INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Erroneous and prejudicial order - Debatable issue - AO allowed set off losses in view of Supreme Court judgment

Assessee-company sought rectification of assessment order by setting-off brought forward business loss and unabsorbed depreciation against the assessed income. AO allowed the same by taking the view that it was a mistake apparent from the record. However, CIT invoked jurisdiction under section 263 by taking the view that the rectification order was erroneous in as much as it was prejudicial to the interest of Revenue. He was of view that subsequent claim made by the assessee was a debatable issue which required a hearing.Held: Expression 'profits or gains chargeable' could not be confined to profits and gains from the business whose income was being computed under section 10. Effect must be given to depreciation allowance first against the profits or gains of the particular business whose income was being computed under section 10 and if the profits of that business are not sufficient to absorb the depreciation allowance, the allowance to the extent to which it was not absorbed would be set-off against the profits of any other business and if a part of the depreciation allowance still remained unabsorbed, it would be liable to be set-off against the profits or gains chargeable under any other head and it is only if some part of the depreciation allowance still remained unabsorbed then only it can be carried forward to the next assessment year. Carried forward depreciation allowance is deemed to be part of and stands on exactly the same footing as the current depreciation for the assessment year under consideration and thus allowable as a deduction. In instant case, since the rectification order passed by AO, was in conformity of decision passed by Supreme Court in CIT v. Virmani Industries (P) Ltd., (1995) 216 ITR 607, the CIT was not justified in remanding the matter back to the AO.