To avail Section 32(2) depreciation claim it’s not necessary that business carried on in following previous year

The Serendipity Apparels Pvt. Ltd. Vs. CIT (ITAT pune))– The assessee has derived its lease rental income under the head from other sources. There is no dispute that the same is covered u/s.56(2)(iii) of the Act. This is followed by Section 57 stipulating allowability of corresponding depreciation relief u/s.32(1) & (2) of the Act. The CIT holds that the assessee’s business as it existed earlier of manufacturing is no longer in existence or the same is not being carried out in the impugned assessment year so as to claim depreciation relief u/s.32(1) & (2) of the Act. We notice from case law of Fabriquik (supra) that their lordships consider earlier decisions of (1987) 168 ITR 773 CIT vs. Deepak Textile Industries Ltd. (Gujarat) and (1995) 216 ITR 607 (Gujarat) CIT vs. Virmani Industries Pvt. Ltd. holding that in order to avail Section 32(2) depreciation claim, it is not necessary that the business carried on in the following previous  year should be the same as it was carried on the preceding previous year. And also that there are no words to that effect in the relevant statutory provision as well. The jurisdictional high court is of the view that an assessee need not carry on any business or profession for availing this benefit in the following year. The Revenue fails to point out any exception thereto. We accordingly accept assessee’s latter two arguments on merits and hold it entitled for the impugned depreciation benefit.

IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD “D” BENCH AHMEDABAD
BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER,
AND SHRI S. S. GODARA, JUDICIAL MEMBER.
ITA. No. 1244/Ahd/2014-(Assessment Year:2009-10)
The Serendipity Apparels Pvt. Ltd. Vs. CIT
By Assessee : Shri S. N. Soparkar with Urvashi Shodhan, A.R.
By Revenue : Shri Sanjay Agrawal, CIT D.R.
Date of Hearing : 28.08.2015
Date of Pronouncement : 21.10.2015

ORDER

PER S. S. GODARA, JUDICIAL MEMBER This assessee’s appeal for assessment year 2009-10, arises from order of the CIT – IV, Ahmedabad, dated 24.03.2014 passed in proceedings u/s.263 of the Income Tax Act, 1961, hereafter ‘the Act’.

2. This appeal raises the following grounds:

1. Ld. CIT erred in law and on facts in invoking provisions of section 263 of the Act seeking to revise scrutiny assessment u/s 143 (3) of the Act holding it as erroneous and prejudicial to the interest of revenue. The order of CIT directing AO to revise order that is neither erroneous nor prejudicial to the interest of revenue is unjust, untenable and against principles of Natural Justice that deserves to be quashed. It be so held now.

2. Ld CIT erred in law and on facts in revising assessment order since merged with order of ld. CIT (A) directing AO to allow set off of brought forward unabsorbed depreciation claimed by the appellant in accordance with law. Ld. CIT ought not to have revised assessment order no linger in existence and also for the fact that department accepted finding of appellate order having not preferred appeal before Hon’ble ITAT. It be so held now.

3. Ld. CIT erred in law and on facts in directing AO to quantify claim of set off of brought forward unabsorbed depreciation of business discontinued by the assessee and further to disallow the same which had been set off by AO against income from other sources. Ld. CIT failed to appreciate that AO granted set off following order giving effect to appellate order of A Y 2006/07 passed as per provisions of the Income Tax Act. Hence the order of ld. CIT deserves to be quashed. It be so held now.

4. Ld. CIT erred in law and on facts in not appreciating claim of the appellant on merits also that appellant is entitled to set off unabsorbed depreciation carried forward from discontinued business against income from any source. Ld. CIT ought to have held that AO granted set off after proper verification and correct interpretation of provisions of section 32(2) and 72 (2) of the Act further clarified by CBDT Circular dispensing with the condition of continuation of the same business for the purpose of claiming unabsorbed depreciation. It be so held now.

