INCOME TAX REPORTS (ITR) HIGHLIGHTS
F Sum paid to trust for purchase of land for school where children of assessee's employees to get preference in admission : Matter remanded : Kennametal India Ltd. v. CIT p. 209
F Cases where tax effect below limit specified but having cascading effect : Circular not to be automatically applied : CIT v. Surya Herbal Ltd.p. 300
F Delay in filing appeal and special leave petitions by Department : Action to be taken to avoid : Director of Income-tax (International Taxation) v. Citi Bank N. A. p. 302
F Sugar plant and ferro-alloys plant : Interest on borrowed capital allowable : CIT v. Monnet Industries Ltd. p. 304
F No notice under section 143(2) : AO has power to issue notice of reassessment : D. T. T. D. C. Ltd. v. Deputy CIT (Delhi) p. 216
F Addition to be deleted where burden of proving source of share application money discharged : CIT v. Jay Dee Securities and Finance Ltd. (All) p. 220
F Addition rightly deleted where assessee producing relevant evidence and establishing that all share applicants not fictitious persons : CIT v. Misra Preservers P. Ltd. (All) p. 222
F No disallowance in hands of assessee where assessee purchasing goods and depositing amount in bank account of seller : CIT v. Smt. Shelly Passi (P&H) p. 227
F Tippers, vibrators and vibrator soil compactors entitled to higher rate of depreciation : CIT v. Rakesh Jain (P&H) p. 230
F Monetary limit in case of appeal filed by Revenue applicable to pending cases : CIT v. Smt. Vijaya V. Kavekar (Bom) p. 237
F Assessment order dealing with question of grant of exemption under section 10B and allowing deduction : Reopening on ground of irregular deduction is mere change of opinion : Metal Alloys Corporation v. Asst. CIT (Guj) p. 245
F Interest from money-lending not excludible for purpose of applying formula for computing export profits for earlier year : CIT v. Anil Chanana (Delhi) p. 247
F Overseas computer education expenses not allowable : Standipack P. Ltd. v. CIT (Cal) p. 251
F Commission for providing expertise in preparation and procurement of tender floated by public sector organisation not allowable : Standipack P. Ltd. v. CIT (Cal) p. 251
F Disallowance of short-term capital loss not justified : Standipack P. Ltd. v. CIT (Cal) p. 251
F Reopening of assessment of same claims on basis of same material not permissible : Gujarat Power Corporation Ltd. v. Assistant CIT (Guj) p. 266
F Attachment of entire properties of assessee and subsequently entire liabilities are satisfied by appropriation of compensation : Case of genuine hardship : Anto Nitto v. CIT (Ker) p. 305
F Audit objection that royalty payment resulted in capital benefit : Opinion by audit cannot constitute tangible material : Xerox Modicorp Ltd. v. Deputy CIT (Delhi) p. 308
F Satisfaction of AO of person against whom search conducted to AO of third person that any undisclosed income belongs to such person : Block assessment made without such satisfaction invalid : CIT v. Intercontinental Trading and Investment Co. Ltd. (Delhi) p. 316
F How convincing is the Calcutta High Court decision under section 37(1) of the Income-tax Act, 1961-T. N. Pandey, Retd. Chairman, CBDT p. 51
F Non-profit Organisations under DTC An appraisal-M. P. Agrawal, Retired D. G. (Exemption) p. 41
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IT : Surrendered income during course of survey has to be assessed separately as deemed income without setting off losses under sections 70 and 71
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[2013] 29 taxmann.com 268 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'A'
Liberty Plywood (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Ambala*
T.R. SOOD, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
IT APPEAL NO. 727 (CHD.) OF 2012
[ASSESSMENT YEAR 2005-06]
DECEMBER 17, 2012
Section 70, read with section 71, of the Income-tax Act, 1961 - Losses - Set off of, from one source against income from another sources under same head of income - Assessment year 2005-06 - Whether income surrendered during course of survey has to be assessed separately as deemed income and set-off of losses under sections 70 and 71 is not possible against such income - Held, yes [Paras 11 & 12] [In favour of revenue]
Section 32 of the Income-tax Act, 1961 - Depreciation - Unabsorbed depreciation - Assessment year 2005-06 - Whether in view of amendment brought out in section 32(2) with effect from 1-4-1997 by Finance Act (No.2) of 1996 and again on 1-4-2002 by Finance Act, 2001 unabsorbed depreciation for block of assessment years 1997-98 to 2001-02 which could not have been set off earlier, cannot be allowed to be set off in subsequent assessment year - Held, yes [Para 14] [In favour of assessee]
FACTS
Facts
• During the course of survey assessee surrendered an additional income of Rs.70 lakhs.
