2012 (11) TMI 674 - AT - Income Tax

Set off and Carry forward of Business loss as well as current year s depreciation against Long Term capital gains held that - legal fiction created by provisions of Sec. 32(2) of the Act has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act.In case of set off of business loss vis-a-vis depreciation, the first preference shall be given to the business loss as per the provisions of Sec. 72(1) of the Act for the simple reason that the business loss can be carried forward only upto 8 assessment years whereas the depreciation can be carried over upto unlimited period. Brought forward unabsorbed depreciation is treated as current years depreciation because of the legal fiction, therefore the treatment given to the current year s depreciation is equally applicable to brought forward depreciation after the application of Finance Act, 2001 - current year s depreciation is to be allowed as set off from the Long Term Capital Gains and brought forward depreciation is to be treated as current year s depreciation as per the legal fiction of section 32(2), the same is also to be allowed to be set off from the Long Term Capital Gains - In the result, appeal filed by assessee is allowed.

Issues Involved:
1. Non-allowance of current year's depreciation while determining business loss.
2. Non-allowance of set off of unabsorbed loss against the current year's Long Term Capital Gain.

Issue 1: Non-allowance of current year's depreciation while determining business loss

The assessee argued that the Ld. CIT(A) erred in confirming the action of the AO in not allowing current year's depreciation of Rs. 2,32,059/- as a set off from the capital gains. The AO had observed that the set off of current year's business loss against the income under other heads of income does not include unabsorbed depreciation as it is not a part of business loss. The AO further noted that Sec. 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business. The AO also pointed out that the Act treats business loss separately from depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for an unlimited period. The Ld. CIT(A) upheld the AO's decision, stating that set off can be claimed only from profits or gains of business.

The Tribunal analyzed Sec. 32(2) and its amendments, noting that post-2002, the set off is available from profits or gains chargeable for the previous year, not just from business or profession. The Tribunal concluded that the current year's depreciation of Rs. 2,32,059/- should be allowed as a set off against the income under the head "Capital gains". Thus, ground No. 1 of the appeal was allowed.

Issue 2: Non-allowance of set off of unabsorbed loss against the current year's Long Term Capital Gain

The assessee contended that the Ld. CIT(A) erred in confirming the action of the AO in not allowing set off of unabsorbed loss of Rs. 6,42,208/- against the current year's Long Term Capital Gain. The AO had rejected the claim on the grounds that the assessee had not claimed the amount in the return and no revised return was filed. The Ld. CIT(A) upheld this decision, stating that the current year's depreciation is not allowed to be set off against the income under the head Long Term Capital Gains, and the unabsorbed depreciation of earlier years was also not allowed as it was not claimed in the computation of income while filing the return.

The Tribunal noted that unabsorbed depreciation merges with the current year's depreciation due to the legal fiction created by Sec. 32(2) of the Act. The Tribunal further observed that under Sec. 72(2), in case of set off of business loss vis-a-vis depreciation, the first preference should be given to the business loss as it can be carried forward only up to 8 assessment years, whereas depreciation can be carried over for an unlimited period. The Tribunal held that brought forward unabsorbed depreciation should be treated as current year's depreciation and allowed to be set off from the Long Term Capital Gains. Thus, ground No. 2 of the appeal was allowed.

Conclusion:

In conclusion, the Tribunal allowed the appeal filed by the assessee, directing that both the current year's depreciation and the brought forward unabsorbed depreciation be set off against the income under the head Long Term Capital Gains.

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