2023 (10) TMI 138 - HC - Income Tax

Set-off of unabsorbed deprecation against short term capital gains - ITAT held that unabsorbed depreciation of the years in question could be set-off only against the profits and gains of subsequent assessment years - HELD THAT - As decided in M/S GUNNEBO INDIA PVT. LTD. 2019 (2) TMI 1872 - BOMBAY HIGH COURT has quoted the relevant portion of the order of ITAT which had dismissed the revenue s appeal where ITAT has held that as per the provisions of Section 32(2) of the Act read with Sections 70 71 and 72 of the Act it becomes very clear that the total depreciation comprising of the depreciation of the relevant assessment year along with the unabsorbed depreciation of the earlier years becomes the total current year s depreciation which is allowed to be set-off against income under any head of income including long term capital gain and hence did not find any reason to interfere with the order of CIT(A). The High Court has also quoted relevant paragraph from General Motors 2012 (8) TMI 714 - GUJARAT HIGH COURT where there is reference to a Circular No. 14 of 2001 issued by the CBDT where the Court has held that the unabsorbed depreciation was available for carry forward and set-off in the subsequent assessment year. In the appeal at hand the ITAT in the impugned order after relying on General Motors (supra) has incorrectly come to a conclusion that the Assessee has claimed set-off of the impugned unabsorbed depreciation against the income under the head capital gain which is not permissible. This is totally contrary to the conclusion of the co-ordinate bench of the ITAT in Gunnebo (supra) where as quoted above the ITAT has held that the unabsorbed depreciation of earlier years become the total current year depreciation which is allowed to be set-off against income under any head of income including long term capital gain. As stated in General Motors (supra) with which we are in respectful agreement if current depreciation is deductible in the first place from the income of the business to which it relates and such depreciation amount is larger than the amount of the profit of that business then such excess comes for absorption from profit and gains from any other business or business if any carried on by the Assessee. If a balance is left even thereafter that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is still a balance leftover it is to be treated as unabsorbed depreciation and taken to the next succeeding year. We hold that ITAT was not justified. Assessee should be permitted to set off of the unabsorbed depreciation against short term capital gains.

Summary

Issues Involved:

1. Deduction for write-off of debit balances in Sundry Creditors' account and deposits.
2. Set-off of unabsorbed depreciation against short-term capital gains.

Summary:

Issue 1: Deduction for Write-off of Debit Balances

The first issue pertains to whether the Tribunal ought to have allowed a deduction for write-off of debit balances in Sundry Creditors' account of Rs. 18,264/- and deposits of Rs. 20,190/-. The Assessing Officer (AO) disallowed Rs. 77,264/- out of the amount of Rs. 1,29,039/- under Section 36(2)(i) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] held that the Assessee had not furnished any evidence to show that the same was the loss incurred during the current assessment year, and the Income Tax Appellate Tribunal (ITAT) upheld this decision. The Assessee did not press this question due to the small amounts involved, and the Court did not express any opinion on this issue.

Issue 2: Set-off of Unabsorbed Depreciation

The second issue is whether the Tribunal was justified in denying set-off of unabsorbed depreciation pertaining to the Assessment Years (AY) 1996-97 to 2001-02 aggregating Rs. 13,89,661/- against short-term capital gains. The AO disallowed the set-off based on a decision of the Special Bench of the Tribunal in DCIT v/s. Times Guaranty Limited, which held that depreciation was available for carry forward only for a period of 8 years and set off only against business income. The CIT(A) and ITAT upheld this view, rejecting the Assessee's reliance on the Gujarat High Court judgment in General Motors (India) Pvt. Ltd. v/s. DCIT, which allowed such set-off against income under any head.

The High Court, referencing its previous decision in PCIT vs. Gunnebo India Pvt Ltd., clarified that as per the provisions of Section 32(2) of the Act read with Sections 70, 71, and 72, the total depreciation, including unabsorbed depreciation of earlier years, becomes the total current year's depreciation and is allowed to be set-off against income under any head of income. The Court emphasized that the CBDT 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, allowing such depreciation to be carried forward indefinitely and set off against profits and gains of subsequent years.

The High Court concluded that the ITAT had incorrectly interpreted the General Motors judgment and quashed the ITAT's order on this issue. The Assessee was permitted to set off the unabsorbed depreciation of Rs. 13,89,661/- against short-term capital gains. The appeal was accordingly disposed of.