Allahabad H.C : Brought forward unabsorbed depreciation can be set off against income from capital gain

High Court Of Allahabad

CIT VS. Kisan Engineering Works Ltd.

Assessment Year : 1992-93

Section : 32, 34A, 72

Prakash Krishna And Ram Surat Ram (Maurya), Jj.

IT Appeal No. 200 Of 2005

March  6, 2013

ORDER

1. The above appeal has been filed under section 260-A of the Income Tax Act 1961 against the order of the Tribunal dated 16.9.2004 passed by the Income Tax Appellate Tribunal, Delhi Bench SMC-II, New Delhi in I.T.A No. 175/Del/2003 for the assessment year 1992-1993.

2. The appeal arises out of revisional proceedings initiated by Commissioner of Income Tax by invoking Section 263 of the Income Tax Act. The Assessing Officer completed the original assessment proceedings under section 143(3) on 26.2.1993 wherein business loss of Rs.1,86,333/- was computed and the long term capital gain computed at Rs.4,71,024/- was given set off of against the current years business loss. The proceedings under section 148 for re-assessment was initiated thereafter in view of the fact that income from long term capital gain which worked out to Rs.3,04,711/- after giving set off to the current year’s business loss was given set off against 66.67% of brought forward unabsorbed depreciation and investment allowance. In response to notice for re-assessment, the assessee furnished its reply and participated in the proceedings. Re-assessment order was completed by the Assessing Officer by computing the income of the assessee in the following manner:

“The unabsorbed b/f depreciation takes the shape of current depreciation and, therefore, can be given set off against income under any head including income from long term capital gains. In view of above, the income of the assessee is computed as under:

Income as computed vide order dated 26.2.93 before set off. Rs. 3,04,711/-
Less : Relief allowed by CIT(A) vide order dated 5.4.99 12,125/-
Less : B/f depreciation as per I.T Records as discussed. Rs. 3,33,459/-
Balance unabsorbed depreciation (-) Rs. 40,873/-

3. The said order was revised by the Commissioner of Income Tax by invoking Section 263 of the Income Tax Act.

4. The Commissioner of Income Tax found that the set off of unabsorbed depreciation and investment allowance is to be restricted to 2/3rd of such allowance and it is not permissible to be set off against any head of income other than the income from business and profession. The Commissioner of Income Tax revised the income by computing it in the following manner:

  Capital gain as per order under section 143 dated 26.2.1993 471024
Add: Income from house property 20000
    492024
Less: Business loss for current asstt. year as determined vide u/s 143(3) dated 26.02.1993 186333
    301691
Less: Relief allowed by the C.I.T(A) vide order 05.04.99 12125
    292566
  or say 292570/-

5. The assessee carried the matter in appeal before the Income Tax Appellate Tribunal which has allowed it by the order under appeal.

In the memo of appeal, the following substantial question of law has been raised.

“Whether on the facts and in the circumstances of the case the Hon’ble ITAT was correct in setting aside the order under section 263 without appreciating properly the restrictive provisions brought to the statute by introducing section 34A by Finance Act, 1992?”

6. Shri Shambhu Chopra, learned standing counsel for the Department in support of the appeal submits that the Tribunal was not justified in interfering with the revisional order passed by the Commissioner of Income Tax. The submission is that under section 72(1)(i) of the Income Tax Act, unabsorbed brought forward depreciation and investment allowance cannot be set off against the income from capital gain. Section 34-A was introduced for limited period by the Finance Act 1992 it provides that in case of domestic companies, only 66 and 2/3rd of unabsorbed depreciation and investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income and shall be carried forward and allowed until the same is absorbed. Section 34-A in no manner prescribes set off of unabsorbed depreciation and investment allowance against the income from capital gains.

7. Refuting the above, Shri Praveen Kumar, learned counsel for the assessee-respondent submits that the view taken by the Tribunal is correct in law and no substantial question of law as such is involved.

8. Considered the respective submissions of the learned counsel for the parties and perused the record.

9. Section 34-A was introduced in the Income Tax Act by Finance Act 1992 to provide that in case of domestic companies, only 66 and 2/3rd of unabsorbed depreciation and investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income and shall be carried forward and allowed in the subsequent years until the same is absorbed.

10. On a plain and simple reading of the Section 34-A, it is clear that it provides for the partial adjustment of the brought forward unabsorbed depreciation and investment allowance for set off to a limited extent against the business income. In other words it no where talks about adjustment of unabsorbed such allowances against the income from capital gains.

11. A bare perusal of the order of the Tribunal would show that the Tribunal proceeded to decide the appeal on the footing that the law provides to give full effect to the unabsorbed depreciation and investment allowance as per provisions of Section 32(2)/Section 32A (3) whereas under Section 34A it is 2/3rd of. It held that the view taken by the CIT that set off to 2/3rd of the unabsorbed depreciation and investment allowance is permissible only against the income from the business and profession and not from the income under the head “income from other sources”.

12. Section 32(2) as it stood at the relevant point, referred by the counsel for the parties is reproduced below:

“(2) Where, in the assessment of the assessee [(or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners)] 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 the profits or gains chargeable being less than the allowance, then subject to the provisions of sub-section(2) of section 72 and sub section(3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year, and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.”

