2012 (6) TMI 702 - AT - Income Tax

Income from other sources set off against unabsorbed depreciation Held that - In the case of Deepak Textile Industries Ltd. (1987 (8) TMI 81 (HC)) it was held that unabsorbed depreciation is to be allowed to be carried forward and set off against assessable income of a subsequent year notwithstanding the fact that the business in respect of which it arose ceased to exist in the year of such set off - once the AO had made requisite enquiry and on investigation he was of the view that the set off of depreciation against the interest income was legally sustainable - no prejudice was caused to the Revenue and upto that extent the order of the AO cannot be termed as an erroneous order. MAT - surplus on transfer of assets to NDDB and the taxability of book profit u/s.115JB of the Act. - held that - an assessment was completed without ascertaining certain legal as well as factual aspect then such an order of the AO was termed as an erroneous order. Reasons assigned for holding so were that the relevant material facts were not before the AO hence neither there was an enquiry nor there was application of mind and due to this reason there was no question of difference of opinion. - Revision order u/s 263 upheld - decided against assessee.

Issues Involved:
1. Set off of income from other sources against unabsorbed depreciation.
2. Taxability of surplus on transfer of assets to NDDB and remission of liabilities.
3. Applicability of Section 115JB regarding book profit claimed as exempt under SICA, 1985.

Detailed Analysis:

1. Set off of Income from Other Sources Against Unabsorbed Depreciation:
The appellant challenged the CIT's decision to disallow the set off of Rs.10,16,010/- (income from other sources) against unabsorbed depreciation. The CIT argued that the Assessing Officer (AO) erroneously allowed this set off, which was prejudicial to the interest of the Revenue. The AO had included the interest income under "other income" and adjusted it against the brought forward business loss, resulting in a NIL income assessment. The CIT believed the AO misunderstood the profit and loss account and balance sheet, leading to an erroneous assessment. The Tribunal found that the AO had indeed made an enquiry and applied the correct legal provisions, referencing the Gujarat High Court decision in Deepak Textile Industries Ltd., which allows unabsorbed depreciation to be set off against assessable income even if the business ceased to exist. Therefore, the Tribunal held that the AO's order was not erroneous or prejudicial to the Revenue in this regard.

2. Taxability of Surplus on Transfer of Assets to NDDB and Remission of Liabilities:
The CIT raised concerns about the surplus from the transfer of assets to NDDB and the remission of liabilities, which the assessee treated as capital reserve and set off against business losses. The CIT noted that the AO did not adequately investigate whether these transactions should be taxed. The Tribunal agreed with the CIT that the AO failed to make necessary enquiries or consider the legal implications, particularly regarding the BIFR's order exempting the assessee from certain tax liabilities. The Tribunal emphasized that the AO's lack of enquiry rendered the assessment order erroneous and prejudicial to the Revenue. Therefore, the CIT's direction to the AO to reassess and verify these facts was upheld.

3. Applicability of Section 115JB Regarding Book Profit Claimed as Exempt Under SICA, 1985:
The CIT objected to the AO's acceptance of the assessee's claim that book profit of Rs.26,19,75,975/- was exempt under SICA, 1985. The CIT argued that the AO did not verify whether the assessee was entitled to this exemption and whether the provisions of Section 115JB were correctly applied. The Tribunal noted that the AO did not conduct any enquiry into this matter, nor did the assessee provide necessary details. The Tribunal held that the AO's failure to investigate and apply the law correctly made the assessment order erroneous and prejudicial to the Revenue. Consequently, the CIT's direction for a fresh assessment on this issue was justified.

Conclusion:
The Tribunal partly upheld the CIT's order under Section 263, agreeing that the AO's lack of enquiry into the surplus on transfer of assets and the applicability of Section 115JB rendered the assessment order erroneous and prejudicial to the Revenue. However, the Tribunal found that the AO had correctly allowed the set off of unabsorbed depreciation against income from other sources, and thus, this part of the CIT's order was not upheld. The appeal was partly allowed, directing the AO to reassess the issues with proper verification.

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