• Assessment was completed by Deputy Commissioner.
• Later on assessment records were examined by the Commissioner wherein he found that the assessment order was erroneous and prejudicial to the interest of the revenue. The Commissioner passed an order under section 263 and opined that surrendered income of Rs. 70 lakhs should be treated as deemed income under section 69, 69A, 69B and therefore, same was not eligible to be set off against carry forward business loss or depreciation in view of the decision of the Gujarat High Court in case of Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11.
• Though the order under section 263 was challenged before the Tribunal, the Tribunal observed that the assessment order was definitely erroneous and prejudicial to the interest of the revenue, however, the Commissioner himself was not correct in observing that surrendered income should be treated as deemed income under section 69, 69A, 69B. Accordingly, the Tribunal held that such a conclusion can be drawn only after necessary enquiry and accordingly, the matter was sent to the file of the Assessing Officer for conducting enquiries.
• The Assessing Officer held that since income surrendered during survey was not recorded in the books of account therefore, no deduction of set off of loss on depreciation could be allowed. Accordingly, the surrendered income was assessed separately.
• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
Arguments of assessee
• The assessee submitted that the income surrendered during survey could not be assessed as deemed income under sections 69, 69A, 69B and 69C if nature of source could be properly identified.
• The assessee further argued that as per section 32(2) if unabsorbed depreciation could not be set off in a year under consideration then the same would be added to the depreciation allowance of the following previous year which means it would become current depreciation of the next year. Such depreciation could be adjusted or set off against any head of the income.
Argument of revenue
• Revenue however, relied on the decision of Punjab and Haryana High Court in case of Kim Pharma (P.) Ltd. v. CIT [IT Appeal No. 106 of 2011 (O&M)] wherein the Court held that in case of surrendered income brought forward losses cannot be set off under sections 70 and 71 against the surrendered income.
Issue for consideration
• Whether the surrendered income should be treated as business income so as to set off brought forward losses under section 70 as well as the depreciation under section 32(2)?
HELD
Surrendered income during course of survey has to be assessed separately
• The Punjab and Haryana High Court in case of Kim Pharma (P.) Ltd. (supra), clearly held that surrendered income can be taxed as deemed income without setting off of the losses under sections 70 and 71. Following the decision of the Punjab and Haryana High Court it is held that surrendered income has to be assessed separately as deemed income and set off of losses under sections 70 and 71 is not possible against such income. [Paras 11 & 12]
Issue relating to setting off of depreciation under section 32(2)
• The plain reading of section 32(2) clearly shows that if the depreciation cannot be fully adjusted against profits and gains chargeable in the relevant year because of inefficiency of the profits then the same would be added to the depreciation of the following year. This means that unabsorbed depreciation which cannot be set off in a particular year, would become current depreciation in the following year and there is no restriction against such set off. Therefore, unabsorbed depreciation which is carry forward as current depreciation under section 32(2) is clearly available for setting off. [Para 12]
• However, this provision has been amended twice with effect from 1-4-1997 by the Finance Act (No. 2) of 1996 and again on 1-4-2002 by the Finance Act, 2001. [Para 13]
• Keeping in view the said amendment it is held that unabsorbed depreciation for the block of assessment years 1997-98 to 2001-02 which could not have been set off earlier, cannot be allowed to be set off in subsequent assessment year. Therefore, the order of the Commissioner (Appeals) is set aside and the matter is remitted back to the file of the Assessing Officer with a direction to only allow set off of unabsorbed depreciation which is outside the block of assessment years 1997-98 to 2001-02. [Para 14]
CASE REVIEW
CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 142 Taxman 713 (SC) (para 10) distinguished.
Kim Pharma (P.) Ltd. v. CIT [IT Appeal No. 106 of 2011 (O&M)] (para 11) followed.
