2015 (12) TMI 767 - AT - Income Tax

Set off of unabsorbed depreciation - Held that - Perusal of the wordings of Section 32(2) as applicable to assessment year 2007-08 i.e. the impugned assessment year will reveal that the wordings are similar to the wordings as applicable for assessment year 2002-03. Respectfully following the decision of Hon ble Supreme Court in the case of CIT v. Virmani Industries Private Limited (1995 (10) TMI 1 - SUPREME Court ) we hold that the assessee company is entitled to set off of unabsorbed depreciation against long term capital gain earned during the year by the assessee company. We order accordingly. Invoking provisions of Section 145A - additions to the closing stock and that too without making corresponding adjustments to the opening stock , purchase and sale of the assessee company - Held that - in the instant case , the assessee company is consistently and regularly following the method of accounting by following exclusive method also called net method which is one of the accepted method of accountancy whereby the taxes paid on purchase of raw material are not included in the cost of purchase on the premise that the assessee company is entitled for Cenvat credit on the same to be adjusted against the excise duty liability on finished goods manufactured by the assessee company , while the basic fallacy in contention of the Revenue is that the Revenue is contemplating adding the excise duty paid to the value of closing inventory following the inclusive method also called as gross method and not to the totality of all relevant transactions during the previous year to arrive at a correct income chargeable to tax as per the Act and hence , in our considered view, the inclusive method also called as gross method as mandated by Section 145A of the Act, is to be applied to the totality of all relevant transactions during the previous year to arrive at a correct income chargeable to tax as per the Act and the same cannot be applied in a piecemeal and ad-hoc manner to a few handful chosen and selected transactions as is done by the revenue in the instant case which will lead to distortion of income chargeable to tax which is not permissible under the Act. Our above observations and discussions in preceding para s are equally applicable to VAT/sales tax on the raw materials, WIP and finished goods. Thus the interest of justice will be best served , if the matter is restored to the file of the AO to re-determine the correct income chargeable to tax as per the Act after considering the provisions of Section 145A of the Act in light of our observations as contained in the preceding para s.

Issues Involved:
1. Denial of set-off of current year's depreciation against capital gains.
2. Non-specification/carry forward of unabsorbed depreciation and brought forward business losses.
3. Addition on account of Section 145A of the Income Tax Act.
4. Adjustment to the opening stock under Section 145A.

Issue-wise Detailed Analysis:

1. Denial of Set-off of Current Year's Depreciation Against Capital Gains:
The assessee company contended that it had set off depreciation allowance for the year under Section 32(1) against long-term capital gains, which should be allowable under Section 71 of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied this set-off, interpreting Section 32(2) to mean that current year's depreciation could only be set off against business income, not capital gains. The Tribunal, however, referred to the Supreme Court's judgment in CIT v. Virmani Industries Private Limited and the decision in Rallis India Limited v. JCIT, which supported the assessee's claim. The Tribunal concluded that the assessee is entitled to set off unabsorbed depreciation against long-term capital gains, following the precedent set by the Supreme Court and the co-ordinate bench of the Tribunal.

2. Non-specification/Carry Forward of Unabsorbed Depreciation and Brought Forward Business Losses:
The CIT(A) upheld the AO's decision not to specify or carry forward the unabsorbed depreciation and business losses. The Tribunal did not provide a separate detailed analysis on this issue but implicitly addressed it within the context of the first issue, affirming the entitlement to set-off and thereby implying that the carry forward should be recognized.

3. Addition on Account of Section 145A of the Income Tax Act:
The AO added excise duty and sales tax to the closing stock without making corresponding adjustments to the opening stock, purchases, and sales, as mandated by Section 145A. The CIT(A) upheld this addition, rejecting the assessee's argument for adjustments to the opening stock. The Tribunal noted that Section 145A requires inclusive valuation of inventory, purchases, and sales, including all taxes and duties. It emphasized that the correct income chargeable to tax should be determined by applying the inclusive method to the totality of relevant transactions, not selectively. The Tribunal directed the AO to re-determine the income chargeable to tax, considering the provisions of Section 145A comprehensively.

4. Adjustment to the Opening Stock under Section 145A:
The Tribunal highlighted that adjustments under Section 145A should be applied to both opening and closing stock to reflect true profits. It referred to the Privy Council's decision in CIT v. Ahmedabad New Cotton Mills Co. Ltd. and the Supreme Court's decision in CIT v. Dynavision Ltd., which support corresponding adjustments to the opening stock when altering the valuation method. The Tribunal rejected the CIT(A)'s reliance on Melmould Corporation v. CIT, distinguishing it based on the context of consistent accounting methods employed by the assessee.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-determine the correct income chargeable to tax after considering the provisions of Section 145A and the Tribunal's observations. The AO was instructed to provide the assessee with an opportunity to present evidence in support of its claims. The Tribunal's order emphasized the need for a comprehensive and consistent application of Section 145A to all relevant transactions to ensure accurate income determination.

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