2011 (3) TMI 1023 - HC - Income Tax

Set off and carry forward of unabsorbed loss including unabsorbed depreciation - assessee was not allowed to carry forward the losses by virtue of section 80 as it had not filed loss return within the time prescribed under section 139(3) of the Act as only such losses which have been determined in pursuance of return filed in accordance with provisions of section 139(1) & (3), could be carried forward - Held that - Section 32 deals with the different types of depreciation whereas section 80 deals with carry forward of unabsorbed losses other than losses on account of depreciation. If that was not so, there was no need for Legislature to provide specific provision for carrying forward of depreciation under section 32 of the Act. It has already been noted that in case of Nagapatinam Import & Export Corpn. (1979 (1) TMI 53 - MADRAS High Court) which was relied by our High Court in the case of J. Patel & Co. (1984 (4) TMI 53 - DELHI High Court) whereby, it was held that section 72 contemplates loss other than unabsorbed depreciation and there was a time-limit within which loss can be adjusted, whereas in the case of unabsorbed depreciation there is no time-limit and further that under the statute there is a separate identity with respect to unabsorbed depreciation though at the time of computation, it becomes a part of loss. Thus it comes out that the effect of section 32(2) is that unabsorbed depreciation of a year becomes part of depreciation of subsequent year by legal fiction and when it becomes part of current year depreciation it is liable to be set off against any other income, irrespective of the fact that the earlier years return was filed in time or not - in favour of the assessee.

Summary

Issues Involved:
1. Whether it is necessary for the return to be filed within the time allowed under section 139(1) read with section 139(3) of the Income-tax Act for carrying forward of unabsorbed depreciation.
2. Whether the provisions of section 80 of the Income-tax Act apply to unabsorbed depreciation covered by section 32(2) of the Act.

Issue-Wise Detailed Analysis:

1. Timeliness of Filing Return for Carrying Forward Unabsorbed Depreciation:
The core issue was whether the return for unabsorbed depreciation must be filed within the due date specified under section 139(1) read with section 139(3) of the Income-tax Act. The ITAT allowed the appeal of the assessee, stating that section 80 does not refer to section 32(2), which deals with unabsorbed depreciation. Therefore, it is not necessary for the carry forward of unabsorbed depreciation that the return should be filed within the time allowed under section 139(3). The ITAT relied on several judgments and a CBDT circular to support this view. The High Court upheld this interpretation, noting that section 32(2) exclusively governs the carry forward of unabsorbed depreciation, and the time limitation under section 139(1) does not apply to it.

2. Applicability of Section 80 to Unabsorbed Depreciation:
The second issue was whether section 80, which restricts the carry forward of losses not determined in pursuance of a return filed under section 139(3), applies to unabsorbed depreciation. The High Court examined the provisions of sections 32, 80, and 139 of the Act. It concluded that section 80 pertains to business losses and does not cover unabsorbed depreciation, which is governed by section 32(2). The court noted that sections 72, 73, 74, and 74A, referred to in section 80, do not deal with unabsorbed depreciation. The court cited various judgments, including those from the Madras, Karnataka, Punjab and Haryana High Courts, which supported the view that unabsorbed depreciation is treated differently from business losses and is not subject to the same time limitations.

Judicial Precedents and Interpretations:
The court referenced multiple cases to support its interpretation:
- Sri Hari Mills Ltd. v. First ITO and Sathappa Textiles (P.) Ltd. v. Second I.T.O.: These cases established that section 80 does not apply to unabsorbed depreciation.
- Brahmaver Chemicals (P.) Ltd. v. Second ITO: This case reinforced that section 80's provisions do not extend to unabsorbed depreciation.
- CIT v. Haryana Hotels Ltd.: This case distinguished between unabsorbed depreciation and business losses, emphasizing that unabsorbed depreciation does not need to be filed within the time prescribed under section 139(1).

Conclusion:
The High Court concluded that unabsorbed depreciation can be carried forward irrespective of whether the return was filed within the time allowed under section 139(1). The court affirmed that section 80 does not apply to unabsorbed depreciation, which is exclusively governed by section 32(2). Thus, both questions were answered in favor of the assessee and against the Revenue, leading to the dismissal of the appeal.