Income Tax Appellate Tribunal - Madras
Southern Travels vs The Asst. Commissioner Of Income Tax on 25 July, 2006
Equivalent citations: [2006]103ITD198(CHENNAI), [2007]288ITR142(CHENNAI), (2006)104TTJ(CHENNAI)750
ORDER
A. Kalyanasundharam, Sr. Vice-President
1. The assessee, a Registered Firm, has filed this appeal against the order of the Commissioner of Income-tax (Appeals)-I, Madurai dated 19th of February, 2004. This Special Bench has been constituted for considering the following question:
In view of the provisions of Section 32(2)(iii) whether it is possible to set off the brought forward depreciation loss against capital gains?
2. On behalf of the assessee firm, Mr. C.V. Rajan, Senior Advocate along with Shri S.P. Chidambaram appeared and for the Department, Mr. C. Venkateswarlu appeared. The counsel for the assessee and the Departmental Representative placed before us in clear terms the contentions that they both felt are relevant to the issue before us. We appreciate the arguments and contentions placed by both of them as they were eloquent and relevant to the issue before us. Considering the rival submissions, we would be rendering our conclusions along with the reasons therefor in the following paragraphs.
3. The issue that is raised for the consideration of this Special Bench is as a consequence of the amendment to Section 32(2) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') which was effective from 1.4.1997. It is our considered view that it would be relevant to reproduce the said section as it stood prior to the amendment and after the amendment:
The provision of Section 32(2) as it stood prior to the amendment by the Finance (No. 2) Act, 1996 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 chargeable being less than the allowance, then, subject to the provisions of Sub-section (2) of Section 72 and Sub-section (3) of Section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.
The provision of Sub-section (2) of Section 32 as amended by the Finance (No. 2) Act, 1996 w.e.f. 1.4.1997 is 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 business or profession for which the allowance was originally computed continued to be carried on by him in the previous year relevant for that assessment year:
Provided further 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 net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation.- For the purposes of this clause, "net worth" shall have the meaning assigned to it in Clause (ga) of sub-section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of J986)]
4. We bring below in a table form the comparative position that all the provisions of Section 32(2) of the Act as it stood prior to 1.4.1997 and after 1.4.1997 which we believe would give a comprehensive view of the changes:
SI No. Section Before 1.4.1997. After 1.4.1997.
1. 32(2) Computation of Computation of income under the income under the head "profits head "profits and gains of a and gains of a business business "insufficient "insufficient to absorb to absorb depreciation depreciation allowance. allowance.
2. 71 Permits adjustment not applicable of losses from one particular source against the income from any other source under the same head for a particular assessment year.
3. 32(2)(i) not applicable In case income from business for the assessment year is insufficient to absorb depreciation allowance of that assessment year, this section permits absorption of depreciation allowance of a business against profits and gains of any other business with the condition that it must be of the same assessment year.
72 In a situation not applicable where the income from from profits and gains of a business of an assessment year is unable to absorb the depreciation of that assessment year, then the income from any other head including capital gains both short-term and long-term is available for adjustment of the unabsorbed depreciation and this is limited to the same assessment year in which the depreciation claim falls short of the income from business.
5. 32(2)(ii) not applicable When the depreciation allowance of a business of the assessment year is unable to be absorbed by any other business of the same assessment year, then the remaining unabsorbed depreciation allowance could be set off against income under any other head that is assessable for the same assessment year.
6. 72 Section 72(2) of the not applicable (carry Act states that forward of preference would business be given to set losses) off of losses over unabsorbed depreciation.
7. 32(2) not applicable In the event
(iii) of the depreciation allowance of the year is unable to be absorbed by any other business income or from the income under any other head in the same assessment year, then the remaining unabsorbed depreciation allowance shall be carried forward in the following manner:
(a) Unabsorbed depreciatio allowance shall be set off against profits and gains of any business carried on by the person;
(b) if the unabsorbed depreciation allowance cannot be wholly so set off it shall be allowed to be carried forward for the following eight assessment years immediately succeeding the assessment year in which it was first computed. This has a proviso and this proviso insists that the business to which depreciation allowance is related to must be carried on in the succeeding years so as to be allowed to be set off. There is another proviso and this is when the company becomes a sick company.
