TREATMENT OF UNABSORBED DEPRECIATION

TREATMENT OF UNABSORBED DEPRECIATION-CARRIED FORWARD UPTO ASSESSMENT YEAR 1997-98

1. Statutory scheme-Section 32(2) as existing upto assessment year 1996-97

The provisions of section 32(2) which are effective upto assessment year 1996-97 are in effects as under:

The allowance of depreciation if could not be given effect to in full or part, due to non availability of the profits and gains, chargeable, the amount of depreciation allowance which could not be given effect to under clause (ii) of sub-section (1) of section 32, shall be added to the amount of allowance of depreciation for the following previous year and shall be deemed to be the allowance for that previous year and so on for the succeeding previous years.

2. Changes brought by the Finance (No. 2) Act 1996

According to the substituted section 32(2) by the Finance (No. 2) Act 1996. 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 business or profession carried on by him and assessable for that assessment year;

(ii) if the unabsorbed depreciation allowance cannot under clause (i), the amount not so set off shall be set off from any other head, if any, assessable for that assessment year.

(iii) if the unabsorbed depreciation allowance cannot be wholly set under clause (i) and clause (ii), the amount of allowance not set off shall be set off shall be carried forward to the following assessment year, and

(a) it shall be set off against the profits and gain, if any, of any business 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 that eight assessment year immediately succeeding the assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: (Providing that the business or profession for which the allowance was originally computed continue 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 the entire 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 1986).

3. The difference between both provisions

On reading the provisions of section 32(2) as it stood prior to the amendment made by the Finance (No. 2) Act, 1996, i.e., operative upto and including assessment year 1996-97, it is seen that where, in the assessment of assessee, full effect cannot be given to the depreciation allowance 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 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 effect of these provisions is that the unabsorbed depreciation for a particular year becomes, by legal fiction, part of the depreciation allowance for the succeeding year and so on without any time limit. What section 32(2) as operative upto and including assessment year 1996-97 contemplates is that current depreciation is deductible, in the first place, from the income of the business to which it relates; if such depreciation amount is larger than the amount of the profits of that business, then such process (sic. Excess) is deductible from the profits or gains of any other business/es, if any, carried on by the assessee, and if a balance is left even thereafter, that comes for absorption from the income from any source under any of the other heads of income during that year, and in case there is still a balance left over, it is to be treated as unabsorbed depreciation and it shall be carried forward to the next succeeding year, and where there is current depreciation for such succeeding year, the unabsorbed depreciation brought forward from earlier year is added to the current depreciation for such succeeding year and is deemed by legal fiction, a part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed, depreciation becomes the depreciation allowance for succeeding year. In this view of the matter, section 32(2) contained an independent provision for setting off unabsorbed depreciation carried forward from a preceding year. The unabsorbed depreciation can be allowed to be carried forward and set off against income from other sources in a subsequent year notwithstanding the fact that the business in respect of which it arose ceased to exist in the year of such set off. However, certain restrictions have been put, for and from assessment year 1997-98 by an amendment made by the Finance (No. 2) Act, 1996, on allowance of unabsorbed depreciation as the old section 32(2) operative upto assessment year 1996-97 has been substituted. According to section 32(2) as substituted by the Finance (No. 2) Act, 1996 with effect from 1.4.1997, the unabsorbed depreciation of earlier years can be carried forward to the following assessment year and can only be set off against the profit and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year and following assessment year not being more than eight assessment year immediately succeeding the assessment year for which the aforesaid allowance was first computed. However, for availing the benefit of carried forward of unabsorbed depreciation, it is essential that the business or profession for which the allowance was originally computed continued to be carried on by the assessee in the previous year relevant for that assessment year as stipulated in the 1st proviso to section 32(2)(iii) as substituted with effect from 1.4.1997. In the context, it may be observed that amended section 32(2) as substituted by the Finance (No. 2) Act, 1996 (with effect from 1.4.1997) has been substituted by the Finance Act, 2001, with effect from 1.4.2002 and status quo ante has been restored with effect from assessment year 2002- 03. The new sub-section (2) of section 32 as substituted by the Finance Act, 2001 with effect from 1.4.2002 has restored the sub- section (2) of section 32 as it stood in the assessment year 1996-97. In other words, the restrictions imposed by the Finance (No. 2) Act, 1996 with effect from 1.4.1997 in the matter of set- off of unabsorbed depreciation has been dispensed with by substituting the section 32(2) by the Finance Act, 2001 with effect from 1.4.2002 and status quo ante i.e., status quo of section 32(2) as existed prior or the amendment made by Finance (No. 2) Act, 1996 with effect from 1.4.1997 has been restored.