CASES REFERRED TO
Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 (Guj.) (para 3), Kevalchand Nemchand Mehta v. CIT [1968] 67 ITR 804 (Bom.) (para 3), CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 (SC) (para 3), Fashion Word v. ACIT [IT Appeal No. 1634 (Ahd.) of 2006] (para 7), CIT v. Chensing Ventures [2007] 291 ITR 258/163 Taxman 175 (Mad.) (para 8), ITO v. Hytaisun Magnetics Ltd. [IT Appeal Nos. 2897 & 2898 (Ahd.) of 2008] (para 8), Kim Pharma (P.) Ltd. v. CIT [IT Appeal No. 106 of 2011 (O&M)] (para 9), CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC) (para 10) and Dy. CIT v. Times Guaranty Ltd. [2010] 40 SOT 14 (Mum.) (SB) (para 13).
Sudhir Sehgal for the Appellant. J.S. Nagar for the Respondent.
ORDER
T.R. Sood, Accountant Member - This appeal is directed against the order passed by the ld. CIT(A), Panchkula dated 1.5.2012.
2. In this appeal the assessee has raised the following grounds:
"1 That the ld. CIT(A) has erred in law and facts in confirming the taxability of income surrendered during survey u/s 133A of Income-tax Act, 1961 as deemed income as per the following details:
| | Unaccounted cash found and surrendered u/s 69A | Rs. 50,00,000/- |
| | Unaccounted investments surrendered u/s 69B | Rs. 75,000/- |
| | Unaccounted expenditure Surrendered u/s 69C | Rs. 12,50,000/- |
| | Total surrendered income | Rs. 70,00,000/- |
2. That the ld. CIT(A) Panchkula has erred in law and facts of the case in confirming the set off of disallowance made of unabsorbed depreciation by the Assessing Officer against the surrendered income."
3. Brief facts of the case are that originally the assessee had filed return of income declaring income of Rs. 17,26,270/-. A survey was conducted in the premises of the assessee on 4.3.2005 and an additional income of Rs. 70,00,000/- was surrendered. Bi-furcation of the surrender income is as under:
| | "Stock | Rs. 7,50,000 |
| | Expenditure as detailed in loose papers i.e. Diesel, wages etc. | Rs. 12,50,000/- |
| | Cash in hand | Rs. 50,00,000/- |
| | Total | Rs. 70,00,000/- " |
Assessment was completed by DCIT, Ambala determining the total income at Rs. 32,66,090. Later on the assessment records were examined by the ld. Commissioner, Panchkula wherein he found that the assessment order is erroneous and prejudicial to the interest of the Revenue. The Ld. CIT passed an order u/s 263 dated 3.12.2008 and opined that surrendered income of Rs. 70.00 lakhs should be treated as deemed income u/s 69, 69A, 69B of the Act and therefore, same was not eligible to be set off against carry forward business loss or depreciation in view of the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11. Though the order u/s 263 was challenged before the Tribunal, the Tribunal observed that the assessment order was definitely erroneous and prejudicial to the interest of the Revenue, however, the CIT himself was not correct in observing that surrendered income should be treated as deemed income u/s 69, 69A, 69B of the Act. Accordingly the Tribunal held that such a conclusion can be drawn only after necessary enquiry and accordingly the matter was sent to the file of Assessing Officer for conducting enquiries. When the assessment proceedings was taken up again in view of the revisionary order u/s 263 as well as the order of the Tribunal, it was mainly submitted before the Assessing Officer that out of a sum of Rs. 70.00 lakhs, Rs. 57.50 lakhs was disclosed in the profit and loss account under the head "total sales and other income" and balance of Rs. 12.50 lakhs was surrendered on account of "expenditure" and was added to the taxable income in the computation. It was further submitted that the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan (supra) should not be followed in the present case because in that case assessee was not able to explain the source of acquisition of gold whereas in the present case the source was business only. It was contended that in the scheme of Act income can be assessed under the heads given in Section 14 and whatever does not fall under these heads, cannot be assessed. Reliance was placed on the decision of Hon'ble Bombay High Court in case of Kevalchand Nemchand Mehta v. CIT [1968] 67 ITR 804 as well as the decision of Hon'ble Supreme Court in case of CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713. Some other case laws were also relied. It was further submitted that as per Section 32(2) if unabsorbed depreciation cannot be set off during a particular year owning to insufficiency of profits the same, would be added to the depreciation in the following year which means it becomes current depreciation in the following year.
