Yes, there is a debate whether unabsorbed depreciation can be set off against salary.
Well, i am personally of the view that
(1) There are clear provisions that depreciation carried forward can beset off against any income of the future years.
(2)the income tax act only restricts the set off of business loss against salary.
So there is a gap between the lip and the sip regarding unabsorbed depreciation.
So there is a gap in the law,
but not in the income tax return...
I took ITR 4, in both pdf format and excel utility, and voila, there is no provision in the schedule CYLA to set off unabsorbed depreciation against salary.
So is it proper to restrict an allowance which is not denied anywhere in the act?
Mr.G.K.
In my opinion,since Unabsorbed depreciation is a Biz loss it cannot be set off against Salary.....
Dear Balaji,
Its true that biz loss cannot be set off against salary, but section 32 says that unabsorbed depreciation can be set off against any income... The restriction in set off provision is in setting off the business loss against salary. Means there is an express allowance in the act, which has been denied.
If CY business loss can be set off against income from HP, and CY HP loss can be set off against salary, then y should the unabsorbed depreciation not be set off against salary.... again, there is nothing that the act says that it cant... its just that Dept have gone straight ahead and made a form which wont even give assessee an option to challenge the dept.
ANOTHER LOOPHOLE
In the case of an assessee, who has income from other sources, from letting out plant and machinery, he will be entitled to claim depreciation on that. It may be noted that section 57(2) provides that the depreciation shall be allowed in the same manner as in section 32.
Now, in this case, if he is having loss from other source and unabsorbed depreciation, then that unabsorbed depreciation can be set off against salary, using the analogy that loss from other source can be set off against salary.
But the assessee who has unabsorbed depreciation from an asset used for business will not be able to set it off, even though it has not been denied to him anywhere in the act.
So the very fact that there is certainly a provision to set off unabsorbed depreciation against salary, does not justify the stance,
that since unabsorbed depreciation is in the nature business loss, it cannot be set off with salary. The lawgic is flawed.
Please keep posting your views... :|
CA.G.Muguntha Narayanan
(Internal Auditor at TVS Motors)
(2195 Points)
Replied 16 January 2010
hi G.k..
Section 32 cannot override the carry forward and set off section. unabsorbed dep is well within the scope of business income. hence i feel it cannot be set off against salary income, coz sec 32 does not start with 'NOTWITHSTANDING' CLAUSE.
manish
(Article Assitant)
(358 Points)
Replied 16 January 2010
Hello friends, Unabsorbed depreciation can be set off against salary, loss from business and profession cant set off against from salary, plz read section 32(2) carefully, and read amendment also which show this things clearly, even u read any tax law book, act or even u can read any teacher's book which fully cleared your doubt. But i am damn sure that unabsorbed dep can be set off against any other head even salary also.
manish
(Article Assitant)
(358 Points)
Replied 16 January 2010
Loss from business cannt be set off, but depreciation of current year or past years can be set off against salary.
machender
(student)
(190 Points)
Replied 16 January 2010
Dear G.K,
there is specific section covering this case plz read sec 71(2A)
where in respect of any assessment year, the net result of the computation under the head "Profits and Gains from Businees" is loss and the assessee ha income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income.
as unabsorbed Depreciation is a Business Loss it can't be set off against salary income.
you may be clear after reading this original text.
Max Payne
(employed)
(2574 Points)
Replied 16 January 2010
We are just trying to broaden evey one's perspective here... like i said this is a GD, not a debate... There are no rights or wrongs here.. we are learning... From an exam perspective, just say that you are taking a view that it is not allowed since the ITR also points that way, 71(2A) says something too... examiner will take your answer.. but the question is still unanswered to me.
Please friends, see all the points said by all people. They are valid in the context in which it is said.
Yes, manchender, 71(2A) says
"Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss and the assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to have such loss set off against such income"
Business loss cannot be set off against salary. that much is clear.
But 71(2A) says business loss... what is interesting is that the moment depreciation is unabsorbed; it can no longer be a part of business income. Though the concept of unabsorbed depreciation arises in the computation of PGBP, the split between loss and unabsorbed depreciation begins at that point.
The birth of unabsorbed depreciation
32(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1 (– Depreciation)) 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.
Thus we see that there is an allowance which is created for the assessee to set of in future.
Carry forward and set off of business losses.
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.
This only says that the assessee should first set off unabsorbed depreciation against business income of the year first before setting off against other heads.
Losses in speculation business. – In case you want to see what 32(2) says actually
73(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
The fact that in section 72, “Carry forward and set off of business losses.” says
“72(3) No loss (other than the loss referred to in the proviso to sub-section (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.”
Still unabsorbed depreciation is carried forward infinitely. Why? Because it is not business loss, and as per section 32(2) it can be carried for any number of previous years.
See sections
72A - Provisions relating to carry forward and set off of accumulated loss AND unabsorbed depreciation allowance in amalgamation or demerger, etc.
72AA - Provisions relating to carry forward and set-off of accumulated loss AND unabsorbed depreciation allowance in scheme of amalgamation of banking company in certain cases.
72AB - Provisions relating to carry forward and set off of accumulated loss AND unabsorbed depreciation allowance in business reorganisation of co-operative banks.
These sections describe how business loss AND unabsorbed depreciation will be allowed to be carried forward and set off.
Why did that I bring up this section? Cos if section was not there, The IT Dept would have told the assessee, see sir, only loss can be carried forward, not the unabsorbed depreciation.
This shows beyond doubt that unabsorbed depreciation is not the same as business loss.
And in my second post, I have shown how there is a provision in the act to set off unabsorbed depreciation from IFOS against salary. And there being no provision to restrict the set off of unabsorbed depreciation from business, the assessee should be given the benefit.
Countering the matching concept
The general principle is that only the expenditure which is incurred to earn income can be set off against that income. Depreciation is not an expense. It is an allowance; for the return on capital invested by business man. Technical definitions aside, unabsorbed depreciation can be set off against any income. This shows that the unabsorbed depreciation does not stick to matching of the income and expenditure. Thus to say that unabsorbed depreciation cannot be set off against on the grounds that it was not incurred to earn salary has no merit.
My idea is not to settle the issue once and for all, but maybe we can have more clarity on the concepts and loopholes.
We probably will not come across case laws, because only the ordinary individual would have both unabsorbed depreciation and salary income. As it is, individuals have little tax knowledge, and the chance that the issue went before an AO is remote.
What this started off was actually from the point that the Dept is not allowing assessee to make a claim in his return of income, and to take up the issue with proper authority to settle the issue. That’s unfair.
C.A Akash Gupta
(C.A ICWA Final CS Professional)
(242 Points)
Replied 16 January 2010
very much confusion about it because vk singhani said that unabsorbed depreciation is not a business loss hence it can e set off from salary head but as per ahuja gupta unabsorbed depreciation will not set off from salary head
Vaibhav
(CA IPCC Student)
(34 Points)
Replied 31 March 2010
Carry forward and set off of losses
Unabsorbed loss under house property, capital loss and business loss can be carried forward for 8 years. Unabsorbed speculation business loss can be carried forward only for a period of 4 years.
Loss can be carried forward and set off even if the business in respect of which it was incurred has been discontinued. However, such loss cannot be set off against income under any other head.
An exception exists in respect of unabsorbed depreciation from business which can be set off against any other source of income in the absence of business income and can be carried forward indefinitely, even if the business through which depreciation was incurred has ceased to exist.
Carry forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the status of carry forward of loss of previous years.
CAclubindia
