- Nov
- 22
- 2012
In case of set off of business loss vis-à-vis depreciation, first preference shall be given to business loss
A simple reading of this section suggests that in case of set off of business loss vis-a-vis depreciation, the first preference shall be given to the business loss as per the provisions of Sec. 72(1) of the Act for the simple reason that the business loss can be carried forward only upto 8 assessment years whereas the depreciation can be carried over upto unlimited period. As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore the treatment given to the current year's depreciation is equally applicable to brought forward depreciation after the application of Finance Act, 2001.
We have already held that current year's depreciation is to be allowed as set off from the Long Term Capital Gains and brought forward depreciation is to be treated as current year's depreciation as per the legal fiction of section 32(2), the same is also to be allowed to be set off from the Long Term Capital Gains. Accordingly, ground No. 2 of the appeal is also allowed.
IN THE ITAT MUMBAI BENCH 'E'
Suresh Industries (P.) Ltd.
v.
Assistant Commissioner of Income-tax
IT Appeal No. 5374 (Mum.) of 2011
[Assessment year 2007-08]
October 10, 2012
ORDER
N.K. Billaiya, Accountant Member – This appeal by the assessee is directed against the order of Ld. CIT(A)-13, Mumbai dt. 7.4.2011 pertaining to assessment year 2007-08.
2. The assessee has raised two substantive grounds of appeal as under:
"1. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in not allowing current year's depreciation of Rs. 2,32,059/- while determining the Business loss. The action is unjustified and unwarranted and against the provisions of Sec. 32(1) of the I.T. Act.
2. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in not allowing set off of unabsorbed loss of Rs. 6,42,208/- against the current year's Long Term Capital Gain. The action is unjustified and unwarranted."
3. The sum and substance of the above mentioned grievance of the assessee suggests that (a) the Ld. CIT(A) should have allowed current year's depreciation at Rs. 2,32,059/- as set off from the capital gains and (b) the unabsorbed depreciation brought forward from the earlier year's at Rs. 6,42,208/- should have also been allowed as set off against current year's Long Term Capital Gain.
4. The facts giving rise to the grievance of the assessee show that for the year under consideration, during the course of the assessment proceedings, the Assessing Officer observed that the assessee company had incurred loss of Rs. 17,48,195/-. The assessee company also had a Long Term capital gains to the tune of Rs. 1,30,00,000/-. The assessee claimed set off of business loss from Long Term capital gains. This fact is not in dispute. What has been questioned by the AO is the set off claimed by the assessee of Current year's depreciation at Rs. 2,32,059/- at the brought forward depreciation at Rs. 6,432,20/-. The AO sought explanation from the assessee for its claim of set off of current year's and brought forward depreciation. The assessee filed a detailed reply to substantiate its claim. The claim of the assessee was rejected by the AO as the AO was of the opinion that the set off of current year's business loss against the income under the other heads of income does not include unabsorbed depreciation as it is not a part of business loss. The AO further observed that Sec. 32(2) restricts the allowable depreciation of the current year only to the extent of profits and gains of business. The other reason for rejecting assessee's claim was that the Act treats business loss separately from the depreciation because business loss can be carried forward only for 8 assessment years whereas depreciation can be carried forward for unlimited period. While rejecting the claim of set off of depreciation in totality, the AO concluded that the assessee has not claimed the amount in return and also no revised return was filed. The AO completed the assessment after disallowing the claim of the assessee for set off of current year's depreciation as well as brought forward depreciation.
5. The assessee agitated the matter before the Ld. CIT(A) but without any success. The Ld. CIT(A) considered the provisions of I.T. Act 1922 vis-à-vis 1961 Act. The sum and substance for rejecting the assessee's appeal as enumerated by the Ld. CIT(A) in his order suggests that the Ld. CIT(A) was of the opinion that the set off can be claimed only from profits or gains and profits or gains are specifically confined to profits and gains of business only. The Ld. CIT(A) also distinguished the facts of the assessee's case with those of (a) CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC) (b) Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 (SC) and (c) CIT v. Virmani Indus. (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343 (SC). The Ld. CIT(A) held that the current years' depreciation is not allowed to be set off against the income under the head Long Term capital gains. Further the claim of the assessee for allowing the unabsorbed depreciation of earlier year's was also not allowed for the reason that the assessee has not claimed in its computation of income while filing the return.