4. The Assessing Officer after considering the submissions did not find force in the same because during the course of survey proceedings no documents have been impounded by the Department showing that the assessee had some other business activity from where he had drawn the income. It was further observed that deemed income u/s 69, 69A, 69B and 69C are to be treated separately as deemed income and are not assessable under any head of the income. He also observed that Section 14 itself used the expression "Save as otherwise provided by this Act", clearly shows that scope of deemed income covered by scheme of Sections 69, 69A, 69B and 69C were to be treated separately because this kind of income is not income from head like salary, house property, business profits or capital gains etc. For this reliance was placed on the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan (supra). Since income surrendered during survey was also not recorded in the books of account therefore, no deduction or set off of loss or depreciation can be allowed. Accordingly surrender income was assessed separately as under:
| | Add | |
| | Unaccounted cash found and surrendered u/s 69A | Rs. 50,00,000/- |
| | Unaccounted investments surrendered u/s 69B | Rs. 7,50,000/- |
| | Unaccounted expenditure Surrendered u/s 69C | Rs. 12,50,000/- |
5. Before the ld. CIT(A) submissions made before the Assessing Officer were reiterated.
6. The ld. CIT(A) did not find force in these submissions and decided the issue against the assessee vide para 3.3 and 3.1 which is as under:
3. The facts as well as the submissions of the appellant have been considered by the undersigned. The cases cited are distinguished on facts. Survey was conducted at the business premises of the appellant on 04.03.2006 just before the close of the F.Y 2005-06. The appellant surrendered an addition income of Rs.70 lacs on account of excess cash Rs. 50 lacs, excess stock Rs. 7,50,000/- and expenses as per loose papers Rs. 12,50,0007-. The additional income was assessed as Deemed income by the appellant u/s 69/4, 69B & 69 as under :-
| | Unaccounted cash found & surrendered u/s 69/4 | 50,00,0007- |
| | Unaccounted investment surrendered u/s 69B | 7,50,000/- |
| | Unaccounted Expenditure surrendered u/s 69C cash | 12,50,000/- |
The income surrendered/ determined u/s 69, 69/\, 69B A 69C is to be treated separately as "Deemed Income'' and is not assessable under any other head of income. Therefore no set off is allowable to the appellant against this income in view of the appellant against this income in view of the judgment of Hon'ble Gujarat High Court in the case of Fakir Mohammed Haji Hasan [2002] 247 ITR 290 (Guj.)
3.1 The appellant's plea that income can be assessed only under five heads of income as per Section 14 is not acceptable in view of the opening words of Section .- 'save as otherwise provided by this Act". Deemed income is not covered under my of the heads u/s 14 i.e.—
(i) Salary
(ii) Income from house property
(iii) Profits gains of business or profession
(iv) Capital gains
(v) Income from other sources The surrendered income has been assessed as 'deemed income' on account of unaccounted cash u/s 69A, unaccounted investment u/s 69B and 'unaccounted expenditure u/s 69C of the IT. Act, 1961 because nature and source of acquisition, investment or expenditure are not accounted/known. Therefore corresponding deductions are not attracted in the case of deemed income. There is no question of allowance of unabsorbed depreciation against deemed income on account of surrender. Therefore the addition is sustained and claim of set off of unabsorbed depreciation is disallowed. As a result these grounds are dismissed."
7. Before us, the ld. counsel of the assessee submitted that the income surrendered during survey can not be assessed as deemed income u/s 69, 69A, 69B and 69C of the Act if nature of source can be properly identified. In this regard he relied on the decision of Ahmedabad Bench of the Tribunal in case of Fashion Word v. ACIT [ITA No. 1634/Ahd/2006] (copy of the order is filed at paper book page 9 to 22). In that case the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan (supra) was considered and it was observed that there seems to be some misunderstanding in the interpretation of the decision of Hon'ble High Court. It was further observed as under:
"The expression "nature and source" used in this section should be understood to mean requirement of identification of source and is genuineness…………………. Where the assessee is able to explain nature and source of investment/expenditure and also if they are recorded in the books of account then such investment/expenditure will not be treated as deemed income but where investment/expenditure is not recorded in the books of account."