5. Without prejudice to challenging revisionary action of ld. CIT the set off of unabsorbed depreciation against income from other sources after giving effect to appellate order remains only to the extent of Rs.10,73,834/- since business loss of Rs. 60,79, 451/- was already set off against income for A. Y. 2007/08 & 2008/09. Ld CIT ought to have directed AO to consider Rs. 10,73, 834/- only as unabsorbed depreciation claimed for set off against income from other sources in consequential proceedings. It be so held now.”

3. The assessee company derives lease rental income from renting out machinery, plants and buildings etc. It earned lease rental income of Rs.2,09,54,980/- in the relevant previous year. The assessee filed its return on 26.09.2009 admitting nil income after claiming set off of unabsorbed depreciation and losses of Rs.87,26,902/- relating to A.Y. 2006-07. The Assessing Officer framed a regular assessment on 15.12.2011 computing its gross income as Rs.1,61,07,474/- thereby disallowing a sum of Rs.73,80,572/- qua depreciation claim of plant and machinery to be set off against assessee’s lease rental income declared under the head “other” sources. The assessee’s total income accordingly stood assessed as Rs.89,54,023/- after allowing set off of Rs.71,53,451/- on account of the above stated unabsorbed depreciation. The Assessing Officer observed in para 4.12 of assessment order that the assessee had earned income from other sources and its depreciation claimed was not allowable as assets in question had not been used for the purpose of business u/s.32(1) r.w.s. 38(2) r.w.s. 57(iii) of the Act. The assessee preferred appeal. The CIT(A) accepted its relevant grounds in order dated 10.07.2012 as under:

“2.3 Decision:

I have carefully perused the assessment order and the submissions given by the appellant. The Assessing Officer has disallowed the claim of depreciation from income from other sources u/s. 56(2)(iii) as it was held by him that the assets were not used for the purpose of business of the appellant after applying the provisions of section 32(1) of the Act r.w. section 38(2) of the Act. The appellant has submitted that the appellant has failed to appreciate the correct factual and legal position. The provisions of section 38(2) .are not applicable in the case of the. appellant and entire depreciation claim should be allowed.

To understand the controversy, it would be appropriate to reproduce, the provisions of section 57(ii), 32 (1) and 38(2).

Section 57(ii)

in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause; (c) of section 30, section 31 and sub-sections (1) and (2) of section 32 and subject to the provisions of section 38 ;

Section 32(1)

In respect of depreciation of–

(i) buildings, machinery, plant or furniture, being tangible assets

(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed–

Section 38 (2)

Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deductions under sub-clause (ii) of. clause (a) and clause (c) of section 30, clauses (i) and (ii) of section 31 and clause (ii) of subsection (1) of section 32 shall be restricted to a fair proportionate part thereof Which the Assessing Officer may determine, having regard to. the user of such building, machinery, plant or furniture for the purposes of the business or profession.

An examination of provisions of section 56(2)(ii) show that the income from letting on hire machinery, plant or furniture which is not chargeable under the head profit and-gains of business-or profession shall be charged under the head income from Other sources. Further, the provisions of section 57(ii) provides that in case of income referred, to in 56(2)(ii), the deductions u/s. 32(1) subject to the provision” of section 38 shall be allowed. Further examination of section 32(1) show that it is a deduction on account of depreciation on certain assets owned by the assessee and used for the purpose of business or profession. Section 38 restrict the depreciation, in case it / is not exclusively used for the purpose of business or profession and the deduction eligible as per the provisions of section 32 shall be restricted to a fair proportionate part. Therefore, if the appellant is able to Drove that the machinery is owned by him. it is leased out and none of the part of the machinery is used by him or not used for the purpose of business; the claim of the appellant shall be allowed.

The facts show that the appellant has leased out the plant and machinery to some other person. The income is not assessed to tax under the head business or profession and the asset, has been used for the purpose of business or profession. The claim of the appellant is, therefore, apparently allowable.