6. The assessee is aggrieved by this finding of the Ld. CIT(A) and is before us. The Ld. Counsel for the assessee submitted that the assessee is a private limited company engaged in the business of manufacturing automotive parts such as gear cover, hand chain wheel, round washer etc. The Ld. Counsel further submitted that the assessee company filed a return of income claiming business loss as well as current year's depreciation to be allowed as set off against the Long Term capital gains. The Ld. Counsel further pointed out that the assessee company has also unabsorbed depreciation of Rs. 6,42,208/- of earlier years . The Counsel strongly objected to the observation of the lower authorities that assessee has not shown /claimed unabsorbed depreciation brought forward in its return of income. To substantiate, the Ld. Counsel drew our attention to pages 1 & 2 of the Paper Book which are the statement of income for the year under consideration. The Ld. Counsel continued arguing that the assessee has filed profit and loss account and balance sheet and has claimed current year's depreciation at Rs. 2,32,059/-. It is the contention of the Ld. Counsel for the assessee that though the AO has accepted the figure of business loss but has denied current year's depreciation to be set off against the profit under the head Long Term capital gains. The Ld. Counsel further pointed out that a copy of the depreciation statement was filed along with Tax Audit Report and therefore the depreciation was legally allowable as per the provisions of Sec. 32(1) of the Act as part of the business loss. The Ld. Counsel further drew our attention to the provisions of Sec. 32(2) of the Act which provides that the unabsorbed depreciation is deemed to be merged with current year's depreciation and accordingly the assessee company is entitled to set off of unabsorbed depreciation relating to earlier assessment year's with the income under the head Long Term capital gains. The Ld. Counsel concluded that the assessee's claim of set off of current year's as well as brought forward depreciation is as per the provisions of law and should be allowed to be set off against the income under the head Long Term capital gains.
7. Per contra, Ld. Departmental Representative strongly relied upon the findings of the lower authorities.
8. We have heard the rival submissions and perused the orders of the lower authorities and have carefully considered the relevant provisions of the Act and the Paper Book submitted by the assessee. A perusal of the statement of income for the year under consideration show that the assessee has shown Long Term capital gains at Rs. 1,30,00,000/- after claiming exemption u/s. 54EC of the Act. The assessee has also shown net loss from business before depreciation at Rs. 17,48,195/-. To this, the assessee added current year's depreciation at Rs. 2,32,059/- and unabsorbed depreciation brought forward from assessment years 1999-2000 and 2002-03 at Rs. 6,42,208/- and claimed set off amounting to Rs. 26,22,462/- from the Long Term capital gains at Rs. 1,30,00,000/-. Profit and gains of business or profession are computed in accordance with the provisions contained in Sec. 30 to 43 of the Act. Depreciation is allowed as per the provisions of Sec. 32(1) of the Act. Section 32(2) of the Act contains provisions relating to unabsorbed depreciation which is as under:
"Where, in the assessment of the assessee, full effect cannot be given to any allowance under 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 the 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.]
9. A perusal of the aforementioned section shows that Sec. 32(2) has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act. Before discussing the provisions of Sec. 72(2) let us first analyze the provisions of Sec. 32(2) of the Act prior to this amendment w.e.f. 1.4.2002
"Substituted by the Finance Act, 2001, w.e.f. 1-4-2002. Prior to its substitution, sub-section (2), as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1-4-1988, Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and Finance Act, 1992, w.e.f. 1-4-1993, substituted by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997 and further amended by the Finance Act, 2000, w.e.f. 1-4-2001, read as under :
'(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 the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,—
(i) 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 ;
(ii) if the unabsorbed depreciation 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;
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and—
(a) 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 ;
(b) 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 :
Provided that the time limit of eight assessment years specified in sub-clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses."
10. A comparative study of pre-amendment and post amendment provisions of Sec. 32(2) suggests that prior to the amendment, the set off was restricted to the profits and gains, if any, of any business or profession whereas post amendment (i.e. the law applicable for the year under consideration) the set off is available from profits or gains chargeable for the previous year. The claim of the lower authorities that profits or gains so mentioned should be restricted to profits or gains of business or profession cannot be accepted because had that been the intention of the legislature it would not have deleted phrase "of any business or profession in the post amended provisions of Sec. 32(2). The law regarding set off of unabsorbed depreciation upto 1.4.1996 was very liberal and set off was allowable against any income. This was also upheld by the Hon'ble Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra). However, the law regarding such set off was changed by the Finance Act No. 2 of 1996 and from A.Y. 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72. However the status quo have been restored from A.Y. 2003-04 and therefore the ratio laid down by the Hon'ble Supreme Court in the case of Virmani Indus. (P.) Ltd. (supra) once again hold good and so now unabsorbed depreciation can be set off against any income. Thus, the claim of current year's depreciation of Rs. 2,32,059/- is directed to be set off against the income under the head "Capital gains". Accordingly, ground No. 1 of the appeal is allowed.
11. Having considered the provisions of Sec. 32(2), it is also clear that if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act. However, this fiction has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act.
