2009 (11) TMI 549 - AT - Income Tax

Carry forward and Set Off - set off of unabsorbed depreciation against income under the head Salaries - sub-s. (2) of s. 71 of the Act again, it clearly specifies that if the net result of computation of the income under the head Profits and gains of business or profession is a loss, then a set off of such loss cannot be made against income assessable under the head salaries - AO as well as the CIT (A) was well justified in not allowing the claim of the assessee for having its unabsorbed depreciation from earlier years to be set off against salary income appeal dismissed

Summary

Issues:
Whether set off of unabsorbed depreciation can be done against income under the head 'Salaries'.

Analysis:
The assessee filed a return of income admitting total income, adjusting unabsorbed depreciation against salary income, which the AO disallowed. The assessee contended that unabsorbed depreciation should be treated separately from business loss for set off purposes. The CIT(A) upheld the AO's decision, stating that unabsorbed depreciation became part of current depreciation. The Authorized Representative argued that unabsorbed depreciation and business loss were treated differently under the Act, citing s. 72. He referenced a Supreme Court decision to support his stance. The Departmental Representative argued that unabsorbed depreciation should not be considered a separate head of income. They highlighted the legislative intent behind the treatment of unabsorbed depreciation. They also referred to an explanatory memorandum to support their interpretation of the law.

The tribunal examined relevant sections of the Income Tax Act, noting that s. 71 deals with inter-head adjustments, s. 72 provides for carry forward and set off of loss, and s. 32(2) deals with unabsorbed depreciation. The tribunal emphasized that unabsorbed depreciation is to be added to subsequent year's depreciation and considered part of current depreciation. They referenced a Supreme Court decision to distinguish between unabsorbed loss and unabsorbed depreciation. The tribunal concluded that unabsorbed depreciation, despite special treatment, remains under the head 'Profits and gains of business or profession'. They clarified that s. 71's specific bar against set off of losses against salary income applies regardless of unabsorbed depreciation. Therefore, the tribunal upheld the decisions of the AO and CIT(A) in disallowing the set off of unabsorbed depreciation against salary income.

In conclusion, the tribunal dismissed the appeal, stating it lacked merit based on the interpretation of relevant sections of the Income Tax Act and the distinction between unabsorbed depreciation and business loss.