1982 (4) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Set off of unabsorbed depreciation against income from other sources.
2. Conditions for allowance of unabsorbed depreciation.
3. Interpretation of Section 32(2) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Set off of unabsorbed depreciation against income from other sources:

The primary issue in these appeals is whether the assessee is entitled to set off unabsorbed depreciation carried forward from previous years against income from other sources. The assessee, a company in liquidation, derived income from interest and rent for the assessment years 1977-78 and 1978-79. The Income-tax Officer (ITO) denied the set off of unabsorbed depreciation, despite the Tribunal's previous favorable decisions for the assessee. The Commissioner (Appeals) upheld the assessee's claim, following prior Tribunal decisions.

2. Conditions for allowance of unabsorbed depreciation:

The revenue argued that Section 32(2) of the Income-tax Act creates a fiction deeming unabsorbed depreciation as current depreciation, but this fiction applies only if the assessee is "carrying on business." According to the revenue, the business must be operational for the unabsorbed depreciation to be set off. The revenue cited that depreciation could only be allowed when the asset is used during the previous year and the business is carried on. If the business has ceased, the claim for unabsorbed depreciation lapses.

The assessee contended that Section 32(2) does not require the business to be carried on in the previous year for unabsorbed depreciation to be set off. The assessee argued that once unabsorbed depreciation is treated as current depreciation by fiction, all conditions for current depreciation are deemed fulfilled. Therefore, the business is assumed to be in existence for the year in question.

3. Interpretation of Section 32(2) of the Income-tax Act, 1961:

The Tribunal examined the provisions of Sections 28, 29, 32(1), and 32(2) of the Act. Section 28 charges income under the head "Profits and gains of business or profession" for businesses carried on by the assessee. Section 29 provides that income under this head is computed according to Sections 30 to 43A. Section 32(1) allows depreciation for assets used for business purposes, while Section 32(2) deals with unabsorbed depreciation, which is treated as current depreciation for subsequent years.

The Tribunal noted that unabsorbed depreciation could be set off against income from other heads if there is income from some business. However, if the business has ceased and there is no income from any business, the unabsorbed depreciation cannot be set off against income from other sources.

The Tribunal referred to various judicial decisions, including CIT v. Rampur Timber & Turnery Co. Ltd., which held that unabsorbed depreciation could be set off against income from other heads if there is no business income. However, the Tribunal distinguished these cases by noting that they involved notional income from business under Section 41(1).

The Tribunal concluded that the fiction in Section 32(2) does not extend to creating a fictional business. If there is no business income, actual or notional, unabsorbed depreciation cannot be set off against income from other sources. The Tribunal emphasized that specific provisions like Section 41 create notional business income, but such provisions do not apply to Section 32(2).

Conclusion:

The Tribunal held that the assessee is not entitled to set off unabsorbed depreciation against income from other sources because the business in respect of which the depreciation is claimed had ceased to exist. The assessee must have income from the same business, some business, or notional business under Section 41 to claim such a set off. If the business source is extinct, unabsorbed depreciation cannot be carried forward or set off against other income sources. The appeals were allowed in favor of the revenue.