Section 32 of the Income-tax Act, 1961

HIGH COURT OF MADRAS Commissioner of Income-tax v. Pioneer Asia Packing (P.) Ltd. K. Raviraja Pandian and Mrs. Chitra Venkataraman, JJ. Tax Case (Appeal) No. 1423 of 2007 November 21, 2007 Section 32 of the Income-tax Act, 1961 - Depreciation - Unabsorbed depreciation - Assessment year 2000-01 - Assessee-company was engaged in business of packing and printing - It claimed set off of capital gains against brought forward unabsorbed depreciation on ground that as per amended provisions of section 32(2) with effect from 1-4-1997 cumulated unabsorbed depreciation brought forward as on 1-4-1997 could be set off against income under any heads for assessment year 1997-98 and seven subsequent years - Assessing Officer rejected assessee’s claim and brought capital gains to tax - Whether since, by amendment to section 32 with effect from 1-4-1997, deeming fiction of treating earlier years’ unabsorbed depreciation as current year depreciation was removed and such unabsorbed depreciation was to be absorbed against profit of succeeding eight years, assessee was entitled to unabsorbed depreciation brought forward as on 1-4-1997 and same could be set off against business profits - Held, yes Circular & Notifications: CBDT Circular No. 762, dated 18-2-1998 FACTS The assessee-company was engaged in the business of packing and printing. The assessee claimed set off of capital gains against the brought forward unabsorbed depreciation on the ground that as per the amendment under Finance Act, 1996 with effect from 1-4-1997, the cumulated unabsorbed depreciation brought forward as on 1-4-1997 could be set off against the taxable business profit or income under any other head for the assessment year 1997-98 and seven subsequent years. The Assessing Officer rejected assessee’s explanation and brought the capital gains to tax. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer, however, the Tribunal accepted the view of the assessee and remitted the case to Assessing Officer for verification as to how much depreciation was available upto 1-4-1997 that could be allowed against the income of the assessee. On appeal under section 260A: HELD As per the amended provisions of section 32(2) with effect from 1-4-1997, if the income from business for the assessment year is insufficient to absorb the depreciation allowance of that assessment year, the amended provision permits absorption of depreciation allowance of a business against profits and gains of any other business of the same assessment year. When the depreciation allowance of a business of the assessment year is not absorbed by any other business of the same assessment year, then the remaining unabsorbed depreciation allowance could be set off against the income under any other head, that is assessable for the same assessment year. In the event of depreciation allowance of the year is unable to be absorbed by any other business income or from income under any other head in the same assessment year, the remaining unabsorbed depreciation allowance shall be carried forward to the following year and (a) unabsorbed allowance shall be set off against the profits and gains of any business carried by a person ; (b) if the unabsorbed depreciation allowance cannot be wholly set off so, 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. The proviso provides that the business to which depreciation allowance is related to must be carried on in the succeeding year so as to allow such set off. Thus, by the amendment to section 32 with effect from 1-4-1997, the deeming fiction of treating the earlier years’ unabsorbed depreciation as current year depreciation was removed and such unabsorbed depreciation was to be absorbed against the profit of the succeeding eight years was limited to eight years. The clarification of the Finance Minister in the Parliament is also to the effect that inasmuch as the cumulated unabsorbed depreciation brought forward as on 1-4-1997 could still be set off against the taxable business profit or income under any other head for the assessment year 1997-98 and seven subsequent years vide (1996) 222 ITR (St) 36. [Speech of the Finance Minister on moving of the Finance (No. 2) Bill, 1996 in the Lok Sabha - Ed.] Circular of the CBDT No. 762 dated 18-2-1998 [(1998)145 CTR (St) 5 : (1998) 230 ITR (St) 12] also clarifies the issue. [Para 4] Therefore, the Tribunal had rightly come to the conclusion that the assessee was entitled to the unabsorbed depreciation brought forward as on 1-4-1997 and same could be set off against the business profits and in order to give effect to that finding, the case was remitted to the file of the Assessing Officer for verification as to how much depreciation was available upto 1-4-1997 that could be included in the income of the assessee. [Para 5] Therefore, the appeal was to be dismissed as no question of law, much less a substantial question of law was involved. [Para 6]