brought forward depreciation

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SHEEJITH

SHEEJITH (Querist)
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24 July 2008 whether brought forward business depreciation can be set off against Salary Income of the current year ?

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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24 July 2008 No. No Loss can be set off against Salary Income.

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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24 July 2008 Depreciation carried forward is not available for set off against salary income.

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CA. Sahendra Jaiswar

CA. Sahendra Jaiswar (Expert)
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24 July 2008 No, brought forward unabsorbed depreciation under business is not allowed against salary income.

SHEEJITH

SHEEJITH (Querist)
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25 July 2008 i think brought forward depreciation can be set off against salary income as depareciation is not a business loss it is an allowance and it covered under section 32(2).

Interhead set off of depreciation loss against salary income

Provisions of Sec 32(2) governs interhead set off, carry forward and set off of depreciation

In CIT vs Jaipuria China Clay Mines (P) Ltd [(1966) 59 ITR 555(SC)] Supreme Court decided as follows:

“Depreciation (unabsorbed) ® Carry forward and set off ® Unabsorbed depreciation allowance (i.e., not actually allowed due to profit, being less than the depreciation allowance) ® To be deducted from the total income along with the current year’s depreciation ® Depreciation could be set off against income other than business income. Words “no profits or gains chargeable for that year “are not confined to profits and gains derived from the business whose income is being computed under s.10 (2) IT Act, 1922 [corresponding to S.32 (2) of the new IT Act, 1961] - Sec 24(2) IT Act, 1922 [corresponding to S.72 of the new IT Act, 1961] only deals with losses other than the losses due to depreciation”

See also
CIT vs Vrmani Industries Pvt Ltd.Etc.Etc [(1995) 216 ITR 607 (SC)]
Rajapalayam Mills Ltd vs CIT [(1978) 115 ITR 777 (SC)]

Further consequent to the interpretations of sec 32(2) by Supreme Court in above cases, Sec 32(2) was amended with changed provisions of interhead set off, carry forward and set off to nullify the effect of judgment. [Finance (No 2) Act 1996 w.e.f 1.4.1997]. However, another amendment was done and the old provisions were restored (Finance Act 2001 w.e.f. 1.4.2002). Thus, on a bare reading of the above referred cases along with the amendments referred above, it will be clear that interhead set off, carry forward and set off of depreciation allowance is governed by 32(2).

The Finance Act 2004 inserted subsection 2A in Sec 71 and as per the amendment; business loss cannot be setoff against income from salary. However, as discussed above, interhead setoff of depreciation allowance is governed by section 32(2). Therefore, the amendment of section 71 has no effect on the interhead set off of depreciation allowance.

[1966] 59 ITR 555 (SC)

SUPREME COURT OF INDIA

Commissioner of Income tax

V.

Jaipuria China Clay Mines (P.) Ltd.

K. SUBBA, RAO, J.C. SHAH AND S.M. SIKRI, JJ.

CIVIL APPEAL NO. 307 OF 1964

NOVEMBER 1, 1965

PLEASE GIVE YOUR VIEWS ON ABOVE SUBJECT

CA Nallathambi Srinivasan

CA Nallathambi Srinivasan (Expert)
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25 July 2008 As my view, the basic concept of IT Act, any loss or expenses should be adjusted against the income for which the said expenses or loss are incurred for generating the said income. Income and expense should be linked.

In this case the salary is not generated from the said business depreciation. Hence it is not possible to set off business depreciation loss against the salary income.