12. Let us first consider the provisions of Sec. 72(2) of the Act which provides as under:
"Whether any allowance or part thereof is, under sub-section 2 of Sec. 32 or sub section (4) of Sec. 35, to be carried forward, effect shall first be given to the provisions of this section.
13. A simple reading of this section suggests that in case of set off of business loss vis-a-vis depreciation, the first preference shall be given to the business loss as per the provisions of Sec. 72(1) of the Act for the simple reason that the business loss can be carried forward only upto 8 assessment years whereas the depreciation can be carried over upto unlimited period. As has been discussed hereinabove, the brought forward unabsorbed depreciation is treated as current years' depreciation because of the legal fiction, therefore the treatment given to the current year's depreciation is equally applicable to brought forward depreciation after the application of Finance Act, 2001.
14. We have already held that current year's depreciation is to be allowed as set off from the Long Term Capital Gains and brought forward depreciation is to be treated as current year's depreciation as per the legal fiction of section 32(2), the same is also to be allowed to be set off from the Long Term Capital Gains. Accordingly, ground No. 2 of the appeal is also allowed.
15. In the result, the appeal filed by the assessee is allowed.
Constitutional validity of MAT provisions relating to set-off of lower of unabsorbed brought forward business loss and unabsorbed depreciation
It was held that clause (iii) of Explanation 1 to section 115JB of the Income-tax Act, 1961 ("the Act") cannot be said to be discriminatory and hence unconstitutional. This clause relates to set-off of unabsorbed business loss or unabsorbed depreciation, whichever is lower. The HC also held that the approach of reading down a provision by modifying the language of a statute to achieve the intention of the legislature, cannot apply to such a provision.
Facts
• The assessee, a private company incorporated in Scotland, U.K., was engaged in the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products.
• The assessee entered into a Production Sharing Contract ("PSC") with the Government of India and Oil & Natural Gas Corporation Ltd. ("ONGC") for the exploration of natural resources, and formed an Unincorporated Joint Venture ("UJV") with other co-venturers to carry out the operations under the PSC.
• The assessee, in accordance with the Guidance Note issued by the Institute of Chartered Accountants of India on Accounting for Oil and Gas Producing Activities, had accounted investment in an oil well as expenditure incurred in its financial statements. As a result, the assessee incurred a book loss in the financial years ("FY") 2005-06 and 2006-07.
• The assessee, or the UJV, did not own any fixed assets. Whenever an asset was needed, it was hired by the UJV. As a result, the assessee had brought forward business loss, but no unabsorbed depreciation.
• The assessee assigned its participating interest in the UJV to a group company for a consideration equal to the exploration costs incurred up to the effective date of assignment. As a result, the profit and loss account for FY 2007-08 showed a net profit.
• No taxable income resulted in the hands of the assessee under the normal provisions of the Act. However, the Assessing Officer, under a strict interpretation of the provisions of section 115JB of the Act, held that there was a book profit in the absence of any unabsorbed depreciation. The assessee filed a writ petition with the HC to declare the provisions of clause (iii) of Explanation 1 of section 115JB of the Act to be beyond the powers of the Constitution.
Issue :- Whether the provisions of clause (iii) of Explanation 1 of section 115JB of the Act are beyond the powers of the Constitution, and whether the same can be read down.
Assessee's contentions:- The assessee contended that:
• There was no commercial income available for the purpose of declaration of dividend. Clause (ii) of Explanation 1 to section 115JB of the Act read with clause (b) to the same Explanation is contrary to the purpose of enactment of section 115JB of the Act.
• The provisions of clause (ii) of Explanation 1 to section 115JB of the Act are discriminatory. The provision discriminates against the assessees who have taken plant and machinery on hire, and therefore have only unabsorbed business loss.
• The Court may modify the language used by the legislature in clause (ii) of Explanation 1 to section 115JB of the Act to achieve the obvious intention of the legislature and produce a rational construction.
Revenue's contentions:- The revenue contended that:
• The tax on book profits under section 115JB of the Act is a tax on income introduced as a measure of equity in taxation. The legislature enjoys wide latitude in the matter of selection of persons, subject matter, events, etc. for taxation. The provisions are not unfair or discriminatory.
• The language of the provisions of clause (ii) of Explanation 1 to section 115JB of the Act is quite clear and unambiguous.
High Court Ruling:- After considering the contentions of the assessee and those of the revenue, the HC held that:
• The fact that the assessee did not have any unabsorbed depreciation or brought forward loss in its account books is a mere fortuitous circumstance. The legislature is not required to envisage every fortuitous circumstance that arises while implementing such a provision.
• Merely because, in a given circumstance, the provisions may act to the disadvantage of a particular assessee, that would not render the provision arbitrary or violate the equality clause.