4. Latest decision

In Asstt. CIT Vs. Poddar Project Ltd. (2005) 275 ITR (Kol). Unabsorbed depreciation pertaining to assessment years 1995-96 and 1996-97 had been claimed to be set off against the current year's income under the head "Income from house property". This assessee's claim was rejected by the AO in view of the section 32(2) as amended by the Finance Act, 1996 by observing that the unabsorbed depreciation pertaining to the assessment years 1995-96 and 1996-97 could not be set-off against income under any head other than business incomes, in as much as, the amended provisions of section 32(2)(iii)(a) are very clear. According to section 32(2) as substituted by the Finance (No. 2) Act, 1996 with effect from 1.4.1997, the unabsorbed depreciation of earlier years can be carried forward to the following assessment year and can only be set off against the profit and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year and following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed. However, prior to that unabsorbed depreciation could have been carried forward for infinite period and could have been set off against income under any head of income. The controversy before Tribunal was whether the depreciation allowance allowed to the assessee upto and inclusive assessment year 1996-97 which remained unabsorbed and brought forward to the assessment year 1997-98 will continue to set off as per the pre-amended provisions of section 32(2) as stood prior to 1.4.1997 and it is only the current depreciation allowance for the assessment year 1997-98 onwards which remains unabsorbed will be governed by the amended provisions of section 32(2) as substituted by the Finance (No. 2) Act, 1996 with effect from 1.4.1997.

In this case it was held by the Kolkata Bench of the Tribunal that it is pertinent to note that Circular No. 762 dated 18.2.1998 explaining the amendments made by the Finance (No. 2) Act, 1996, has also confirmed the assurance by pointing out that the unabsorbed allowance upto the assessment year 1996-97 will be added to the allowance of 1997-98 and that the limitation of 8 years start only from assessment year 1997-98. It also follows that the limitation against set off of against other income should also be applicable for unabsorbed depreciation after this period of eight years as has been clearly indicated in the Finance Minister's speech but not so clearly brought out in the said Circular.

On the basis of the Finance Minister's speech and the CBDT Circular, one may draw the following conclusions: (i) Unabsorbed depreciation related to the earlier years upto and including assessment year 1996-97 and brought forward from those earlier years to the assessment year 1997-98 can be set off against the profits and gains of a business or profession or any other income of the assessee for the assessment year 1997-98. If it is not possible to set off the entire amount of unabsorbed depreciation brought from earlier years upto and including assessment year 1996-97, the unabsorbed amount can be carried forward to the next 7 assessment years for being set off against the profits and gains of a business or profession or income under any other head. (ii) If full effect cannot be given to the current depreciation allowance of the assessment year 1997-98, and subsequent assessment years, it can be carried forward for being set-off only as per amended provisions of section 32(2) substituted with effect from 1.4.1997 by the Finance (No. 2) Act, 1996.

To remove the ambiguity in interpreting the amended provision of section 32(2) (with effect from 1.4.1997) and to ascertain the object and purpose in amending section 32(2), the speech made by the Finance Minister can certainly be referred to, in as much as, this is in accord with the recent trend in juristic thought not in western countries but also in India that interpretation of statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible.

Having regard to the clarification given, by the Finance Minister in his speech delivered while moving the Finance (No. 2) Bill, 1996 in the Lok Sabha and giving harmonious meaning and reasoning to the amended section 32(2) brought into effect on and from 1.4.1997.

The depreciation allowance allowed to the assessee upto, and assessment year 1996-97 which remained unabsorbed and is brought forward to the assessment year 1997-98 and subsequent assessment years upto assessment year 2004-05 can be set-off as per pre- amended section 32(2) and, consequently it can be set-off against taxable business profits or income under any other hand for assessment year 1997-98 and seven subsequent assessment years. Therefore, the assessee's claim, in the present case, to set-off unabsorbed depreciation brought forward assessment years 1995-96 and 1996-97 against income under "House Property" assessment year 1998-99 is to be allowed, and, order accordingly. Consequently, the issue involved in the Cross Objection filed by the assessee is decided in favour of the assessee.