Background
Until assessment year 1997-98 (i.e. up to assessment year 1996-97), depreciation allowance of a particular year, to the extent remaining unabsorbed, was considered as the depreciation allowance of the succeeding year(s) for set-off against income under any head. As a consequence, unabsorbed depreciation had an indefinite life for set-off against any income.
With effect from assessment year 1997-98, the law was amended so that unabsorbed depreciation of a particular year was permitted to be carried forward for a period of eight years only for set-off against profits and gains of business or profession. This was the position up to assessment year 2001-02 (the period between assessment year 1997-98 and assessment year 2001- 02 is referred to as the ‘intervening period’).
The law existing prior to the intervening period was reinstated with effect from assessment year 2002-03.
The Special Bench of the Income-tax Appellate Tribunal (“the Special Bench”) has, in a recent decision1, held that the unabsorbed depreciation of the intervening period, which remained to be adjusted beyond assessment year 2001-02, can be set off only against income under the head ‘Profits and Gains of Business or Profession’ for a maximum period of eight years.
Facts
Times Guaranty Limited (“the assessee”) was engaged in the business of merchant banking. The assessment of the assessee, for assessment years 2003-04 and 2004-05, was completed by the assessing officer (“the AO”) without allowing set-off of unabsorbed depreciation determined in assessment years 1997-98 to 1999-2000 against income under the head ‘Income from other sources’. On appeal, the Commissioner of Income-tax Appeals (“the CIT(A)”) held that unabsorbed
1 DCIT v. Times Guaranty Ltd. (unreported decision – ITA Nos.
4917 & 4918/Mum/2008) Source: itatonline.org
Unabsorbed depreciation of assessment years 1997-98 to 2001-02 held not eligible for relief granted by amended section 32(2) in assessment year 2002-03
Tax & Regulatory Services
News Alert*
2 July, 2010
depreciation determined for assessment years 1997-98 to 1999-2000 be allowed to be set off against income under the head ‘Income from other sources’. The department filed an appeal before the Income Tax Appellate Tribunal (“the Tribunal”) against the order of the CIT(A).
Issue
The issue before the Special Bench was whether the unabsorbed depreciation of the intervening period could be carried forward for an undefined period for set-off against any income from assessment year 2002-03.
Revenue’s contentions
The departmental representative contended as follows:
• Despite the fact that an amendment of law took place by the Finance Act, 2001 with effect from 1 April, 2002, the assessee could not claim set-off of unabsorbed depreciation relating to the intervening period against the income under any head except ‘Profits and gains of business or profession’. This is according to the provisions applicable with effect from assessment year 2002-03.
• Section 32(2), as substituted with effect from AY 2002-03, was a deeming provision and as such its role could not have been extended beyond what was precisely mandated.
Assessee’s contentions
The assessee contended as follows:
• The law as existing on the first day of the relevant assessment year is applicable.
As set-off was being claimed in assessment years 2003-04 and 2004-05, section 32(2), as substituted with effect from assessment year 2002-03, would be applicable as per which unabsorbed depreciation of earlier years was to be considered as part of the current year’s depreciation allowance allowed to be set- off against income under any head.
• In any case, as the assessee was engaged in the business of merchant banking, the entire interest income was liable to be considered under the head ‘Profits and gains of business or profession’ and the AO’s action of assessing interest income under the head ‘Income from other sources’ was incorrect.
• Lastly, in view of difference of opinion between various benches of the Tribunal, two interpretations were possible. Therefore, relying on the judgement of the Supreme Court in the case of Vegetable Products Ltd. [1973] 88 ITR 192 (SC), the assessee insisted that a view in favour of the assessee should be followed.
Special Bench Ruling
• During the intervening period, based on the law then existing, the amount of unabsorbed depreciation allowance, which could not be set off against income under any head in the year in which such allowance was first computed, was eligible to be carried forward for set-off only against income under the head ‘Profits and gains of business or profession’ to the following assessment year(s)for no more than eight assessment years immediately succeeding the assessment year for which it was first computed.
• A further fallout of the amendment made to section 32(2) by the Finance (No. 2) Act, 1996, with effect from 1 April, 1997, was the controversy that it did not deal with the fate of the unadjusted brought forward depreciation allowance for and up to assessment year 1996-97. Fears were expressed in the Parliament on this issue as a result of which the Finance Minister clarified that the cumulative unabsorbed depreciation brought forward as on 1 April, 1997 could be set off against taxable profits or income under any head for the assessment year 1997-98 and seven subsequent years. The clarification by the Finance Minister sealed the fate of the unadjusted brought forward depreciation up to assessment year 1996-97 as available for set-off against taxable profits or income under any head for assessment year 1997- 98 and the subsequent seven years.
• The amendment made to section 32(2) by the Finance Act, 2001 was effective from 1 April, 2002. From the language of section 32(2), it is manifest that this is a substantive provision and not a procedural one. It is a settled legal position that an amendment to a substantive provision is normally prospective, unless expressly stated otherwise or it
appears to by necessary implication. Nowhere do the Notes on Clauses or the Memorandum explaining the provision of the Finance Bill, 2001 indicate that the substitution of sub-section (2) of section 32 is retrospective. It is, therefore, evident that the substantive provisions contained in section 32(2), as substituted by the Finance Act, 2001, are prospectively applicable to assessment year 2002-03 onwards.
• A deeming provision or a legal fiction cannot be extended beyond the purpose for which it was intended. As per the amendment made to section 32(2) by the Finance Act, 2001, with effect from assessment year 2002-03, the unadjusted depreciation allowance was deemed to be the current depreciation allowance for the following years. The amendment implies that the directive of the deeming provision of section 32(2) of the Act shall apply only when the assessment of the assessee from assessment year 2002-03 onwards is made, in which depreciation allowance for the current year cannot be given full effect to owing to inadequacy of profits.