• The provisions of section 115JB of the Act are not intended to make any classification between a capital asset infrastructure company and a capital intensive company with no capital assets. If, as a consequence of implementing these provisions, some companies are put to hardship, it would not mean that the legislature has created a distinct class of companies which are hit by these provisions and that section 115JB is discriminatory.
• Only after computing the income under the provisions of the Income Tax Act, if the income tax payable works out to less than ten per cent of book profits, the provisions of section 115JB of the Act would be applicable. This would not render the statutory provisions unconstitutional or invalid.
• The provisions of clause (iii) of the Explanation to section 115JB are clear and ambiguous and it is not possible to take two views as to the meaning of the statutory language. Hence, the reading down of the provisions would not be permissible.
Conclusion :-The decision provides guidance to tax payers liable to tax on book profits under section 115JB of the Act. The HC upheld the constitutional validity of clause (iii) of the Explanation to section 115JB. There are diverse judgements on the applicability of tax on book profits to a foreign company which was not the subject matter of the petition before the HC.
Cairn Exploration (No. 7) Ltd. v. U01 [2010-TII-19-HC-AHM-INTL]- Gujarat High Court
IT : Section 72(2) does not control the operation of section 32(2) to have the set off of unabsorbed depreciation against the income from other sources. Therefore, an assessee needs not to wait to exhaust the carried forward losses for utilizing the unabsorbed depreciation
FACTS
• The assessee, engaged in the manufacturing of semi-conductors, claimed set off of unabsorbed depreciation for more than Rs.13 crores and unabsorbed loss of Rs.18 crores relating to different assessment years.
• While re-computing the income for the A.Y. 1998-99, the AO could adjust only partial brought forward loss against the available business income and therefore, there still remained unadjusted carried forward loss.
• The assessee sought for adjustment of carried forward of unabsorbed depreciation with the available income from other sources but the same was negated by the AO.
• On appeal, the Commissioner (Appeals) also rejected the assessee's case by holding that the assessee could not have set off any depreciation before exhausting the set off of losses up to eight assessment years.
• On appeal by the assessee, the Tribunal after consideration of sections 32(2) and 72(2), held that the assessee was entitled to set off of unabsorbed depreciation as against the income from other sources.
• Aggrieved by the same, the Revenue appealed in the High Court.
Disposing the issue in favour of assessee and against the revenue, the Madras High Court held as under:
• A reading of section 32(2) makes it clear that if the unabsorbed depreciation allowance could not be wholly set off under clauses (i) and (ii), the amount of depreciation not so set off can be set off from income from other head, if any, available for that assessment year.
• Since there is hardly anything contained in section 72(2) to prevent set off of carried forward depreciation under the head income from business or income from other sources, the contention of the Revenue that section 72(2) controls the operation of section 32(2) to have the set off of unabsorbed depreciation against the income from other sources, could not be agreed upon.
• Section 72(2) speaks about set off of business loss as against the business income and if there is loss as well as unabsorbed depreciation, the set off shall be first on the business loss as against the business income and then on unabsorbed depreciation.
• Further, section 32(2) makes it clear that if the unabsorbed depreciation allowance could not be wholly set off with business profits, then the amount of depreciation not so set off can be set off from income from other head, if any, available for that assessment year.
• Thus, it is not necessary that one should wait for the assessee to earn income from business so as to exhaust the carried forward loss to be set off as against the business income and then apply the unabsorbed depreciation.
• Thus, in view of the clear provisions, the Revenue's plea is rejected and the order of the Tribunal is confirmed.
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[2012] 27 taxmann.com 242 (Madras)
HIGH COURT OF MADRAS
Commissioner of Income-tax
v.
SPEL Semi Conductor Ltd.
CHITRA VENKATARAMAN
AND K. RAVICHANDRABAABU, JJ.
TAX CASE (APPEAL) NO. 2490 OF 2006
OCTOBER 10, 2012
JUDGMENT
Chitra Venkataraman, J. - The Revenue is on appeal as against the order of the Income Tax Appellate Tribunal relating to assessment year 1998-99. The above Tax Case (Appeal) was admitted on the following questions of law:-
"1. Whether on the facts and circumstances of the case, the Tribunal was right in directing the Assessing Officer to recompute the income after allowing set off of unabsorbed depreciation from income from other sources, especially, when carry forward losses remained?
2. Whether the provisions of Section 32(2) can be given effect to, ignoring the provisions of Section 72(2) of the Income Tax Act?"
