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TMI Blog2013 (7) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... at head, unless it is so provided under any provision of the Act - Section 32(2)(i) provided that it could be set off against profits and gains, if any, of any business or profession carried on by the assessee and in case it could not be done then it could be set off from the income of the Assessee under any other head under section 32(2)(ii) of the Act - The unabsorbed depreciation allowance that could not be so set off, was to be carried forward for the next eight years under section 32(2)(iii)(b) - In section 32(2) (ii), any other income is specifically mentioned, but it is not so mentioned in section 32(2)(iii). This clearly shows the intention of the legislature that the carried forward unabsorbed depreciation allowance cannot be set off against income other than the income from profits and gains of business or profession - Decided against assessee. Intention of legislature - Whether speech of the Finance Minister be taken into account, while interpreting a clear and unambiguous section - Held that:- Following decision of P.V. Narsimha Rao v. State [1998 (4) TMI 503 - SUPREME COURT], The intention of the legislature is to be seen from the use of the words in the statute. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee manufactured Straw Boards and carried on business up to 30.09.1998. It sold its plant, machinery, and business to M/s ARDEE Board Private Limited on 01.10.1998. 3. The Assessee filed its return on 31.03.2000 for AY 1999-2000 showing nil income. In the return, it was mentioned that: There was short-term capital gain arising out of sale of depreciable assets of Rs. 24,49,607/-, long-term capital loss of Rs. 3,18,408/-, business loss of Rs. 5,56,356/- and the resultant income was Rs. 15,73,843/-; The unabsorbed depreciation of Rs. 9,92,669/- for the AY 1990-91 and unabsorbed depreciation of Rs. 5,81,174/- (out of Rs. 8,48,406/-) for the AY 1991-92, was being set off with the resultant income to make it nil. 4. The return of the Assessee was processed under section 143(1) of the Act. However, the Assessing Officer (the AO) started re-assessment proceedings under section 147 of the Act and a notice under section 148 of the Act was issued to the Assessee on 06.02.2004. 5. The AO by his order dated 03.03.2005 disallowed the carried forward unabsorbed depreciation. He held that: Under first proviso to section 32(2)(iii) of the Act, the business was required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) (iii) (a) which stipulates such setoff only against profits and gains, if any, of any business of profession carried on by the assessee?' However, the main question is as we have indicated in our opening paragraph. 10. On the basis of the aforesaid questions and on the arguments of the counsel for the parties, the following points arise for determination in the appeal: (i) Whether the benefit of set off can be availed under section 32(2) (iii) of the Act, even if the business was not carried on for the entire year; (ii) Whether the carried forward unabsorbed depreciation can be set off only against the profits and gains of any business or profession carried on by the Assessee or against income under any other head; (iii)Whether the short-term capital gain on the sale of depreciable assets is an income under the head of 'profits and gains of any business or profession' or not; 1st POINT: NOT NECESSARY TO CARRY ON BUSINESS FOR ENTIRE YEAR 11. The counsel for the Department submitted that: In view of first proviso to section 32(2)(iii), the carried forward unabsorbed depreciation could be set off only if business was carried on for the entire previous year; I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x, Kerala v. Tata Agencies, (2007) 6 SCC 429; Nagar Palika Nigam v. Krishi Upaj Mandi Samiti, AIR 2009 SC 187 = (2008) 12 SCC 364. As a consequence a construction which requires for its support addition or substitution of words or which results in rejection of words as meaningless has to be avoided Shyam Kishori Devi v. Patna Municipal Corporation, AIR 1966 SC 1678 = 1966 (3) SCR 466; Management, Shahdara (Delhi) Saharanpur Light Rly. Co. Ltd. v. SS Rly. Workers Union, AIR 1969 SC 513 = (1969) 2 SCR 131; S. Narayanaswami v. G. Panneerselvam, AIR 1972 SC 2284 = (1972) 3 SCC 717; Union of India v. Sankalchand, AIR 1977 SC 2328 = (1977) 4 SCC 193; AR Antuley v. Ramdas Srinivas Nayak, AIR 1984 SC 718 = (1984) 2 SCC 500; Mohammad Alikhan v. Commissioner of Wealth Tax, AIR 1997 SC 1165 = 1997 (3) SCC 511; Institute of Chartered Accountants of India v. Price Waterhouse, AIR 1998 SC 74 = (1997) 6 SCC 312; State of Maharashtra v. Nanded Prabhani Operator Sangh, AIR 2000 SC 725 = (2000) 2 SCC 69; Grasim Industries Ltd. Collector of Customs, AIR 2002 SC1706 := (2002) 4 SCC 297; JP Bansal v. State of Rajasthan, AIR 2003 SC 1405= 2003 AIR SCW 1848 = (2003) 5 SCC 134; State of Jharkhand v. Govin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 68; Indian Leaf Tobacco Vs CIT 137 ITR 827 ); CIT Vs Society of Sisters of St. Anne 146 ITR 28 . 