He further relied on the decision of Hon'ble Supreme Court in case of D.P. Sandu Bros. Chembur (P.) Ltd. (supra) wherein it was observed as under:
"Section 56 provides for the chargeability of income of every kind which has not to be excluded from the total income under the Act, only if it is not chargeable to income -tax under any of the heads specified in Section 14 items A to E. Therefore, if the income is included under any one of the heads."
8. The ld. counsel of the assessee further argued that as per Section 32(2) if unabsorbed depreciation can not be set off in a year under consideration then the same would be added to the depreciation allowance of the following previous year which means it would become current depreciation of the next year. Such depreciation can be adjusted or set off against any head of the income. In this regard he relied on the decision of Hon'ble Madras High Court in case of CIT v. Chensing Ventures [2007] 291 ITR 258/163 Taxman 175. He also relied on the decision of Ahmedabad Bench of the Tribunal in case of ITO v. Hytaisun Magnetics Ltd. [ITA Nos. 2897 & 2898/Ahd/2008] (copy of order filed at page 1 to 8 of paper book) wherein it was observed as under:
"We find that it is not in dispute that during the year under consideration the assessee had income of Rs. 2,34,10,540/- assessed under the head income from other sources in view of provisions of section 69 of the Act. Further it is also not in dispute that the assessee had brought forward unabsorbed depreciation of Rs. 10.13 crores in Assessment year 1993-94 , Rs. 1.59 crores in Assessment year 1994-95 and Rs. 68.14 lakhs in Assessment year 1995-96 which is available for set off against income of the current year. As per provisions of section 32(2) unabsorbed depreciation are deemed as part of current year's depreciation to the extent of available income. Further there is no provisions under the Income Tax Act to prohibit set off of current year's business loss against income of the assessee which is assessable under the head income from other sources. Section 70 does not prohibit such set off.
9. On the other hand, the ld. DR for the revenue strongly supported the order of Assessing Officer as well as the ld. CIT(A). He relied on the decision of Hon'ble Punjab & Haryana High Court in case of M/s Kim Pharma (P) Ltd. v. CIT [ITA No. 106 of 2011 (O&M)] wherein the Court held that in case of surrendered income brought forward losses can not be set off under sections 70 & 71 of the Act against the surrendered income.
10. We have heard the rival submissions carefully. The main controversy involved is whether the surrender income amounting to Rs. 70.00 lakhs should be treated as business income so as to set off brought forward losses u/s 70 of the Act as well as the depreciation u/s 32(2). As far as the decision of Hon'ble Supreme Court in case of D.P. Sandu Bros. Chembur (P.) Ltd. (supra) is concerned, we find that facts in that case are totally different. In that case the assessee had sold tenancy rights for Rs. 35.00 lakhs which were claimed to be non-taxable. However, the Assessing Officer assessed the same as income from other sources u/s 10(3) of the Act. On assessee's appeal the Commissioner held that the sum was taxable under the head "capital gain". He determined the cost of acquisition on the basis of fair market value and subjected the receipt for tenancy rights after reducing the cost of such rights as assessable under the head 'capital gain". On further appeal, the Tribunal held that though the income was assessable under the head 'capital gain' but since there was no cost of acquisition and therefore, following the decision of Hon'ble Supreme Court in case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 it was held that since the capital gain can not be computed, the same was not taxable. On revenue's appeal to the High the issue was decided against the Department. When this matter traveled to the Hon'ble Supreme Court after detailed discussion, it was held that tenancy rights constituted capital assets. While dealing with the alternative argument of the Revenue that sale tenancy rights should be taxable under the head of income from other sources the Hon'ble Apex Court observed at placitum 14 to 16 as under:-
"Section 14 of the Income-tax Act, 1961 as it stood at eh relevant time similarly provided that "all income shall for the purpose of charge of income-tax and computation of total income be classified under six heads of income", namely:-
(A) Salaries;
(B) Interest on Securities;
(C) Income from house property;
(D) Profits and gains of business or profession;
(E) Capital gains;
(F) Income from other sources unless otherwise, provided in the Act has not to be excluded from the total income under the Act, only if it is not chargeable to income tax under any of the heads specified in section 14, items A to E. Therefore, if the income is included under any one of the heads, it cannot be brought to tax under the residuary provisions of section 56.