2. The assessee is engaged in the business of manufacture of semi conductors. Admittedly the assessee has claimed set off of unabsorbed depreciation from the assessment years 1990-91 to 1997-98 for more than Rs.13 crores and unabsorbed loss for Rs.18 crores relating to assessment year 1995-96 to 1997-98. While recomputing the income for the assessment year 1998-99, the Assessing Officer adjusted the loss brought forward from 1995-96 and 1996-97 to Rs. 1,36,60,836/- and Rs.11,24,919/- respectively on the business income of Rs.1,47,85,755/- and arrived at the business income as 'Nil'. It is a matter of record that after adjusting carried forward loss, there was still more amount available by way of carried forward loss. It is also seen from the assessment order that the assessee had income from other sources to the tune of Rs.10,03,533/-. The assessee sought for adjustment of carried forward of unabsorbed depreciation in the income from other sources. The claim of the assessee was negatived by the Officer. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who rejected the assessee's case by holding that the assessee could not have set off any depreciation before exhausting the set off of losses upto eight assessment years. In other words, the assessee should have exhausted first the unabsorbed carried forward loss for earlier years before claiming any set off on unabsorbed depreciation. Thus, holding, the Commissioner of Income Tax (Appeals) dismissed the appeal. Aggrieved by the same, the assessee went on further appeal before the Tribunal. On consideration of Section 32(2) of the Income Tax Act and Section 72(2) of the Income Tax Act, the Tribunal held that the assessee was entitled to set off unabsorbed depreciation as against the income from other sources. Aggrieved by the same, the Revenue is on appeal before this Court.
3. Section 32(2) of the Income Tax Act, which is relevant for the case on hand, reads as follows:-
32(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 the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,-
(i) 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;
(ii) if the unabsorbed depreciation 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;
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and -
(a) 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;
(b) 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:
4. Section 72(2) of the Act, which is relevant for the case on hand reads as under:-
72(1) ........
72(2) Where any allowance or part thereof is, under sub section (2) of Section 32 or sub section (4) of Section 35, to be carried forward, effect shall first be given to the provisions of this section.
5. A combined reading of the above said sections shows that while carried forward of loss could be adjusted as against the profits and gains of business or profession of the year, the set off of unabsorbed depreciation allowance as per Section 32(2) could be given effect to only after giving relief on the carried forward loss. Given the fact that the carried forward of business loss could be adjusted only as against the business income, if there is no other income available, then as per Section 72(2) of the Act, unabsorbed depreciation has to wait for further years subject to the limitation of eight years for absorbing the same in the business income of the assessee. However, in a case of assessee as one before us, when the assessee has income both from business as well as from other sources, that after having set off of the business loss as against the current year income from business, there existed no further business income, the carried forward business loss remaining still unabsorbed could only be carried forward for the next year. However, given the fact that the assessee has income under the other heads, Section 32(2) provides the relief.
6. Thus, as far as the income from other sources are concerned, given the fact that under Section 32(2) of the Act, there is a provision of set off of unabsorbed depreciation allowance as against the income from other sources, it is not necessary that one should wait for the assessee to earn income from business so as to exhaust the carried forward loss to be set off as against the business income and then apply the unabsorbed depreciation. A reading of Section 32(2) thus makes it clear that if the unabsorbed depreciation allowance could not be wholly set off under clause (i) and clause (ii), the amount of depreciation not so set off can be set off from income from other head, if any, available for that assessment year. The language of Section 32(2) is very clear and there is hardly anything contained in Section 72(2) to prevent such set off of carried forward depreciation being given to the assessee under the head of income from business or income from other sources. The Revenue does not deny the fact that as far as the income from other sources are concerned, there could be no set off of business loss or carried forward loss. However, what is contended by the Revenue is that Section 72(2) controls the operation of Section 32(2) to have the set off of unabsorbed depreciation against the income from other sources. We do not agree with this line of reasoning. What is spoken to under Section 72(2) is as regards set off of business loss as against the income from profits and gains of business or profession and if there is loss as well as unabsorbed depreciation, the set off shall be first on the business loss as against the business income and then on unabsorbed depreciation. What is spoken to under Section 32(2) is as regards set off of unabsorbed depreciation as per clause (ii) of sub section (1) and when the unabsorbed depreciation could not be set off as against the income from business or profession by reason of there being no income available under the said heads and where there is income from other sources, effect must be given to Section 32(2) of the Act for that assessment year.
7. In the light of the clear provisions, we have no hesitation in rejecting the Revenue's plea, there by confirming the order of Tribunal. The above Tax Case (Appeal) is dismissed. No costs.
[2010] 126 ITD 442 (CHENNAI)
IN THE ITAT CHENNAI BENCH 'B'
Income-tax Officer (OSD), Company Circle 1(4), Chennai
v.