5. The perusal of the amendment of the section which was reproduced earlier| the above comparative table gives us in clear terms that the position prior to 1997 as contained in Sections 32, 70, 71 and 72 of the Act have all been incorporated into Section 32(2) of the Act itself with effect from 1.4.1997. The law maker thus having incorporated the provisions of Sections 70, 71 and 72 of the Act in Section 32 of the Act and has made this section a comprehensive in itself.
6. The facts of the case as it exist are that the claim of depreciation for set off relates to assessment year 1997-98 and the business to which it was related to is still continuing. The assessment year involved is 1999-2000. It is thus clear that the present case of the assessee do not fall into Section 32(2)(i) which permits setting off of unabsorbed depreciation against profits and gains of any business of the same assessment year. Section 32(2)(ii) is also not aITRacted in the case of the assessee because of the same reason, viz. the unabsorbed depreciation is not of the same assessment year as 1999-2000 but is of 1997-98. It is only in the event of the depreciation remaining wholly unabsorbed for the assessment year 1999-2000, that the assessee could insist for adjustment or set off of such unabsorbed portion of the depreciation against income from any other head including capital gains. This being not the fact of the present case, the claim of the assessee that unabsorbed depreciation should be allowed to be adjusted against capital gains is incorrect because this provision is not aITRacted to the facts of the present case.
7. The facts of the present case, as they are AITRact the provisions of Section 32(2)(iii) of. the Act. This is because the unabsorbed depreciation is for assessment year 1997-98 and the assessment year before us is 1999-2000. unabsorbed depreciation being two years older to the present assessment year all that the assessee would be entitled to is carry forward of the said unabsorbed depreciation to be set off against the profits and gains of the business to which this depreciation is related to is still carried on and will be allowed to be carried forward for set off for the following six assessment years because already two assessment years have lapsed.
8. During the course of discussion when the Special Bench of the Tribunal was being insisted upon, the decisions of the Tribunal in Uttam Air Products (P) Ltd. v. Dy. Commissioner of Income Tax in I.T.A. No. 767/Del/2001 for assessment year 1997-98 reported in (2006) 99 TTJ (Del) 718, order dated 28.10.2004 and in Perfect Pharmacists (P.) Ltd. v. Jt. Commissioner of Income Tax in I.T.A. No. 247(Ind.)/99 dt. 16-4-2004 (2004) 140 Taxman 49 were relied upon and stated to be applicable to the facts of the case. At the outset, we may observe that both the said orders of the Tribunal are concerned with the assessment year 1997-98. The decision in Uttam Air Products (P) Ltd. considered the speech of the Finance Minister and the circular of the CBDT No. 762 dt. 18.2.1998 that explained the manner in which the amended provisions of Section 32(2) of the Act would have to be acted upon, the Bench came to conclude that the unabsorbed depreciation for the assessment year 1996-97 would have to be treated as depreciation allowance the for the assessment year 1997-98 and the period eight years would be calculated from assessment year 1997-98. In the other case of Perfect Pharmacists (P.) Ltd. identical facts existed as was in the case of Uttam Air Products (P.) Ltd. and for identical reasons, as in that case, the Bench had approved the claim of the assessee.
9. In the present case before us the assessment year 1999-2000, as mentioned earlier, and the depreciation allowance is for the assessment year 1997-98 which the assessee is claiming for set off against the income for the present assessment. year. As explained in the earlier paragraph in the table giving comparative position before the amendment and after the amendment it is absolutely clear that it is only Section 32(2)(iii) of the Act, that is operational in the case of the assessee. On that basis all that the assessee could claim is for carry forward of the unabsorbed depreciation for six more successive assessment years to be adjusted against the income from profits and gains from the same business from which the depreciation claim arose and the assessee would be entitled to carry this act for the next six assessment years. Further, the clear condition that is laid down in this section is that in the assessment year in which the assessee is claiming the set off of the unabsorbed depreciation, the assessee must be carrying on that business and the income from that business must exist. To put it in other words, if the business from which the depreciation claim arose is not carried out in any of the assessment years, the assessee would not be entitled to the set off. For the aforesaid reasons, we decide the question in the negative, i.e. in favour of the Revenue.
10. The appeal is dismissed. No costs.