The A. O. has interpreted the provisions of section 38 to mean that the asset must be used for the purpose of assessee’s business of profession. He has interpreted that the depreciation claimed would be allowable, if the asset is owned by the appellant ‘and’ used for the purpose of assessee’s business or profession. In my opinion, the interpretation taken by the A.O. is not justified. By interpreting the provisions of section 38 in this manner, the very purpose of bringing the income from machinery, plant and furniture under the head income from other sources and providing deduction on account of depreciation on it will be defeated. The appellant has let out the machinery and the asset has been used for the purpose of business by the lessee and no part of the leased out assets have been used by the assessee for his use or for non – business purpose. It is evident that the assets have been used for the purpose of hiring by the assessee and the lesser has used it for its business. I am inclined to agree with the explanation given by the appellant for the term ‘so far as may be’ to mean that the provisions may be generally followed to the extent possible. In case of machinery leased out, it is the lessor who uses the machinery’ and not the lessee, it would, therefore, be incorrect to apply the provisions of section 38 to mean that the assessee or the lessor should use the leased out machinery. The purpose of section 38 is to restrict the depreciation to the extent it was not used for the purpose of business. In present case, it would have been applicable if it was established that the machineries were used by the lessor for some purpose other than business. By applying the provisions of section 38, the A.O. has made the provisions of section 57 (ii) redundant as in accordance with this interpretation/the claim of depreciation cannot be allowed, if the assets are used for hire or leased out.

The reliance placed by the appellant on the judgment of Honourable ITAT, Pune in the case of Kasat Textiles Pvt.Ltd. [61 TTJ 724] and the decision of ITAT, Chennai Bench in the J. Farm House [ITA No. 310 to 313/MDS/2011] also supports the above view.

In view of the above discussion, the correct interpretation of section 57(ii) would be that, to the extent, assets are leased and wholly used by the assessee, depreciation, on such assets would be fully allowable and only if such assets are also partly used by the assessee for personal purposes other than the purpose of hiring, a portion of depreciation can be disallowed. Therefore, the appellant is entitled for depreciation as claimed by him and the disallowance made by him and the disallowance made by the A.O. is directed to be deleted: The grounds of appeal are accordingly allowed.

3. The ground No.6 of the appeal relates to non-granting the set off of the brought forward depreciation as claimed by the appellant. This ground being consequential, the A.O. is directed to allow set off of brought forward depreciation in accordance with the provisions of Law. The ground of appeal is treated as allowed for statistical purpose.”

The first round of assessment proceedings seems to have attained finality accordingly.”

4. We proceed further and find that the CIT formed reasons to believe that above stated regular assessment framed in assessee’s case was erroneous causing prejudice to interest of the Revenue. He issued Section 263 notice seeking to revise the same as under:

“By an order u/s. 143(3) of the Act dated 15/12/2011, your income was assessed at Rs. 89,54,020/- as against NIL returned income. On perusal of the case records, it is seen that you have shown lease income during the year under consideration and has disclosed NIL total income in the return of income. The said NIL income was arrived at after set off of unabsorbed depreciation loss of Rs. 87,26,902/- for A.Y. 2006-07 against current year income under the head “income from other sources” and the balance unabsorbed depreciation losses of Rs. 1,64,18,767/- was carried forward to next assessment year. The Assessing Officer, in the assessment order, has allowed set off of unabsorbed depreciation for A.Y. 2006-07 amounting to Rs, 71.53.451/- and total income assessed at Rs. 89,54,023/- without considering the fact that the set off of unabsorbed depreciation of Rs. 71.53.451/- against income under the head “income other sources” was factually incorrect as per provisions of Section 72(2) of the Act.

2. Further, it is noticed from the record-that you have already stopped business activity of manufacturing of fabrics from grey yarn on job work basis and from 1st October 2006, you Have given your assets to M/s. Arvind Mills under lease agreement arid since then i.e. 1st October 2006, you have not earned any income chargeable under the Head income from business or profession as prescribed under section 14 of the Income-tax Act. The unabsorbed depreciation claimed as set off and carry forward pertains to the period prior to giving the assets on the lease & closure of manufacturing activity. Since, the assessee company has not carried on in any business during the year under consideration, the unabsorbed depreciation claimed as part of current depreciation as per Section 32(2) of the Act, is not allowable as deduction u/s.57(ii) of the Act against income under the head income from other sources.