Data Software Research Company (International) (P.) Ltd.*
U.B.S. BEDI, JUDICIAL MEMBER AND AHMAD FAREED, ACCOUNTANT MEMBER
IT APPEAL NO. 1602 (MAD.) OF 2008
[ASSESSMENT YEAR 2003-04]
APRIL 16, 2009
Section 115 JAA of the Income-tax Act 1961 - Minimum alternate tax - Assessment year 2003-04 - Whether in view of provisions of sub-section (3) of section 115JAA, benefit of carry forward of MAT credit is available for a total period of six (1+5) years - Held, yes - Whether, therefore, where assessee-company was allowed MAT credit for assessment year 1997-98, it was entitled to claim carry forward and set off of same in assessment year 2003-04 - Held, yes
Circulars and Notifications : Circular No. 763, dated 18-2-1998, issued by CBDT
FACTS
For the relevant assessment year, the assessee filed its return declaring certain income. While finalising the assessment under section 143(3), the advance tax paid was given credit and the interest as applicable was levied. Then only the credit for MAT under section 115JAA was granted.
Further, it was noticed from the memo of income that out of the MAT credit available under section 115JAA for the assessment year 1997-98 to the tune of Rs. 59,04,340, the balance sum of Rs. 14,69,706 was set off during the assessment year 2003-04. The Assessing Officer opined that the tax credit on account of section 115JAA for the assessment year 1997-98 was available for set off up to the assessment year 2002-03 only and after that, it could not be set off. Hence, he passed an order under section 154 whereby tax credit of Rs. 14,69,706 claimed and allowed for the assessment year 2003-04 was disallowed and brought to tax. On appeal, the Commissioner (Appeals), however, allowed the assessee's claim.
On revenue's appeal :
HELD
The scheme of levying Minimum Alternative Tax (MAT) on zero-tax companies was introduced by the Finance Act, 1996 with effect from 1-4-1997. A new section 115JAA was also inserted to provide for a tax-credit scheme by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent years, subject to certain conditions. [Para 7.1]
There is no ambiguity in the language of sub-section (3) of section 115JAA. The carry forward is available for a total of six (1+5) years. It appears that the confusion in the instant case arose because of the language used in the CBDT Circular No. 763, dated 18-2-1998. [Para 9.1]
The period of 'five assessment years', mentioned in sub-paragraph (2) of paragraph 45.4 of aforesaid circular contradicts with what is stated in sub-section (3) of section 115JAA. It is trite law that statutory provisions prevail over a circular in case of a contradiction between the two. Therefore, the conclusion reached by the Commissioner (Appeals) was to be accepted. [Para 10.1]
In the result, the appeal filed by the department was to be dismissed. [Para 11]
CCE v. Ratan Melting & Wire Industries [2008] 220 CTR (SC) 98 (para 10).
R. Vijayaraghavan for the Appellant. P.R. More for the Department.
ORDER
Per Ahmad Fareed, Accountant Member. - This appeal by the department is directed against the order of CIT(A) dated 21-4-2008 for assessment year 2003-04.
2. The grounds raised by the department in this appeal are as under :
1.The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.
2.1The learned CIT(A) erred in holding that the assessee is entitled for MAT credit for the assessment year under consideration.
2.2The learned CIT(A) ought to have seen that Circular No. 763, dated 18-2-1998 has made the intention of the statute very clear that the benefit of carry forward of MAT credit is restricted to only five assessment years immediately succeeding the assessment year in which the MAT was paid.
2.3The learned CIT(A) erred in accepting the assessee's contention in this case that the assessment year 1998-99 should be counted as zero and assessment year 1999-2000 as the first assessment year etc., to come to the conclusion that the MAT credit would be available to the assessee for the assessment year under consideration also in that method of accounting.
3.For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.
3.The assessee was a private limited company engaged in the business of software development and consultancy activity. The return for assessment year 2003-04 was filed by the assessee-company on 28-11-2003 showing income of Rs. 54,24,662. The assessment order was passed by the Assessing Officer under section 143(3) on 30-11-2005 which was subsequently revised under section 154 of the Act on 30-4-2007 as under :
"The assessee-company filed its Return of Income on 28-11-2003 admitting a net income of Rs. 54,24,663. The return of income was processed under section 143(1) on 9-2-2005 and later taken up for scrutiny and completed under section 143(3) on 30-12-2005. While finalizing the assessment, the advance tax paid was given credit and the interest as applicable was levied. Then only the credit for MAT under section 115JAA was granted.
Further, it was noticed from the Memo of income that out of the MAT credit available under section 115JAA for the assessment year 1997-98 to the tune of Rs. 59,04,340, the balance sum of Rs. 14,69,706 was set off during the assessment year 2003-04. As per section 115JAA(3) the amount of tax credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) but such c/f will not be allowed beyond the 5th assessment year immediately succeeding the assessment year in which the tax credit becomes allowable under sub-section (1).
