Depreciation – Carrying on of business – Set-off of unabsorbed depreciation of previous years – Section 32(2) and 41(2) – A. Y. 2002-03 – Where once amount realised by assessee by sale of building, plant and machinery was treated as income arising out of profits and gains from business by virtue of section 41(2) notwithstanding fact that assessee was not carrying on any business during relevant assessment year, provision contained in section 32(2) would become applicable and, consequently, set-

The appellant is a Public Limited Company manufacturing cement in a factory situated at Mathodu village, Hosadurga Taluk. In the relevant year, i.e. A. Y. 2002- 03, the assessee had not carried on any business. In the relevant year the assessee had received amounts on sale of building, plant and machinery and as a result an amount of Rs. 34,01,644/- was treated as income from business u/s. 41(2). However, the assessee’s claim for set off of the brought forward unabsorbed depreciation was rejected. This was upheld by the Tribunal.

On appeal by the assessee, the Karnataka High Court reversed the decision of the Tribunal and held as under:

“In computing the income from business, the provisions of Section 32 as well as Section 41 of the Act would be applicable. Therefore, once the amount realized by the assessee by sale of building, plant and machinery is treated as income arising out of the profits and gains from the business by virtue of Section 41(2) of the Act, notwithstanding the fact that the assessee was not carrying on any business during the relevant assessment year, the provision contained in Section 32(2) become applicable and consequently, the setoff has to be given for unabsorbed depreciation allowances of previous year brought forward in terms of that provision.”