2. From the above it is evident that the Assessing Officer has not verified the above issue and allowed your legally and factually incorrect claim of set off and carry forward of unabsorbed depreciation without application of mind and without application of correct provisions of the income-tax. Therefore, the assessment order passed by the Assessing Officer is erroneous in so far as it is ‘prejudicial to the interest of Revenue’. In this regard reliance is placed on the judgment of the Supreme Court in the case of Malabar Industrial Co. Ltd Vs CIT(A) (SC) 243 ITR 83. I, therefore, propose to revise the said order u/s. 263 of the Act.”

5. The assessee filed its reply on 18.03.2014 inter alia reiterating the above stated factual position, above stated CIT(A)’s order allowing its set off of brought forward losses and sought to invoke “merger” principle. The CIT rejects the said pleas in the order under challenge as follows:

“2.3. The submission filed by the assessee is considered vis-a-vis facts of the case and is not found tenable. On perusal of the case records, following facts emerge which are relevant to deciding the issue on hand:-

(i) It is seen that, assessee is earning its income by way of lease rent on movable and immovable properties. The gross lease rent received is Rs.2,09,54,980/- for the year under consideration against which assessee has claimed mainly two expenses namely; interest of Rs.52,30,162/- and depreciation of Rs. 73,80,572/-. The gross total income for the year under consideration has been worked out at Rs.82,95,115/- and the total income has been disclosed at Nil after claiming set off of unabsorbed depreciation for A.Y. 2006-07 to the extent of income available.

(ii) Assessee itself has treated the income from lease rent as income from other sources, but the TDS certificates themselves also reflect the nature of receipt to be ‘rent’. Similar mention is made in the tax audit report in Clause 8(b) of Form 3CD filed for the year under consideration that ‘this year the company has leased its movable and immovable assets’.

(iii) Although, the Assessing Officer disallowed assessee’ claim for depreciation for the year under consideration against income offered to tax under the head ‘income from other sources’ by invoking provisions of section 38 r.w. section 32(1) and (2) of the Income Tax Act, he failed to take into consideration the fact that the unabsorbed depreciation for A. Y. 2006-07 claimed by the assessee and allowed by him without invoking the same provisions which are attracted in this case as unabsorbed depreciation has to be treated as current depreciation as per provisions of section 32(2) of the I. T. Act, 1961 which reads as under:-

“[(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (I) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of subsection (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]”

(iv) It is not disputed by the assessee that unabsorbed depreciation pertains to the business of manufacturing of fabrics from grey yarn on job work basis which was continued up to 30/09/2005 i.e. A. Y. 2006-07 and subsequently no such business has been carried on by the assessee and entire manufacturing facility has been given on lease. In the circumstances, the unabsorbed depreciation does not pertain to the business carried on by the assessee during the year under consideration and hence not allowable as deduction u/s,57(ii) of the Act against Income under the head Income from other sources.

2.4. From the above, it Is clear that the unabsorbed depreciation claimed by assessee as deduction against Income chargeable to tax under the head income from other sources pertained to business of manufacturing of fabrics from grey yarn which in me year under consideration is no longer in existence, since the said manufacturing facility has been entirely leased out for the full period of year under consideration. Since the provisions of section 32(2) of the Act read with section 72(2) of the Act lay down that any depreciation of previous year remaining unabsorbed and carried forward to next year can be set off against income of subsequent year provided the same business is continued during the said subsequent year. Hence, on plain reading of the provisions of section 32(2) of the Act read with section 72(2) of the Act, assessee is not eligible for set off of the unabsorbed depreciation pertaining to the business of manufacturing against income from lease rent chargeable to tax under the head ‘Income from other sources’.