13. Section 71(2) as then stood and referred by the counsel for the parties is reproduced below:

“(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, it any, assessable for that assessment year under any head of income including the head “Capital gains” (Whether relating to short term capital assets or any other capital assets.)”

14. The relevant portion of Section 32-A(3) is also reproduced below:

“(3) Where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, or, as the case may be, the immediately succeeding previous year (the total income for this purpose being computed after deduction of the allowances under section 33 and section 33A, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VI-A) is nil or is less than the full amount of the investment allowance, –

(i) the sum to be allowed by way of investment allowance for that assessment year under sub-section (1) shall be only such amount as is sufficient to reduce the said total income to nil ; and
(ii) the amount of the investment allowance, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the investment allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the investment allowance, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, as the case may be, the immediately succeeding previous year.

Explanation.- Where for any assessment year, investment allowance is to be allowed in accordance with the provisions of this sub-section in respect of any ship or aircraft acquired or any machinery or plant installed in more than one previous year, and the total income of the assessee assessable for that assessment year (the total income for this purpose being computed after deduction of the allowances under section 33 and section 33A, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VI-A) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that assessment year, the following procedure shall be followed, namely :-

(a) the allowance under clause (ii) shall be made before any allowance under clause (i) is made; and
(b) where an allowance has to be made under clause (ii) in respect of amounts carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forward from a later assessment year.”

15. The Income Tax Act as pointed out by Shri N.A. Palkhivala in his commentary makes a distinction in between unabsorbed depreciation and carried forward loss.

16. In the commentary, the following eight distinction have been pointed out:

“23. Unabsorbed Depreciation and Carried Forward Loss

This sub-section deals with the carry-forward of unabsorbed depreciation allowance; while s72(1) deals with the carry-forward of loss incurred under the head ‘Business or profession’.

There are eight features which distinguish the two:

(a) In a year in which the income is insufficient to absorb the full depreciation, the total income is taken as nil; while if there is a loss to be carried forward, the assessment order must show the figure of the loss.(s 157).
(b) The unabsorbed depreciation is deemed to be part of the depreciation allowance for a subsequent year and will enter into the computation of the income of such subsequent year. Carried forward loss does not enter into such computation, but after the subsequent year’s income is determined the carried forward loss is deducted therefrom.
(c) The unabsorbed depreciation, as stated above, can be set off against any income of a subsequent year under any head; whereas the carried forward loss can be set off only against the carry-forward of any business or profession.
(d) This sub-section allows the carry forward of depreciation allowance to any subsequent year without any time limit; while under s 72 a loss can be carried forward only for a period of eight years.
(e) Section 79 which disentitles a company in certain circumstances upon a change in shareholding to carry forward an earlier year’s loss does not apply to unabsorbed depreciation.
(f) The condition in s 80 regarding furnishing the return by the assessee for the concerned year within the time specified under s 139(1), in order to be entitled to carry forward, applies to business loss, etc, and not to unabsorbed depreciation. Therefore, unabsorbed depreciation under s 32(2) can be carried forward even if the return for the concerned year is filed beyond the time specified under s 139(1). Due to the legal fiction contained in s 32(2) to the effect that unabsorbed depreciation becomes part of depreciation for the next year, such unabsorbed depreciation is allowed to be carried forward even if no return for the concerned year is filed.
(g) In the year of set-off of business loss the same business in which the loss was incurred has to be carried on [proviso to s 72(1)(i)] (now deleted from 1 April 2000); whereas there is no such condition for carry-forward of unabsorbed depreciation.
(h) Section 78 which dis entitles a firm to carry forward losses in certain cases of change in constitution does not apply to unabsorbed depreciation.”

17. Section 71(2) reproduced above contemplates a situation where in respect of any assessment year, the net result of computation under any head of income, other than capital gains “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, In such a situation, such loss may, subject to the provisions of this Chapter, be set off for and from assessment years 1992-1993, against assessee’s income if any, assessable for that assessment year under any head of income including the head “Capital gains”.

18. The brought forward unabsorbed depreciation and brought forward investment allowance shall be added in the current depreciation and investment allowance be set off against the income from capital gains. The business income is a loss. The view taken by the Tribunal is therefore, fully justified. We do not find any merit in the argument of the learned counsel for the appellant which proceeds on the footing that business loss and unabsorbed depreciation and unabsorbed investment allowance are one and the same thing.

19. The learned counsel for the Department has placed reliance on CIT v. Kunal Engg. Co. Ltd. [2010] 325 ITR 328 (Mad.) wherein it was observed that set off unabsorbed income should be restricted to the extent of 2/3rd, the Commissioner of Income Tax as well as the Appellate Tribunal correctly followed the above provisions, with reference to Section 34-A of the Income Tax Act.

20. In this view of the matter, the Commissioner of Income Tax was not justified in invoking the jurisdiction under section 263 of the Income Tax Act or not allowing the unabsorbed depreciation against income from capital gains to the extent of admissibility to Rs.66.67 %.

21. Before closing the judgment it may be clarified that we were called upon to interpret the law relevant to assessment year 1992-93 only.

22. We do not find any merit in the appeal. The appeal is dismissed.

[Citation : 358 ITR 510]