Therefore, if the assessee has fulfilled conditions prescribed therein for carry forward of unabsorbed depreciation, then the ld. AO is directed to allow carry forwarded of unabsorbed deprecation to subsequent years.

Issues Involved:
1. Disallowance of set-off of unabsorbed depreciation against salary income.
2. Interpretation and applicability of Section 71(2A) of the Income Tax Act, 1961.
3. Jurisdiction and legality of the Commissioner (Appeals)'s order.
4. Carry forward of unabsorbed depreciation to subsequent years.

Issue-wise Detailed Analysis:

1. Disallowance of Set-off of Unabsorbed Depreciation Against Salary Income:
The primary issue in both appeals is the disallowance of the set-off of unabsorbed depreciation against salary income. The assessee argued that unabsorbed depreciation, which is a business expenditure under Section 32 of the I.T. Act, 1961, should be allowed to be set off against salary income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed this set-off based on Section 71(2A) of the I.T. Act, 1961, which explicitly prohibits the set-off of business losses, including unabsorbed depreciation, against salary income. The Tribunal upheld this disallowance, citing the clear language of Section 71(2A) and the explanatory memorandum to the Finance Act, 2004.

2. Interpretation and Applicability of Section 71(2A) of the Income Tax Act, 1961:
The assessee contended that Section 71(2A) should not apply to unabsorbed depreciation, arguing that it should be treated differently from business losses. The AO and CIT(A) rejected this interpretation, stating that unabsorbed depreciation is part of the business loss and thus falls under the purview of Section 71(2A). The Tribunal agreed with this interpretation, noting that the law clearly prohibits the set-off of business losses, including unabsorbed depreciation, against salary income from AY 2005-06 onwards.

3. Jurisdiction and Legality of the Commissioner (Appeals)'s Order:
The assessee claimed that the CIT(A)'s order was "bad in law and without jurisdiction." However, the Tribunal did not find merit in this argument. The CIT(A) had followed the statutory provisions and relevant case laws, including the decision of the ITAT, Mumbai in the case of DCIT vs. Time Guaranty Limited. The Tribunal upheld the CIT(A)'s order as legally sound and within jurisdiction.

4. Carry Forward of Unabsorbed Depreciation to Subsequent Years:
The assessee alternatively argued that if the set-off against salary income is disallowed, the unabsorbed depreciation should be allowed to be carried forward to subsequent years. The Tribunal agreed with this contention, noting that there is no restriction under Section 72 of the I.T. Act, 1961, for carrying forward unabsorbed depreciation. The Tribunal directed the AO to allow the carry forward of unabsorbed depreciation to subsequent years, subject to the fulfillment of conditions prescribed in the Act.

Conclusion:
The Tribunal upheld the disallowance of the set-off of unabsorbed depreciation against salary income based on Section 71(2A) of the I.T. Act, 1961. However, it allowed the carry forward of unabsorbed depreciation to subsequent years. Both appeals filed by the assessee were partly allowed, with the Tribunal directing the AO to examine the provisions for carrying forward unabsorbed depreciation.

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