24. In the relevant AY, sub-section (1) of section 32 {Section 32(1)} provided how depreciation was to be calculated for different assets and its set off against profits and gains of that business. 25. Sub-section 2 of section 32 {Section 32(2)} (see Appendix-1) explained the words 'unabsorbed depreciation'. It was that part of allowance under clause (ii) of sub-section (1) of section 32 {section 32(1) (ii)} {see Endnote-1 for clarification on section 32(1)(ii)} that could not be given full effect to in any previous year owing to there being no profits or gains in that previous year or it being less than the allowance. 26. Section 32(2)(i)(ii) provided setting of current unabsorbed depreciation. Section 32(2)(i) provided that it could be set off against profits and gains, if any, of any business or profession carried on by the assessee and in case it could not be done then it could be set off from the income of the Assessee under any other head under section 32(2)(ii) of the Act. The unabsorbed depreciation allowance that could not be so set off, was to be carried forward for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on lying behind the ambiguous or obscure words. In the case of statements made in Parliament, as at present advised, I cannot foresee that any statement other than the statement of the minister or other promoter of the Bill is likely to meet these criteria.' 32. Our Supreme Court considered the Pepper case in P.V. Narsimha Rao v. State (AIR 1998 SC 2120) (the Narasimha case). The question in this case was, whether a member of Parliament was a public servant 6The relevant part of the speech of the Finance Minister is as follows: 'Clause 11 of the Bill seeks to amend s.32 of the IT 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 1st April, 1997, can still be set off against taxable business profits or income under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 230 = (1982) 2 SCC 61; Babaji Kondaji Garod v. Nasik Merchants Co-operative Bank Ltd. AIR 1984 SC 192 = (1984) 2 SCC 50; Doypack System Pvt. Ltd. v. Union Of India, AIR 1988 SC 782 = 1988 (2) SCC 299; Member Secretary, Andhra Pradesh State Board for Prevention and Control of Water Pollution v. Andhra Pradesh Rayons Ltd, AIR 1989 SC 611 = 1989 (1) SCC 44; Keshavji Ravji and Co. v. Commissioner of Income Tax, AIR 1991 SC 1806 = (1990) 2 SCC 231; Bola v. BD Sardana, AIR 1997 SC 3127 = (1997) 8 SCC 522; Unique Butyle Tube Industries (P) Ltd. V UP Financial Corporation, (2003) 2 SCC 455. . 35. Justice Holmes once remarked From the book 'Philosophical Foundation of Language in the Law' published by Oxford University press, edited by Andrei Marmor and Scott Soames- Page 7., 'I do not care what their intention was, I only want to know what the words mean?' And at the other time, 'We do not inquire what the legislation meant; we ask only what the statute means.' In one of his decisions Northern Securities Co. Vs US -193 US 197, he observed, '[A]t times judges need for their work the training of economists or statesmen, and must act in view of their foresight of consequences, yet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing as we have held. 40. In our opinion, the carried forward unabsorbed depreciation under section 32(2)(iii) of the Act could be set off in the relevant AY only against any profit and gains of any business or profession carried on by the Assessee and not against any other non-business income. However, the question remains, whether the short-term capital gains on sale of depreciable assets can be treated as income from profits and gains of business or profession or not. This is being dealt with, in the third point. 