2.5. Now coming to various decisions cited by the assessee in favour its contention that unabsorbed depreciation of any business can be set off against any income chargeable to tax, it is found that these decisions are not applicable to the facts of the instant case since these decisions had been delivered with respect to the provisions of section 32(2) of the Act prior to the amendment; by the Finance Act, 2001 w.e.f. 1/4/2002. Similar is the situation with respect to the Circular No. 794 of 2000 of CBDT relied upon by the assessee in support of its claim. Since the said circular is in the nature of explanatory notes on amendments introduced by Finance Act, 2000, whereas as mentioned above the provisions of section 32(2) of the Act have been amended by Finance Act, 2001 w.e.f. 1/04/2002. Hence, the reliance placed by the assessee on the said circular is found to be misplaced.

3. From the above it is evident that the above it is evident that the Assessing Officer has not verified the issue regarding eligibility for claim of set off of unabsorbed depreciation of discontinued business against income chargeable to tax under the head income from other sources and thereby allowed assessee’s legally and factually incorrect claim of set off and carry forward of unabsorbed depreciation without application of mind and without application of correct provisions of the Income-tax.

3.1. Therefore, the assessment order passed by the Assessing Officer is held to be erroneous in so far as it is ‘prejudicial to the interest of Revenue’. In this regard reliance is placed on the judgment of the Supreme Court in the case of Malabar Industrial Co. Ltd Vs CIT(SC) 243ITR 83.

4. Therefore, I set aside the order dated 15/12/2011 passed u/s. 143 (3) of the Act by the Assessing Officer ACIT(OSD), Circle – 8, Ahmedabad with a direction to quantify assessee’s claim of set off and carry forward of unabsorbed brought forward depreciation of discontinued business and disallow the same which has been set off against income from other sources.”

6. The assessee raises three arguments. The first one is merger plea based on Section 263 (1)(c). Its case is that the CIT(A) has already accepted its depreciation set off claim in the above extracted findings. The CIT accordingly ought not to have invoked Section 263 revision proceedings. The assessee’s second argument is that its income from other sources in question comes u/s. 56(2)(iii) of the Act which in turn is entitled for Section 32(1) & (2) depreciation claim as per Section 57 (ii) of the Act. The assessee’s third argument challenges CIT’s finding that it had derived income from other sources only in the impugned assessment year and its business of manufacturing of fabrics from grey yan was no longer in existence since entire manufacturing stood leased out for the full period of the year under consideration. Case law of (2002) 260 ITR 207 (Gujarat) CIT vs. Fabriquip Pvt. Ltd. is quoted in support. The assessee accordingly prays for acceptance of its appeal.

7. The Revenue draws strong support from the CIT’s order under challenge passed u/s.263 of the Act.

8. We have heard both the parties and perused the case file. Relevant facts stand narrated in preceding paragraphs. The same are not repeated for the sake of brevity. We come to merits of the case first. The assessee has derived its lease rental income under the head from “other” sources. There is no dispute that the same is covered u/s.56(2)(iii) of the Act. This is followed by Section 57 stipulating allowability of corresponding depreciation relief u/s.32(1) & (2) of the Act. The CIT holds that the assessee’s business as it existed earlier of manufacturing is no longer in existence or the same is not being carried out in the impugned assessment year so as to claim depreciation relief u/s.32(1) & (2) of the Act. We notice from case law of Fabriquik (supra) that their lordships consider earlier decisions of (1987) 168 ITR 773 CIT vs. Deepak Textile Industries Ltd. (Gujarat) and (1995) 216 ITR 607 (Gujarat) CIT vs. Virmani Industries Pvt. Ltd. holding that in order to avail Section 32(2) depreciation claim, it is not necessary that the business carried on in the following previous  year should be the same as it was carried on the preceding previous year. And also that there are no words to that effect in the relevant statutory provision as well. The jurisdictional high court is of the view that an assessee need not carry on any business or profession for availing this benefit in the following year. The Revenue fails to point out any exception thereto. We accordingly accept assessee’s latter two arguments on merits and hold it entitled for the impugned depreciation benefit. Its legal plea of merger principle (supra) is rendered infructuous. The CIT’s order under challenged passed u/s.263 of the Act stands reversed accordingly.

9. This assessee’s appeal is allowed.

Pronounced in the open Court on this the 21st day of October, 2015.