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TMI Blog2011 (4) TMI 823X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation against short term capital gain under section 143(1) of the Act. Subsequently, by the impugned notice dated 28-3-2000, the respondent has reopened the assessment of the petitioner proposing to recompute the loss/depreciation allowance and asking the petitioner to file a return. The petitioner, by a letter dated 19-4-2000 requested the respondent to supply a copy of the reasons recorded by him. vide another letter dated 27-4-2000, the petitioner reminded the respondent that no communication had been received in response to the earlier letter and stated that the original return be considered to be one filed in response to the notice under section 148 of the Act. The respondent thereafter issued a notice dated 22-8-2000 under section 143(2) of the Act. The petitioner, vide its reply dated 7-9-2000 informed the respondent that it had still not received a copy of the reasons and prayed for an adjournment. Though the respondent had not supplied the reasons, from the enclosure dated 8-5-2001 forwarded along with the notice issued under section 142(1) of the Act, it was obvious as to what the section 148 notice was about because the petitioner was asked to show cause as to why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance, then, the allowance or part of the allowance to which effect had not been given, as the case may be, was required to be added to the amount of the allowance for depreciation for the following year and was deemed to be part of that allowance, or if there is no allowance for the previous year, be deemed to be the allowance for that previous year and so on for the succeeding previous years. According to the learned advocate the allowance of depreciation which could not be given effect to while making the assessment for assessment year 1996-97, was deemed to be part of the allowance for depreciation for the following year, that is, assessment year 1997-98, which is the year under consideration. Thus, when sub-section (2) of section 32 came to be substituted with effect from 1-4-1997, the unabsorbed depreciation of the previous year relevant to assessment year 1996-97 and earlier years already formed part of the allowance for the previous year relevant to assessment year 1997-98. Therefore, such allowance for depreciation was the depreciation allowance for assessment year 1997-98. Hence, while computing the depreciation allowance under the substituted provisions of sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch as in view of the provisions of sub-section (2) of section 32 of the Act, as it stood prior to 1st April, 1997, the depreciation of those assessment years already formed part of the depreciation allowance for the previous year relevant to assessment year 1997-98 and as such, what was deducted was the depreciation allowance of assessment year 1997-98 which was permissible under the newly substituted sub-section (2) of section 32 of the Act. 3.2 In support of his submissions, the learned advocate placed reliance upon the decision of the Madras High Court in the case of CIT v. Pioneer Asia Packing (P.) Ltd. [2009] 310 ITR 198/[2008] 170 Taxman 127, wherein the Court had held that as a result of the amendment of section 32(2) with effect from 1st April, 1997, the deeming fiction of treating the earlier years' unabsorbed depreciation as the current year's depreciation was removed. The period available for absorbing the unabsorbed depreciation against the profit of the succeeding years was limited to eight years. Reliance was also placed upon the decision of the Madras High Court in the case of CIT v. RPIL Signalling Systems Ltd. [2010] 328 ITR 283, wherein the Court had held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed hereinabove, the petitioner was duly entitled to set off the unabsorbed depreciation for assessment year 1997-98 in terms of clause (ia) of section 32(2) of the Act against any head of income in case it could not be set off under clause (i). Hence, there being no error in the assessment under section 143(1) of the Act, no income chargeable to tax can be said to have escaped assessment so as to vest in the Assessing Officer the jurisdiction to reopen the assessment under section 147 of the Act. It was, accordingly, urged that the petition be allowed by setting aside the impugned notice. 4. Vehemently opposing the petition, Mr. M.R. Bhatt, learned senior advocate appearing on behalf of the respondent, submitted that earlier the assessment having been made under section 143(1) of the Act, it cannot be said that the Assessing Officer has expressed any opinion, hence, the contention regarding change of opinion is misconceived. Reliance was placed upon the decision of the Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316, for the proposition that there being no assessment under section 143(1) of the Act, the question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following assessment year and set off against profits and gains of any business or profession up to a period of eight years. Thus, if in the first year, it is not possible to set off the unabsorbed depreciation against the profits and gains of business or profession or under any other head of income, in subsequent years, such unabsorbed depreciation can be set off only against profits and gains from business or profession, and as such, the petitioners would not be entitled to set off the carried forward unabsorbed depreciation allowance of assessment years 1993-94 to 1996-97 against income from short term capital gains. 