2015 (11) TMI 1064 - AT - Income Tax

Revision u/s 263 - depreciation set off claim - assessee s argument is that its income from other sources in question comes u/s. 56(2)(iii) of the Act which in turn is entitled for Section 32(1) & (2) depreciation claim as per Section 57 (ii) - Held that - The assessee has derived its lease rental income under the head from other sources. There is no dispute that the same is covered u/s.56(2)(iii) of the Act. This is followed by Section 57 stipulating allowability of corresponding depreciation relief u/s.32(1) & (2) of the Act. The CIT holds that the assessee s business as it existed earlier of manufacturing is no longer in existence or the same is not being carried out in the impugned assessment year so as to claim depreciation relief u/s.32(1) & (2) of the Act. We notice from case law of Fabriquik (2002 (7) TMI 27 - GUJARAT High Court) that their lordships consider earlier decisions of CIT vs. Deepak Textile Industries Ltd. (1987 (8) TMI 81 - GUJARAT High Court) and CIT vs. Virmani Industries Pvt. Ltd. 1995 (10) TMI 1 - SUPREME Court holding that in order to avail Section 32(2) depreciation claim, it is not necessary that the business carried on in the following previous year should be the same as it was carried on the preceding previous year. And also that there are no words to that effect in the relevant statutory provision as well. The jurisdictional high court is of the view that an assessee need not carry on any business or profession for availing this benefit in the following year. The Revenue fails to point out any exception thereto. We accordingly accept assessee s latter two arguments on merits and hold it entitled for the impugned depreciation benefit. Its legal plea of merger principle (supra) is rendered infructuous. The CIT s order under challenged passed u/s.263 of the Act stands reversed accordingly. - Decided in favour of assessee.

Summary

Issues Involved:
1. Invocation of Section 263 by the CIT.
2. Validity of revising the assessment order merged with CIT(A)'s order.
3. Direction to the AO to quantify and disallow set-off of unabsorbed depreciation.
4. Entitlement to set off unabsorbed depreciation against income from other sources.
5. Quantum of unabsorbed depreciation to be considered for set-off.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 by the CIT:
The CIT invoked Section 263 of the Income Tax Act, 1961, to revise the scrutiny assessment under Section 143(3), holding it as erroneous and prejudicial to the interest of revenue. The CIT observed that the AO allowed set-off of unabsorbed depreciation against income from other sources without proper verification, which was factually incorrect as per Section 72(2). The CIT's action was based on the premise that the assessee's business of manufacturing was discontinued, and thus, the unabsorbed depreciation could not be set off against income from other sources.

2. Validity of Revising the Assessment Order Merged with CIT(A)'s Order:
The assessee contended that since the assessment order had merged with the CIT(A)'s order, the CIT should not have invoked Section 263. The CIT(A) had allowed the set-off of brought forward depreciation, and the department did not appeal against this decision. However, the CIT rejected this plea, stating that the AO failed to apply the correct provisions of the Income Tax Act, making the assessment order erroneous and prejudicial to the revenue.

3. Direction to the AO to Quantify and Disallow Set-off of Unabsorbed Depreciation:
The CIT directed the AO to quantify the claim of set-off of unabsorbed depreciation from the discontinued business and disallow it against income from other sources. The CIT emphasized that the AO did not verify the eligibility for the claim of set-off, thereby allowing an incorrect claim without proper application of mind and relevant provisions of the Income Tax Act.

4. Entitlement to Set-off Unabsorbed Depreciation Against Income from Other Sources:
The assessee argued that its income from other sources under Section 56(2)(iii) was entitled to depreciation under Section 32(1) & (2) as per Section 57(ii). The CIT held that the assessee's manufacturing business was no longer in existence, and thus, the unabsorbed depreciation could not be set off against income from other sources. However, the ITAT referred to the jurisdictional High Court's decisions, which held that an assessee need not carry on any business in the following year to claim Section 32(2) depreciation. The ITAT accepted the assessee's argument, allowing the depreciation benefit.

5. Quantum of Unabsorbed Depreciation to be Considered for Set-off:
The assessee contended that the set-off of unabsorbed depreciation against income from other sources should only be Rs. 10,73,834/- since the business loss of Rs. 60,79,451/- was already set off against income for A.Y. 2007-08 & 2008-09. The CIT did not address this specific quantum issue in detail, focusing instead on the broader eligibility and correctness of the set-off claim.

Conclusion:
The ITAT reversed the CIT's order under Section 263, holding that the assessee was entitled to the depreciation benefit under Section 32(2) despite the discontinuation of its manufacturing business. The appeal was allowed, and the CIT's direction to the AO to disallow the set-off of unabsorbed depreciation was quashed. The ITAT's decision was based on the interpretation that an assessee need not carry on any business in the subsequent year to claim the benefit of unabsorbed depreciation.