There is no dispute that a tenancy right is a capital asset the surrender of which would attract section 45 so that the value received would be capital receipt and assessable if at all only under item E of section 14. That being so, it cannot be treated as a casual or non-recurring receipt u/s 10(3) and be subjected to tax u/s 56. The argument of the appellant that even if the income cannot be chargeable u/s 45, because of the inapplicability of the computation provided u/s 48, it could still imposed tax under the residuary head as thus unacceptable. If the income cannot be taxed u/s 45, it cannot be taxed at all. (See S.G. Mercantile Corporation P. Ltd. v. CIT (1972) 83 ITR 700 (S.C)."
11. Thus it is clear from the above that once the item of receipt is held to be falling under a particular head then the same cannot be charged alternatively under another head particularly under the head "income from other sources". This observation can not lead to the conclusion if income does not belong to a particular head same cannot be charged at all. As far as the decision of Ahmedabad Bench of the Tribunal in case of Fashion Word (supra) is concerned interpreting the decision of Hon'ble High Court in case of Fashion Word (supra) has to give a way to interpretation put on the same decision by the Hon'ble Punjab & Haryana High Court in case of Kim Pharma (P.) Ltd. (supra), Hon'ble High Court clearly held that surrendered income can be taxed as deemed income without setting off of the losses u/s 70 & 71. We are bound to follow the decision of Hon'ble Punjab & Haryana High Court and following the same, we hold that surrendered income has to be assessed separately as deemed income.
12. Coming to the issue of setting off of depreciation u/s 32(2), first of all it has to be noticed that the decision of Hon'ble Punjab & Haryana High Court in case of Kim Pharma (P.) Ltd. (supra) held that surrendered income during the survey has to be assessed separately as deemed income and set off of losses u/s 70 & 71 was not possible against such income. However, it is clear that this decision does not deal with the issue of setting off of depreciation u/s 32(2). Section 32(2) reads as under:
"32(2) 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."
The plain reading of the above clearly shows that if the depreciation cannot be fully adjusted against profits and gains chargeable in the relevant year because of inefficiency of the profits then the same would be addled to the depreciation of the following year. This means that unabsorbed depreciation which can not be set off in a particular year, would become current depreciation in the following year and there is no restriction against such set off. Therefore, un-absorbed depreciation which is carry forward as current depreciation u/s 32(2) is clearly available for setting off and similar view was taken by the Ahmedabad Bench of the Tribunal in case of Hytaisun Magnetics Ltd. (supra) held as under:
"We find that it is not in dispute that during the year under consideration the assessee had income of Rs. 2,34,10,540/- assessed under the head income from other sources in view of provisions of section 69 of the Act. Further it is also not in dispute that the assessee had brought forward unabsorbed depreciation of Rs. 10.13 crores in Assessment year 1993-94 , Rs. 1.59 crores in Assessment year 1994-95 and Rs. 68.14 lakhs in Assessment year 1995-96 which is available for set off against income of the current year. As per provisions of section 32(2) unabsorbed depreciation are deemed as part of current year's depreciation to the extent of available income. Further there is no provisions under the Income Tax Act to prohibit set off of current year's business loss against income of the assessee which is assessable under the head income from other sources. Section 70 does not prohibit such set off."
13. However, this provision has been amended twice w.e.f. 1.4.1997 by Finance Act (No. 2) of 1996 and against on 1.4.2002 by Finance Act, 2001. Certain restrictions were introduced again set off of by such unabsorbed depreciation. Controversy also arose in this respect. Ultimately the matter travelled to the Special Bench of the Tribunal in case of Dy. CIT v. Times Guaranty Ltd. [2010] 40 SOT 14 (Mum.)(SB). In this case it was held as under:-
"Under section 32(2) of the Income-tax Act, 1961, prior to its substitution, by the Finance (No. 2) Act, 1996 with effect from April 1,1997 the current depreciation under section 32(1) could be adjusted against income under any head including "Capital gains" and "Income from house property" in the same year. If there remained some unadjusted depreciation allowance, that was carried forward in the following year(s) for set off against income under any other heads just like current depreciation allowance under section 32(1) pertaining to such year.