• This position can be appreciated from another angle also. From the language of section 32(2) of the Act in the intervening period it can be noted that the depreciation allowance for the current year, to which full effect could not be given, has been referred to as unabsorbed depreciation allowance. As the language of section 32(2) currently does not talk of any brought forward ‘unabsorbed depreciation allowance’ or the depreciation allowance which could not be given effect to in the earlier years, there is no question of expanding the legal fiction.
• 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 principle of favourable interpretation is applicable only where there exists a logical and bona fide doubt about the interpretation of a provision and not otherwise. This principle cannot be used to misinterpret a statutory provision which is otherwise clear and brooks no doubt about its meaning or interpretation, just to give the the tax payer a benefit which the statute did not intend to give.
• The legal position of the current and brought forward unadjusted / unabsorbed depreciation allowance in the three periods as held by the Special Bench is tabulated below:
Period up to Assessment Year 1996-97
Period from Assessment Year 1997-98 to 2001-02
Period from Assessment Year 2002-03 onwards i) Current depreciation under
section 32(1) can be set off against income under any head within the same year.
ii) Such current depreciation which cannot be set off within the same year shall be deemed depreciation under section 32(1), i.e.
depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation.
i) The brought forward unadjusted
depreciation allowance for and up to assessment year 1996-97 which could not be set off up to assessment year 1996-97 shall be carried forward for set-off against income under any head for a maximum period of eight assessment years starting from assessment year 1997-98.
ii) Current depreciation under section 32(1) (for each year separately from assessment year 1997-98 to assessment year 2001-02) can be set off firstly against business income and then against
i) Brought forward unadjusted depreciation allowance for and upto assessment year 1996-97 can be set off upto assessment year 2004-05 against income under any head.
ii) Unabsorbed depreciation allowance of the intervening period can be set off only against income under the head
‘Profits and gains of business or
profession’ within a period of eight assessment years succeeding the assessment year for which it was first computed.
iii) Current
depreciation under
Period up to Assessment Year 1996-97
Period from Assessment Year 1997-98 to 2001-02
Period from Assessment Year 2002-03 onwards income under any
other head in the same year.
iii) Current depreciation for assessment years 1997-98 to 2001-02 which cannot be set off in the same year shall be carried forward for a maximum of 8 assessment years from the
assessment year immediately succeeding the one for which it was first computed, to be set off only against the income under the head ‘Profits and gains of business or profession’.
section 32(1), for each year
separately starting from assessment year 2002-03, can be set off against income under any other head. The amount of the depreciation allowance not set off shall be carried forward to the following year.
iv) The amount of the depreciation allowance not set off as per iii) above shall be deemed depreciation under section 32(1), i.e.
depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation, in perpetuity.
• As regards the assessee’s contention that the interest income needs to be assessed under ‘Profits and Gains of Business or Profession’, the Special Bench held that there is unanimity of the opinion that if the surplus funds are deposited in a bank, interest income will partake the character of income from other sources irrespective of the nature of the assessee’s business. It was never the case of the assessee that the funds were required to be deposited in the bank necessarily for carrying on its business.
Conclusion
This decision of the Special Bench will have far-reaching implications on those taxpayers which have accumulated unabsorbed depreciation of the years prior to assessment year 2002-03. On the basis of this ruling, the unabsorbed depreciation of assessment year 2001-02 and prior years would lapse. As this controversy gives rise to a question of law, it appears that the controversy will be settled only by Courts.
For private circulation only Contacts
Ahmedabad
President Plaza, 1st Floor Plot No 36 Opp Muktidham Derasar
Thaltej Cross Road, SG Highway Ahmedabad, Gujarat 380054 Phone +91-79 3091 7000
Bangalore
6th Floor, Millenia Tower 'D' 1 & 2, Murphy Road, Ulsoor, Bangalore 560 008 Phone +91-80 4079 6000
Bhubaneswar
IDCOL House, Sardar Patel Bhawan Block III, Ground Floor, Unit 2 Bhubaneswar 751009
Phone +91-674-253 2279 / 2296
Chennai
PwC Center, 2nd Floor 32, Khader Nawaz Khan Road Nungambakkam
Chennai 600 006
Phone +91-44 4228 5000
Hyderabad
#8-2-293/82/A/113A Road no. 36, Jubilee Hills, Hyderabad 500 034,
Andhra Pradesh Phone +91-40 6624 6600
Kolkata
South City Pinnacle, 4th Floor, Plot – XI/1, Block EP, Sector V Salt Lake Electronic Complex Bidhan Nagar
Kolkata 700 091
Phone +91-33 44046000 / 44048225
Mumbai
PwC House, Plot No. 18A, Guru Nanak Road - (Station Road), Bandra (West), Mumbai - 400 050 Phone +91-22 6689 1000
New Delhi / Gurgaon Building No. 10, Tower - C 17th & 18th Floor, DLF Cyber City, Gurgaon Haryana -122002 Phone : +91-124-3306000
Pune
GF-02, Tower C, Panchshil Tech Park, Don Bosco School Road, Yerwada, Pune - 411 006 Phone +91-20 41004444
For more information contact us at, [email protected]
The above information is a summary of recent developments and is not intended to be advice on any particular matter. PricewaterhouseCoopers expressly disclaims liability to any person in respect of anything done in reliance of the contents of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of PricewaterhouseCoopers, this Alert may not be quoted in whole or in part or otherwise referred to in any documents
© 2010 PricewaterhouseCoopers. All rights reserved. "PricewaterhouseCoopers", a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