According to the above provision, the tax credit on account of section 115JAA for the assessment year 1997-98 will be available for set off up to assessment year 2002-03 only and after that it cannot be set off. Hence, tax credit of Rs. 14,69,706 claimed and allowed for assessment year 2003-04 should be disallowed and brought to tax.
Hence, in order to withdraw the claim of MAT credit for assessment year 2003-04, a notice under section 154 was issued to the assessee. The assessee-company in its reply filed claim that the tax credit shall be allowable for set off from the assessment year 1998-99 which succeeds assessment year 1997-98 in which tax credit was allowed for the succeeding 5 years, i.e., from the assessment year 1999-2000 up to the assessment year 2003-04.
But as per the provision stated above, the set off of tax credit cannot be allowed beyond the 5th assessment year immediately succeeding the assessment year in which tax credit becomes allowable. In this case the 1st assessment year in which the tax credit was allowable was assessment year 1998-99 and as such including the assessment year 1998-99 the assessee was entitled for set off only till the assessment year 2002-03. Hence, the claim of tax credit under section 115JAA for the assessment year 2003-04 to the tune of Rs. 14,69,706 is disallowed. . . ."
4. The CIT(A) allowed the assessee's appeal and his order has been challenged by the department in the present appeal.
5. Shri P.R. More, the learned DR, supported the order of the Assessing Officer. He vehemently argued saying that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.
6. Shri R. Vijayaraghavan, the learned AR reiterated the arguments which were put forward on behalf of the assessee before Assessing Officer and the CIT(A). He contended that under sub-section (3) of section 115JAA the carry forward of tax-credit is available up to the fifth assessment year immediately succeeding the assessment year in which tax credit became allowable under sub-section (1), that there was no ambiguity in the language of the statute, and that a circular which was contrary to statutory provisions had no existence in law.
7. We have considered the rival submissions in the light of material on record and the precedent cited. The short issue for adjudication in this case is: 'for how many years the carry forward is allowable under section 115JAA(3) of the Act'.
7.1 The scheme of levying Minimum Alternative Tax (MAT) on zero-tax companies was introduced by the Finance Act, 1996 with effect from 1-4-1997. A new section 115JAA was also inserted to provide for a tax-credit scheme by which the MAT paid can be carried forward for set-off against regular tax payable during the subsequent years, subject to certain conditions. The sub-sections (1), (2) and (3) of section 115JAA read as under :
"115JAA (1) Where any amount of tax is paid under sub-section (1) of section 115JA by an assessee being a company for any assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.
(2) The tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under sub- section (1) of section 115JA and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act.
(3) The amount of tax credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1)."
8. In the present case, the tax credit was allowed for the first time for assessment year 1998-99. The Assessing Officer, in his rectification order passed under section 154 on 30-4-2007, held that such a tax credit could be allowed only up to assessment year 2002-03, and that it was not allowable for assessment year 2003-04. The CIT(A) allowed the assessee's claim for the reasons given in paragraph 5 of his order as under :
"5. I have gone through the facts of the case and the submissions made by the appellant on this issue. The details of tax credit allowed as per the letter filed by the appellant on 14-8-2006 with the Assessing Officer is as under:
Accordingly in our case tax credit shall be allowable for set off from assessment year 1998-99, which succeeds assessment year 1997-98 in which tax credit was allowed, for the succeeding 5 years, i.e., from assessment year 1999-2000 up to assessment year 2003-04 as given below :
| Asst. year | Tax credit allowed u/s 115JA | Tax credit availed u/s 115JAA | No. of years allowed for c/f |
| 1997-98 | 5904340 | | - |
| 1998-99 | | 1522 | 0 |
| 1999-00 | | 48602 | 1 |
| 2000-01 | | 0 | 2 |
| 2001-02 | | 3237939 | 3 |
| 2002-03 | | 1146571 | 4 |
| 2003-04 | | 1469706 | 5 |
5.2 I have gone through the submissions made by the appellant. Section 115JAA clearly specifies that tax credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-section (4) and sub-section (5) but such carry forward shall not be allowed beyond the 5th assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1). In the instant case, the first year, therefore, commences from the assessment year 1999-2000 and ends in the assessment year 2003-04 and, therefore, the officer is hereby directed to allow the tax credit available for the assessment year 2003-04."
9. In our opinion the CIT(A) has rightly interpreted the sub-section (3) of section 115JAA of the Act. The sub-section (3) says, ". . . such carry forward shall not be allowed beyond the fifth assessment immediately succeeding the assessment year in which tax credit became allowable under sub-section (1)".