3rd POINT: SHORT TERM CAPITAL GAIN IS NON-BUSINESS INCOME 41. The counsel for the Assessee has brought to our notice sub-section (2) of section 41 {section 41(2)} (see Appendix-2) and submits that: (i) Short term capital gain from sale of depreciable assets is dealt under section 41(2) of the Act. Under this section, it is to be treated as income from business or profession; (ii) The Assessee is entitled to set off its carried forward unabsorbed depreciation from short-term capital gains arising out of sale of depreciable assets as it is treated as business income; (iii) In any case, the purpose of putting business assets in one block was to facilitate filing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) of the Act? 47. Section 41(2) was substituted in the Act by Finance Act 2 of 1998 with effect from 01.04.1998. At that time, section 32(1)(i) (see Appendix-4) related to depreciation claimed by an undertaking engaged in generation or generation and distribution of power (for clarification please see Endnote-1), that is to say, section 41(2) is confined to the assets of an undertaking engaged in generation or generation and distribution of power. 48. The Assessee was not engaged in generation or generation and distribution of power. It was manufacturing straw boards. In the present case, depreciation was not claimed under section 32(1)(i) of Act, but it was claimed under section 32(1)(ii) of the Act. Section 32(1)(i) as well as section 41(2) of the Act is not applicable here. 3rd Submissions: Full effect is to be given to Legal Fiction. 49. Concept of 'block of asset' was introduced by the Taxation Laws (Amendment Miscellaneous Provisions) Amendments Act 1986 wef 01.04.1988. It broadly included tangible assets. It was amended by Finance (number 2) Act, 1998 wef 01.04.1999 to include intangible assets as well. This concept was basically introduced to simplify the return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma v. K. Devi, AIR 1996 SC 1963 = (1996) 4 SCC 76; State of Tamil Nadu v. Arooran Sugars Ltd. AIR 1997 SC 1815; Bhavnagar University v. Palitana Sugar Mill (P) Ltd. AIR 2003 SC 511 = (2003) 2 SCC 111; Commissioner of Wealth Tax v. Trustees of HEH, (2003) 5 SCC 122; Dipak Chandra Rutidas v. Chandan Kumar Sarkar AIR 2003 SC 3701 = (2003) 7 SCC 66; Prafulla Kumar Das v. State of Orissa, AIR 2003 SC 4506 = (2003) 9 JT 477; Ashok Leyland Ltd. v. State of Tamil Nadu AIR 2004 SC 2836 = (2004) 3 SCC 1; State of West Bengal v. Sadam K. Bormal, AIR 2004 SC 3666 = (2004) 6 SCC 59; Clariant International Ltd. v. Securities Exchange Board AIR 2004 SC 4236 = (2004) 8 SCC 524; Mohd. Akram Ansari v. Chief Election Officer (2008) 2 SCC 95. decided so far. 53. Section 50 of the Act creates a legal fiction by which under certain circumstances, transfer of depreciable assets is to be treated as the short-term capital gains. In case, it is to be treated as the short-term capital gain, then legal effect has to be given to it as short-term capital gain and it is to be treated as income under the head 'E- Capital gains'. It cannot be treated as income under head 'D- Profits and gains of business or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1)(ii) in section 32(2) of the Act means the second set of clause (ii) of section 32(1) in the relevant AY. So is true about section 41(2)(b) of the Act. It was substituted by Finance (number-2) Act, 1998 wef 01.04.1998. At that time, similar situation was there. This shows that in the relevant year reference to section 32(1)(i) in section 41(2) (b) of the Act is to the second set of clause (i) of section 32(1) in the relevant AY. Endnote-2: The judgement was reserved however, a part of the same under headings, 'THE FACTS', 'POINTS FOR DETERMINATION', '1st POINT: NOT NECESSARY TO CARRY ON BUSINESS FOR ENTIRE YEAR', and '2nd POINT: ONLY AGAINST PROFIT AND GAINS OF BUSINESS OR PROFESSION' was dictated in the open Court on the date the judgement was reserved. Appendix-1 Section 32(2) of the Income-Tax Act, 1961 as applicable in AY 1999-2000 was as follows. It was substituted by Finance (No.2) Act 1996 wef 01.04.1997. 32. Depreciation (1) ... (2) 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 owing to there being no profits or gains chargeable for that previous year or owing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of business, is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due. Explanation.-Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year. Appendix-3 Section 50 of the Income-Tax Act, 1961 50. Special provision for computation of capital gains in case of depreciable Assets. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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