Income-tax Act, 1961 — S. 32(2) — Effect of substitution of S. 32(2) w.e.f. A.Y. 2002-03 is that unabsorbed depreciation of the earlier period is allowable under the new provision, but has to be dealt with in accordance with the old provision and is subje

DCIT v. Times Guaranty Limited

During the assessment years under consideration the assessee
continued to derive income from the business of merchant banking activity. For
the assessment years under consideration the assessee claimed to set off
unabsorbed depreciation determined in A.Y. 1997-98 and A.Y. 1998-99 against
income under the head ‘Income from Other Sources’. The assessing officer did not
allow the claim.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
relying on the decision of the Supreme Court in the case of CIT v. Virmani
Industries Private Limited, (216 ITR 607) held that unabsorbed depreciation was
available to an assessee perpetually for set-off against the gross total income.

Aggrieved, the Department preferred an appeal to the
Tribunal. The President constituted a Special Bench to consider the following
question :

“On the facts and circumstances of the case, whether the
unabsorbed depreciation relating to A.Ys. 1997-98 to 1999-2000 is to be dealt
with in accordance with the provisions of
S. 32(2) as applicable for A.Ys. 1997-98 to 1999-2000 as claimed by the
Revenue or the same has to be dealt with in accordance with the provisions as
applicable to A.Ys. 2003-04 and 2004-05 as claimed by the assessee.”

(1) The amendment to S. 32(2), by the Finance Act, 2001
w.e.f. 1-4-2002 is a substantive amendment. Amendment to a substantive provision
is normally prospective unless expressly stated otherwise or it appears so by
necessary implication. The substantive provision contained in S. 32(2) as
substituted by the Finance Act, 2001 w.e.f. 1-4-2002 is prospectively applicable
to A.Y. 2002-03 onwards.

(2) S. 32(2) is a deeming provision. A deeming provision
cannot be extended beyond the purpose for which it is intended. By a legal
fiction, the amount of depreciation allowance u/s.32(1) which is not fully
absorbed against income for that year is deemed to be the part of depreciation
allowance for the succeeding year(s).

(3) S. 32(1) deals with depreciation allowance for the
current year and S. 32(2) uses the present tense to refer to allowance to which
effect ‘cannot be’ and ‘has not been’ given. This indicates that S. 32(2) speaks
of depreciation allowance u/s.32(1) for the current year starting from A.Y.
2002-03. Brought forward unabsorbed depreciation of earlier years cannot be
included within the scope of S. 32(2). If the intention of the Legislature had
been to allow such b/fd unabsorbed depreciation of earlier years at par with
current depreciation for the year u/s.32(1), u/s.32(2) would have used past or
past perfect tense and not the present tense. Further, the unabsorbed
depreciation for the period from A.Y. 1997-98 to A.Y. 1999-2000 has been
referred to as ‘unabsorbed depreciation allowance’ and given a special name and
cannot fall within S. 32(1) in A.Y. 2002-03.

(4) The effect of the amendment to S. 32(2) is that
unabsorbed depreciation of the earlier period is allowable under the new
provision, but has to be dealt with in accordance with the restrictions
contained in the old provision and is subject to the limitation of being
eligible for set-off only against business income. It can be carried forward
after a period of eight years.

(5) The legal position of current and brought forward
unadjusted/unabsorbed depreciation allowance in the three periods is summarised
as under :

A. In the first period (i.e., up to A.Y. 1996-97)

(i) Current depreciation, that is the amount of allowance
for the year u/s.32(1), can be set off against income under any head within
the same year.

(ii) Amount of such current depreciation which cannot be so
set off within the same year as per (i) above shall be deemed as depreciation
u/s.32(1), that is depreciation for the current year in the following year(s)
to be set off against income under any head, like current depreciation.

B. In the second period (i.e., A.Y. 1997-98 to 2001-02)

(i) Brought forward unadjusted depreciation allowance for
and up to A.Y. 1996-97 (hereinafter called the ‘First unadjusted depreciation
allowance’), which could not be set off up to A.Y. 1996-97, shall be carried
forward for set-off against income under any head for a maximum period of
eight A.Ys. starting from A.Y. 1997-98.

(ii) Current depreciation for the year u/s.32(1) (for each
year separately starting from A.Y. 1997-98 up to A.Y. 2001-02) can be set off
firstly against business income and then against income under any other head.

(iii) Amount of current depreciation for A.Ys. 1997-98 to
2001-02 which cannot be so set off as per (ii). above, hereinafter called the
‘Second unabsorbed depreciation allowance’ shall be carried forward for a
maximum of eight assessment years from the A.Y. immediately succeeding the
A.Y. for which it was first computed, to be set off only against the income
under head ‘Profit and gains of business or profession’.

C.    In the third period (i.e., A.Y. 2002-03 onwards)

(i)    ‘First unadjusted depreciation allowance’ can be set off up to A.Y. 2004-05, that is, the remaining period out of the maximum period of eight A.Ys. [as per (Bi) above] against income under any head.
(ii)    ‘Second unabsorbed depreciation allowance’ can be set off only against the income under the head ‘Profit and gains of business or profession’ within the period of eight A.Ys. succeeding the

A.Y. for which it was first computed.
(iii)    Current depreciation for the year u/s. 32(1), for each year separately, starting from A.Y.
2002-03 can be set off against income under any head. Amount of depreciation allowance not so set off (hereinafter called the ‘Third unadjusted depreciation allowance’) shall be carried forward to the following year.
(iv)    The ‘Third unadjusted depreciation allowance’ shall be deemed as depreciation u/s.32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation, in perpetuity.
(6)    The argument that the Department having taken a stand in Jai Ushin Ltd. [ITA No. 3412/ (Delhi)/2006] cannot argue to the contrary is not acceptable. Such limitation if placed on the Revenue will also have to apply to the assessee. Further, as a Special Bench is constituted to resolve conflict of opinion amongst different Benches, it will be too harsh to stop the assessee or the Revenue from arguing the case in the way they like.

(7)    The principle that if two interpretations are possible, then the view in favour of the assessee should be adopted cannot be applied in a loose manner so as to debar a superior authority from examining the legal validity of conflicting views expressed by lower authorities. This rule is applicable where the provision in question is such which is capable of two equally convincing interpretations and not otherwise.