4.3 Attention was invited to sub-section (2) of section 32 of the Act as it stood prior to 1-4-1997, to submit that the same was subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73 of the Act. Referring to the provisions of sub-section (2) of section 72, it was submitted that in view of the said provision, where any allowance or part thereof is, under sub-section (2) of section 32 to be carried forward, effect is first required to be given to the provisions of section 72 and as such, what is handed over on 1-4-1997 is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anting deduction because prior to the amendment, losses could be carried forward for a period of eight years only whereas the unabsorbed depreciation could be carried forward indefinitely. Thus, all that the said sub-section provides is that depreciation can be set off only after loss is set off. It was further submitted that the Circular as well as the Prime Minister's Speech only state what is already provided under sub-section (2) of section 32 of the Act. In the circumstances, the assessment cannot be reopened on an erroneous interpretation of a statutory provision, despite there being a CBDT Circular explaining the same. 6. The facts are not in dispute. In the case of the petitioner, earlier, assessment was made under section 143(1) of the Act for the assessment year 1997-98. Subsequently, by the impugned notice issued on 28-3-2000 the assessment for assessment year 1997-98 is sought to be reopened. Since no assessment has been framed under section 143(3) of the Act, the only requirement for initiating proceedings under section 147 of the Act, by issuing notice under section 148 of the Act, is that the Assessing Officer should have reason to believe that income chargeable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst profit & gains of business or profession of subsequent years, allowance of set off of unabsorbed depreciation relating to earlier years against short term capital gain is not proper. After adjusting current years business loss and depreciation aggregating Rs. 9.27 lakhs total taxable income works out to Rs. 222.20 lakhs which should have been brought to tax. Omission to do so has resulted in the escapement of income by Rs. 222.20 lakhs with consequent short levy of tax and interest. In view of the above, assessment is reopened under section 147 by issue of notice under section 148 of the I.T. Act. Issue Notice under section 148 accordingly." 9. The reasons recorded indicate that the Assessing Officer has reopened the assessment on the ground that the petitioner had set off unabsorbed depreciation aggregating Rs. 244.94 lakhs relating to assessment years 1993-94 to 1996-97 and that it was permissible to set off unabsorbed depreciation only against profit and gains of business or profession of subsequent years and as such, the allowance of set off of unabsorbed depreciation relating to earlier years against short term capital gain was not proper. The Assessing Officer has, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set-off under clause (i) and clause (ia), the amount of allowance not so set off shall be carried forward to the following assessment year and- 1. it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; 2. if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed." 11. On a plain reading of sub-section (2) of section 32 of the Act as it stood prior to 1-4-1997, it is apparent that under the said provision the allowance which is permitted by way of depreciation in the current year will be adjusted against the profits and gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 997-98. Hence, for all intents and purposes, the unabsorbed depreciation for assessment years 1993-94 to 1996-97 was deemed to be the depreciation allowance for assessment year 1997-98. Subsequently, sub-section (2) of section 32 of the Act came to be substituted with effect from 1st April, 1997 by the Finance (No. 2) Act, 1996. 13. According to section 32(2) as substituted where in the assessment of the assessee, full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year (i) owing to there being no profit or gains chargeable for that previous year or (ii) owing to the profits and gains being less than the allowance, then, the allowance or part of the allowance to which effect has not been given (unabsorbed depreciation allowance) as the case may be, shall be dealt with as follows: Such unabsorbed depreciation allowance, shall (as provided under clause (i)) be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; and The amount of unabsorbed depreciation allowance which cannot be wholly set of under clause (i) shall be set off from the income under any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation of assessment years 1993-94 to 1996-97 already formed part of the depreciation allowance for the previous year relevant to assessment year 1997-98 when the substituted provision came into effect. The aforesaid interpretation is clarified by the Finance Minister in his Speech which is reproduced in paragraph 5 of the petition and reads thus:- "Clause 11 of the Bill seeks to amend section 32 of the Income-tax Act, 1961 relating to depreciation. During the course of discussion on the General Budget, a number of Hon'ble members have expressed their apprehension that the proposed amendment limiting carry forward of unabsorbed depreciation to 8 years will adversely affect the growth of industry. Similar apprehensions have been raised in a larger number of post-budget memoranda. I would like to allay these fears. 'The proposed amendment is only prospective inasmuch as the cumulative unabsorbed depreciation brought forward as on 1-4-1997, can still be set off against taxable business profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years.' Therefore, the proposed change will have effect only after 8 years and there is no cause f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsorbed depreciation allowance of assessment year 1996-97 shall be added to the allowance of 1997-98 and will be deemed to be the allowance of that year. The limitation eight years shall start from the assessment year 1997-98. 23.6 These amendments take effect from the 1st day of April, 1997, and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years." 15. Thus, the Finance Minister's Speech and the CBDT Circular merely clarify the statutory provisions as they stand. It is true, as contended by the learned counsel for the respondent, that there is no ambiguity in the provisions of sub-section (2) of section 32 of the Act. However, the Assessing Officer appears to have misconstrued the provisions of sub-section (2) of section 32 and accordingly seeks to reopen the assessment based on such misconception of the statutory provision. 16. Insofar as the reference to sub-section (2) of section 72 of the Act on which reliance had been placed upon by the learned counsel for the respondent is concerned, section 72(2) only gives priority to setting off of carried forward loss as against unabsorbed depreciation, presumably in light of the fact that prior to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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