there is no provision to restrict on calming unabsorbed depreciation against salary so we can set off it

no...

m still damn confuse......

DEAR KARAN

UNABSORBED DEPRECIATION IS COVERED U/S 32(2)  NOT BY SECTION 72 ANDTHE FOLLOWING PROCEDURE IS TO BE ADOPTED FOR THE PURPOSE TO SET OFF UNABSORBED DEPRECIATION

1. FIRSTLY IT IS TO BE SET OFF FROM THE CURRENT YEAR'S PROFIT

2. IN INADEQUANCY OF BUSINESS PROFIT IT IS TO BE DEDUCTED FROM OTHER HEADS EXCEPT SALARY HEAD

3. IN CASE OF INADEQUANCY OF HEADS OF INCOME (EXCEPT SALARY HEAD),IT CAN BE CARRIED FORWARD FOR UNLIMITED PERIOD. 

no...it can not b set off........

Dear Prateek,

    Can u pls specify the source of ur answer, coz, there is no such statement in the I.T.Act,1961

 Please u supply the facts…… with Sec.32(2)

[(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 year⁹, 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.]

Set off of loss from one head against income from another.

Sec.71 [(2A) 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.]

Regards

K.Ilayaraja

mr .Ilayaraja is totaly correct . as per IT act business losses cant be set of against salary income..Unabsorbed depreciation is part of business loss hence cnt be sett agianst salary.....as per sec 71 2A of Income Tax act  if in any Year  assess has business loss bt  salary Income, business losses cant be  sett off against Salary Income..

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.

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Full text of the judgement CIT vs Jaipuria China Clay Mines (P) Ltd [(1966) 59 ITR 555(SC)] is given below.

[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

JUDGMENT

S.M. SIKRI, J. —This is an appeal by certificate granted by the High Court of Calcutta against its judgment in a reference made to it under section 66 of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred to it by the Appellate Tribunal, at the instance of the assessee, was as follows:

"Whether, in the facts and circumstances of the case, the unabsorbed depreciation of the past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current year's depreciation be deducted from the total income of the previous year relevant for the assessment year 1952-53?"

The relevant facts and circumstances are as follows: The Income-tax Officer assessing the respondent, M/s. Jaipuria China Clay Mines (P.) Ltd., Calcutta hereinafter referred to as "the assessee" for the year 1952-53 computed its total income at Rs. 14,041 before charging depreciation for that year. From that figure he deducted depreciation for the year amounting to Rs. 5,350, thus computing a profit of Rs. 8,681. From this figure he deducted an equivalent amount, i.e., Rs. 8,681, in respect of losses during 1947-48, and he thus worked out the business income as nil. He then computed the dividend income at Rs. 2,01,130 and determined the total income at this figure and levied tax on it. The assessee had in its favour an unabsorbed depreciation aggregating to Rs. 76,857 and it contended before the Income-tax Officer that this sum should be deducted from the income received from dividends, which, if done, would reduce the total income to Rs. 1,32,955, but the Income-tax Officer refused to accede to this contention. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer and the assessee's appeal to the Appellate Tribunal met with the same fate. The High Court, however, accepted the contention of the assessee and answered the question referred to it in favour of the assessee.

The answer to the question depends on the interpretation of sections 6, 10 and 24 of the Act. We are concerned with the law as it stood on April 1, 1952. The scheme of the Act is that the tax is levied in respect of the total income of the previous year of every individual, Hindu undivided family, etc., and the total income consists of income under various heads such as Salaries, Interest on securities, Income from property, Profits and gains of business, profession or vocation, and Income from other sources and Capital gains. Various sections deal with how income, profits and gains under each head have to be computed. Section 10 deals with the computation of profits and gains of any business carried on by an assessee. Section 10(2) prescribes the allowances, which have to be deducted before computing the profits and gains; one of the allowances is "depreciation", and this is provided under sub-clause (vi). [Proviso (b) to section

10(2)(vi).] On this a great deal of argument has been addressed to us and it reads as follows:

"(b) Where, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years."

It may be mentioned that the words "in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners" were inserted by section 8 of the Income-tax (Amendment) Act, 1953 (25 of 1953), with effect from April 1, 1952. The next relevant statutory provision is section 24, which provides for set-off of losses in computing aggregate income. Relevant portions of section 24 are in the following terms:

"24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year . . .

Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23, in the manner applicable to a registered firm, any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm; and where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section . . . .

(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income, shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year ; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on ; but no loss shall be so carried forward for more than six years, and a loss arising in the previous years for the assessment for the years ending on the 31st day of March, 1940, the 31st day of March, 1941, the 31st day of March, 1942, the 31st day of March, 1943, and the 31st day of March, 1944, respectively, shall be carried forward only for one, two, three, four and five years, respectively:

Provided that . . .

(b) where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of this sub-section;

(c) nothing herein contained shall entitle any assessee, being a registered firm, to have carried forward and set off any loss which has been apportioned between the partners, under the proviso to sub-section (1), or entitle any assessee, being a partner in an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23 in the manner applicable to a registered firm, to have carried forward and set off against his own income any loss sustained by the firm ; . . ."

Mr. Sastri, learned counsel for the revenue, urges that depreciation, although a permissible allowance under section 10(2) of the Act, serves to compensate an assessee for the capital loss suffered by him by way of depreciation of his assets. He says that if it had not been expressly allowed as allowance, it would have been treated as capital expenditure and would have been excluded. He further says that depreciation is a charge on the profits of a business. Bearing these two factors in mind, he urges that the expression "loss of profits and gains" in section 24(1) does not include any deficiency resulting from depreciation and, therefore, an assessee is not entitled to ask the department to include the depreciation in the amount which can be set off against income, profits and gains under other heads such as income from property or dividends. Mr. Rajagopala Sastri for the assessee relies on the history of the legislation and a number of authorities to support the judgment of the High Court.

