INCOME TAX ACT, 1961

Depreciation- Unabsorbed depreciation-Set-off against current year's income-Period of 8 years

Assessee sought to adjust carry forward unabsorbed depreciation for the period prior to assessment year 1996-97 in the relevant assessment year against the income from house property and short-term capital gain. AO was of opinion that as the unabsorbed depreciation up to assessment year 1996-97 became current depreciation of assessment year 1997-98 and got merged with depreciation of assessment year 1997-98 and since there was no provision in the substituted provision with effect from assessment year 1997-98 for set off of unabsorbed depreciation against any other income, the assessee was not entitled to adjust the unabsorbed depreciation with other income in the relevant assessment year. As regards the provisions, which got substituted with, effect from assessment year 2002-03 reinstating provisions, which were available up to assessment year 1996-97. AO also held that same were available only for depreciation arising in current year and to be carried forward to the subsequent years, therefore, the assessee was not entitled to take benefit of reinstated provisions of 2002-03. Held:As per the provisions effective from 1997-98, depreciation arising in the relevant year could be carried forward to the next year and could be set off only against the business income, those provisions got substituted by new provisions with effect from assessment year 2002-03 and in the new reinstated provisions, there is no express mention about treatment of the earlier years unabsorbed depreciation against any other head of income. AO had treated the unabsorbed depreciation of 1996-97 as a current depreciation of 1997-98 and deprived the assessee benefit of set off against any other head of income whereas the earlier provisions had been again reinstated from assessment year 2002-03. The assessee could not be put to disadvantage of [not allowing] carry forward and set off of unabsorbed depreciation against other income which was available to him up to assessment year 1996-97. Since unabsorbed depreciation pertained to the assessment years 1996-97 and before, therefore, as per the various provisions of law relating to carry forward depreciation, the order of CIT (A) to set off unabsorbed depreciation against other income was to be upheld but in view of the fact that by virtue of provisions effective from assessment year 1997-98, the assessee was entitled to carry forward only up to 8 assessment years. In the present case, unabsorbed depreciation up to assessment year 1996-97 had become current depreciation of assessment year 1997-98 which should be available for set off for eight years and as the relevant assessment year fell within a period of 8 years, hence, unabsorbed depreciation up to assessment year 1996-97 should be set off against other income of assessee in the relevant assessment year.

Income Tax Act, 1961 Section 32

Case Law Analysis:Referred:K.P. Varghese v. CIT [1981] 131 ITR 597/ 7 Taxman 13 (SC) (para 7).

Decision: In favour of Assessee.
A.Y. 2002-03

ITO v. Keshwa Enterprises (P.) Ltd.