Under sub-section (2) of section 32 as substituted by the Finance (No. 2) Act, 1996, with effect from April 1,1997, the scope of set-off of the brought forward unabsorbed depreciation allowance was restricted to the income under the head "Profits and gains of business or profession". Under clause (i) of substituted sub-section (2), the unabsorbed depreciation allowance could be set off against "profits and gains" of any business or profession carried on by the assessee for that assessment year. Under clause (ii) of sub-section (2) if the unabsorbed depreciation allowance could not be wholly set off under clause (i), the amount not so set off could be set off from the "income under any other head", if any, assessable for that assessment year.
The provision for carry forward and set-off of unabsorbed depreciation for any number of years against income under any head, was further diluted by way of clause (iii)(b) to section 32(2) restricting the right to set-off of unabsorbed depreciation for a period of not more than eight assessment years succeeding the assessment year in which the allowance was first computed. This part of the provision did not deal with the treatment of unadjusted brought forward depreciation allowance for and up to the assessment year 1996-97. The Finance Minister clarified the amendment as prospective inasmuch as the cumulative unabsorbed depreciation brought forward as on April 1, 1997, could be set off against taxable profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years. In other words, the period of eight years under clause (iii)(b) of section 32(2) came to be reckoned from assessment year 1997-98 irrespective of the fact that the unadjusted brought forward depreciation arose in an earlier assessment year. Thus, on the strength of the clarification given by the Finance Minister, the unadjusted depreciation brought forward up to April 1, 1997 became eligible for set off not only against the business income but also against income under other heads in eight assessment years.
Two like expressions are used in sub-section (2), viz, firstly, "profits or gains " in the main part of sub-section (2) and then, "profits and gains" in clause (i). The expression "profits and gains" as used in clause (i) or (iii)(a) refers only to income under the head "Profits and gains of business or profession".
Section 32(2) was again substituted by the Finance Act, 2001 with effect from April 1, 2002 restoring the provision as prevailing prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1,1997.
Sub-section (2) of section 32 is a substantive provision and not a procedural one. It is settled legal position that the amendment to a substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere seen either from the Notes on Clauses or Memorandum explaining the provision of the Finance Bill, 2001, that substitution of sub-section (2) of section 32 is retrospective. Therefore, the substantive provision contained in section 32(2) as substituted by the Finance Act, 2001 with effect from April 1, 2002, is prospectively applicable to the assessment year 2002-03 onwards.
Section 32(2) is a deeming provision and by a legal fiction, the amount of depreciation allowance under section 32(1) which is not fully absorbed against income for that year is deemed to be part of the depreciation allowance for the succeeding year(s). A deeming provision cannot be extended beyond the purpose for which it is intended. Section 32(1) deals with depreciation allowance for the current year. It is only when the assessment of the assessee from assessment year 2002-03 onwards is made in which depreciation allowance for the current year under section 32(1) cannot be given full effect, owing to the inadequacy of profits, that the directive of the deeming provision under section 32(2) shall apply.
Wherever there is mention of loss under a particular head for the current year which is sought to be set off against the income under the same head or other heads of the income for that very year, the words "cannot be" and "has not been" have been brought into play. The words, "cannot be" and "has not been" used in the present tense in section 32(2) suggest that the reference to depreciation allowance under section 32(1), which could not be adjusted due to inadequacy of profits, is for the current year alone starting from assessment year 2002-03 onwards. The brought forward unabsorbed depreciation of earlier years cannot be included within the scope of section 32(2).
In section 32(2) the depreciation allowance for the current year to which full effect cannot be given due to the paucity of profits, has been referred to as "unabsorbed depreciation allowance". Such unabsorbed depreciation allowance for the assessment years 1997-98 to 2001-02 strictly comes under section 32(2) as "unabsorbed depreciation allowance". As the language of this deeming provision does not talk of any brought forward "unabsorbed depreciation allowance" or depreciation allowance which could not be given effect to in the earlier years that resultantly became part of section 32(2), there is no question of expanding the scope of the legal fiction.
The purpose of a legal fiction in section 32(2) is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year. In other words the object of the provision is to treat the whole or part of the depreciation allowance under section 32(1), which could not be adjusted in the first year, as the current depreciation under section 32(1) in the second year. In the second year, such depreciation of first year becomes part and parcel of depreciation under section 32(1) of the second year. If again in the second year, the total of depreciation under section 32(1) (including the amount of allowance which came from first year and became depreciation under section 32(1) in the second year) cannot be absorbed, it shall become current depreciation for the third year to be dealt with in the same manner as the amount of depreciation in the third year and so on. Once the unabsorbed depreciation for the first year is given the character of current depreciation in the second year, the purpose of section 32(2) is fulfilled. The "unabsorbed depreciation allowance" of the period after substitution by the Finance (No. 2) Act, 1996 cannot be given the character of current depreciation in the assessment years after substitution with effect from April 1, 2002.
CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC) relied on.
Therefore, the law prevailing as on the 1st April of the assessment year 2002-03 and subsequent years does not permit the brought forward un-absorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 to assume the character of depreciation under section 32(1) in these assessment years.
If there is both repeal of the old provision and simultaneous insertion of a new provision in its place, it is called "substitution".
But for the relaxation given by the Finance Minister in Parliament, the brought forward unadjusted depreciation of the period prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1, 1997 would have elapsed. There is no such concession given by the Finance Minister while substituting the provisions of section 32(2) with effect from April 1, 2002. Therefore, the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 cannot be treated as the current depreciation in the assessment years under consideration.
The position can be summed up as follows :
For the assessment years 1997-98 to 2001-02 brought forward unadjusted depreciation allowance for and up to assessment year 1996-97 (the "first unadjusted depreciation allowance"), which could not be set off up to assessment year 1996-97, shall be carried forward for set off against income under any head for a maximum period of eight assessment years starting from assessment year 1997-98. Current depreciation for the year under section 32(1) (for each year separately starting from assessment years 1997-98 up to 2001-02) can be set off firstly against business income and then against income under any other head. The amount of current depreciation for assessment years 1997-98 to 2001-02 which cannot be so set off, the "second unabsorbed depreciation allowance", shall be carried forward for a maximum period of eight assessment years from the assessment year immediately succeeding the assessment year for which it was first computed, to be set off only against the income under the head "Profits and gains of business or profession". For the assessment year 2002-03 onwards the "first unadjusted depreciation allowance" can be set off up to assessment year 2004-05, that is, the remaining period out of maximum period of eight assessment years against income under any head. The "second unabsorbed depreciation allowance" can be set off only against the income under the head "Profits and gains of business or profession" within a period of eight assessment years succeeding the assessment year for which it was first computed. Current depreciation for the year under section 32(1), for each year separately, starting from assessment year 2002-03 can be set off against income under any head. The amount of depreciation allowance not so set off (the "third unadjusted depreciation allowance") shall be carried forward to the following year. The "third unadjusted depreciation allowance" shall be deemed depreciation under section 32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation, in perpetuity."
14. From the above it is clear that unabsorbed depreciation for the block of Assessment year 1997-98 to 2001-02 which could not have been set off earlier, cannot be allowed to be set off now. Therefore, we set aside the order of the ld. CIT(A) and remit the matter back to the file of Assessing Officer with a direction to only allow set off of unabsorbed depreciation which is outside the block of Assessment year 1997-98 to 2001-02.
15. In the result, appeal of the assessee is partly allowed.
Nitu ----- Forwarded Message -----
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Saturday, 19 January 2013 4:50 AM
Subject: SC on Depreciation
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Saturday, 19 January 2013 4:50 AM
Subject: SC on Depreciation
SUPREME COURT DECISION ON DEPRECIATION
'Leasing firm entitled to depreciation if the lessee uses the vehicle for hiring'
It is not necessary that the assessee must have used the asset itself in order to be entitled to depreciation, held the Supreme Court in ICDS Ltd v CIT. It was contended by the revenue that one of the requirements for grant of depreciation is use of the asset by the assessee and in case of lease of the asset by the assessee, it simply could not have used the asset as it was physically with the lessee. The apex court, while rejecting this contention, held that user contemplated was for the purpose of business. It was indeed used for the purpose of business when the asset was leased and the lessee used it. That the vehicle was registered in the name of the lessee with the transport authorities, need not come in the way of grant of depreciation, said the court. It also upheld the claim of the leasing company that since the lessee used the vehicle for his business of running it on hire, the vehicle should beget heightened depreciation reserved for such vehicles. In short, in case of leasing, the tax benefits predicated on the type of use would devolve on to the leasing company from the lessee.
Best Wishes
CA. V.M.V.SUBBA RAO
Chartered Accountant
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