Apart from authority, looking at the Act as it stood on April 1, 1952, it is clear that the underlying idea of the Act is to assess the total income of an assessee. Prima facie, it would be unfair to compute the total income of an assessee carrying on business without pooling the income from business with the income or loss under other heads. The second consideration, which is relevant is that, the Act draws no express distinction between the various allowances mentioned in section 10(2). They all have to be deducted from the gross profits and gains of a business. According to commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in the accounts. If the profits are not large enough to wipe off depreciation, the profit and loss account would show a loss. Therefore, apart from proviso (b) to section 10(2)(vi), neither the Act nor commercial principles draw any distinction between the various allowances mentioned in section 10(2); the only distinction is that while the other allowances may be outgoings, depreciation is not an actual outgoing.

Bearing these two considerations in mind, if one looks at the language of proviso (b) to section 10(2)(vi), the first question that arises is: What is the meaning of the expression "in the assessment of the assessee or if the assessee is a registered firm, in the assessment of the partners, full effect cannot be given to any such allowance in any year?" It would be noted that the words used are "in the assessment of the assessee or the assessment of the partners". Taking the case of the partners of a registered firm, the assessment must be their individual assessments, i.e., assessments in which the profits from the firm and other sources are pooled together. The legislature is clearly assuming that effect can be given to depreciation allowance in the assessment of a partner; the only way effect can be given in the assessment of a partner is by setting it off against income, profits and gains under other heads. The learned counsel for the revenue tried to meet this inference by suggesting that what the legislature contemplated was an assessment of those partners who were carrying on other business. But in our opinion this suggestion is unsound. What would happen if a partnership consists of four partners, two carrying on other business and two carrying on no other business, Mr. Sastri was unable to explain. Now, if this is the inference to be drawn from these words, it is quite clear that the 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 section 10.

It appears that the legislature accepted the interpretation placed by various High Courts on the Act as it stood before it was amended by Act 25 of 1953. In 1930, the Lahore High Court in Karam Ilahi Muhammad Shafi v. Commissioner of Income-tax¹ held that depreciation on buildings and machinery can be set off against gains and profits accrued to the owner of those buildings and machinery from other sources such as rental from house property during the year in question. In A. Suppan Chettiar & Co. v. Commissioner of Income-tax² the Madras High Court held that "where the profits and gains of a business are insufficient to cover the full depreciation allowance under section 10(2)(vi) of the Income-tax Act on the machinery, plant, etc., used for the purposes of that business, the excess depreciation can be set off against the profits and gains of other business or from other sources." In Ballarpur Collieries v. Commissioner of Income-tax³ the court of the Judicial Commissioner, Nagpur, held that the partners of the assessee, a registered firm owning collieries, were entitled to set off depreciation against the other income of the members of the firm under section 24 of the Income-tax Act. In Laxmichand Jaiporia Spinning and Weaving Mills, In re⁴ the East Punjab High Court arrived at the same conclusion. The High Court further held that "the object of proviso (b) to sub-section (2) of section 24 is only to give preference to ordinary losses incurred by an assessee in regard to set-off over the loss which comes under clause (b) of the proviso to sub-section (2)(vi) of section 10. Where set-off is to be given for different kinds of losses other than those due to depreciation, such losses must be set off first and then the loss due to depreciation." In Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax⁵ the Bombay High Court understood the effect of proviso (b) to section 10(2)(vi) and proviso (b) to section 24(2) as follows:

"If a business was worked at a loss in any particular year, the loss can be set off against any other head under section 24(1); if the loss cannot be fully set off then it can be carried forward to the next year, but then it can be only set off against the profits of that particular business and that set-off would be permissible to the assessee for a period of six years only. After six years the right to set off would come to an end. But in the case of depreciation and to the extent that the loss was caused by depreciation being not fully absorbed there would be no limit to the carrying forward of that depreciation, and that depreciation can be set off at any time so long as the business showed a profit in the future."

After the amendment, the same view has been taken in Commissioner of Income-tax v. Ravi Industries Ltd.⁶ by the Bombay High Court and in Commissioner of Income tax v. Girdharlal Harivallabhadas Mills Co. Ltd.⁷ by the Gujarat High Court. The only contrary view which has been placed before us is that of the Madras High Court in Commissioner of Income-tax v. B. Nagi Reddy⁸, but we are unable to agree with the view expressed in the last case. The Madras High Court observed at page 196 as follows:

"In our opinion, the statute leads one to the irresistible conclusion that the depreciation allowance must be a charge only on the profits. The limit of the charge is the limit of the profits. The non-existence of profits will prevent the absorption of the allowance. There is no warrant for taking in and absorbing the depreciation allowance in the profit and loss account to work out a loss. If that were the true position, the provision for carrying forward the unabsorbed depreciation allowance would be wholly redundant, if not meaningless, in view of the specific provision for the carrying forward of losses."

The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forward only for six years under section 24(2), the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that the legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in section 10 (2)(vi) and in a different manner, section 24(2) only deals with losses other than the losses due to depreciation.

In conclusion, we agree with the High Court that the question referred to it should be answered in favour of the assessee. In the result, the appeal fails and is dismissed with costs.

Regards

K.Ilayaraja

Contrary view…..

Winman saral Tax says - In our view, unabsorbed depreciation can be setoff against salary income.

Source : Winman saral Tax.

Regards

K.Ilayaraja.