9.1 There is no ambiguity in the language of sub-section (3) of section 115JAA. The carry forward is available for a total of six (1+5) years. It appears that the above confusion has arisen because of the language used in the CBDT Circular No. 763, dated 18-2-1998. The paragraph 45.4 of this Circular, dealing with 'Minimum Alternative Tax on companies', reads as under :
"45.4 The Act also inserts a new section 115JAB to provide for a tax credit scheme by which the MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions, as under:
(1)When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company.
(2)MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five years carry forward limit."
10. The period of 'five assessment years', mentioned in sub-paragraph (2) reproduced above, contradicts with what is stated in sub-section (3) of section 115JAA. It is trite law that statutory provisions prevail over a Circular in case of a contradiction between the two. This position was reiterated by the Supreme Court in the case of CCE v. Ratan Melting & Wire Industries [2008] 220 CTR (SC) 98. Therefore, we agree with the conclusions reached by the CIT(A). His order is, accordingly, upheld.
11. In the result the appeal filed by the department is dismissed.
Income tax - Whether non-payment of interest to a cooperative bank attracts provisions of Sec 43B - NO: Bombay HC
By TIOL News Service
By TIOL News Service
MUMBAI, NOV 22, 2012: THE issues before the Bench are - Whether non-payment of interest to a cooperative bank attracts the provisions of Sec 43B and Whether for the purpose of meaning of "scheduled banks" given in Section 43B, only the explanation to Section 11(5)(iii) is relevant and not the main section. And the answers go in favour of the Revenue.
Facts of the case
The assessee is an individual engaged in the business of trading in cotton bales. For the AY 2004-05, the respondent-assessee filed his return of income declaring a loss. In his return the respondent assessee had claimed a deduction/expense on account of interest payable by him to Shree Mahalaxmi Mercantile Co-operative Bank Limited on a loan taken. During the course of the assessment proceedings the AO noticed that the amount of interest of Rs.52.85 lacs had not been actually paid even upto the date of filing of return of income. Consequently, the AO disallowed the deduction/expenses u/s 43B of the Act and added it back to the income of the assessee.
Being aggrieved, the respondent-assessee filed an appeal to the CIT(A). The CIT(A) dismissed the respondent-assessee's appeal on the ground that it was an admitted position that the interest of Rs. 52.85 lacs had not been paid to Shree Mahalaxmi Mercantile Co-operative Bank Limited upto the date of filing of the return. In the circumstances, on application of Section 43B of the Act the order of the AO was upheld. On second appeal, the Tribunal held that Section 43B of the Act would not apply in case of payment of interest to a co-operative bank for the reason that the section is applicable only in respect of interest payable on a loan taken from a scheduled bank. The Tribunal held that Shree Mahalaxmi Mercantile Co-operative Bank Ltd. was not covered within the definition of scheduled bank u/s 43B of the Act. Thus, the appeal of the respondent-assessee was allowed.
Aggrieved, the assessee filed an appeal before the High Court.
Having heard the parties, the High Court held that,
++ from the reading of the above sections, it is amply clear that Section 43B of the Act is applicable only in respect of any amount paid as interest to a scheduled bank. A scheduled bank as defined in Explanation 4 to Section 43B of the Act would have the same meaning as contained in the Explanation to Section 11(5) (iii) of the Act. The Explanation to Section 11(5)(iii) of the Act defines a scheduled bank to mean various banks referred to therein i.e. State Bank of India, its subsidiaries, Nationalized Banks and any bank included in the second schedule to Reserve Bank of India Act, 1924. The Shree Mahalaxmi Co. op. Bank Ltd. is not mentioned in the second schedule to the Reserve Bank of India Act, 1934 nor covered by any other Banks mentioned to the Explanation to Section 11(5)(iii) of the Act;
++ consequently, the Tribunal was correct in its conclusion that non payment of interest amount to a co-operative bank would not attract the provisions of Section 43B of the Act. This is for the reason that in terms of Explanation (4) to Section 43B of the said Act scheduled bank would have a meaning given to it in the Explanation to Section 11(5)(iii) of the Act. Therefore, one has to merely look at the Explanation to Section 11(5)(iii) of the Act to determine whether or not Shree Mahalaxmi Mercantile Cooperative Bank limited is included within the meaning of a Scheduled Bank. Sub Clause (iii) of sub section 5 of Section 11 speaks about the deposit of any amount in a scheduled bank or co-operative Society engaged in banking but the same is of no consequence. This is for the reason that for purposes of Section 43B of the Act we would be governed by the meaning given in the explanation to Section 11(5) (iii) of the Act and not by the main part thereof. Therefore, no fault can be found with the order of the Tribunal dated 26/10/2009.
(See 2012-TIOL-926-HC-MUM-IT)
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