Case Law Details

Case Name : Mohan Bottling Co. Pvt. Ltd. Vs ASSTT Commissioner of Income Tax (ITAT Chandigarh)
Appeal Number : ITA No.586/Chd/2011
Date of Judgement/Order : 27/02/2013
Related Assessment Year :
Courts : All ITAT (4278) ITAT Chandigarh (105)

Computing provisions of one head of income can be used for the purpose of computing income under that head only and cannot be used for computing income under another head. Therefore, remission of particular income u/s 41 can be taxed only under the head “business income” and this provision can not be read for computing the income under the head “income from other sources and we are of the opinion that remission of interest by the bank can not be charged to tax as income from other sources. Therefore, we do not find any force in the submissions of the ld. DR for the revenue that first appellate authority has rightly invoked S. 41 while computing income under the head ‘income from other sources’. Therefore, in our opinion, the amount of remission on account of interest cannot be charged as income under the head ‘income from other sources’ because there is no provision for the same. In any case this is only notional income because no deduction was ever claimed by the assessee and income was reflected just to square up the account of the bank.

As far as taxability of this amount u/s 41 is concerned, it was contended that the assessee has not claimed deduction on account of interest and the same has not been allowed by the Department. However, perusal of the assessment order or appellate order do not show that there is a finding to this effect. Therefore, we remit this issue back to the file of Assessing Officer with the direction to verify whether any deduction on account of interest towards bank was claimed and allowed and then decide the issue in accordance with law.

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘A’ CHANDIGARH

ITA No.586/Chd/2011 – Assessment Year: 2001-02

MOHAN BOTTLING CO PVT LTD

Vs

ASSTT COMMISSIONER OF INCOME TAX

ITA No.587/Chd/2011 -Assessment Year: 2001-02

PURE DRINKS (CALCUTTA) PVT LTD

Vs

ASSTT COMMISSIONER OF INCOME TAX

ITA No.588/Chd/2011 -Assessment Year: 2001-02

PURE DRINKS (BOMBAY) PVT LTD
Vs

ASSTT COMMISSIONER OF INCOME TAX

ITA No.589/Chd/2011 -Assessment Year: 2001-02

PURE DRINKS (NEW DELHI) PVT LTD
Vs

ASSTT COMMISSIONER OF INCOME TAX

ITA No.590/Chd/2011 -Assessment Year: 2001-02

PUNJAB BEVERAGES PVT LTD
Vs

ASSTT COMMISSIONER OF INCOME TAX

ITA No.591/Chd/2011- Assessment Year: 2001-02

SOUTHERN BOTTERS PVT LTD
Vs

ASSTT COMMISSIONER OF INCOME TAX
T R Sood, AM and Sushma Chowla, JM

Dated: February 27, 2013

ORDER

Per: T R Sood:

These appeals are directed against the order passed by the ld. CIT(A), Patiala dated 18.3.2011. All these appeals involve common issues, therefore, these appeals were heard together and are being disposed off by this common order.

2. During the course of hearing the ld. counsel of the assessee pointed out that he does not wish to press appeal in ITA No.586/Chd/2011 and accordingly he has made an endorsement on the grounds of appeals to this effect. The ld. DR for the revenue has no objection, therefore, this appeal is dismissed as not pressed.

3. The ld. counsel of the assessee, Shri M.S. Syali, Sr. Advocate submitted that principally following issues are involved in all the appeals:

1. Reopening of the assessment

2. Confirmation of addition on account of income arising out of waiver of interest by the Banks under the head “income from other sources”.

3. Rejection of claim for setting off of/adjustment of unabsorbed depreciation of earlier years.

4. Levy of interest u/s 234A and 2348

Reopening of the assessment

4. As discussed earlier common disputes are involved in these appeals, therefore, for adjudication, the facts of ITA No. 587/Chd/2011 were considered with the consent of the parties.

5. Brief facts in respect of first issue are that the assessment was reopened by recording following reasons:

“In this case, return of income had been filed on 11.2.2002 in response to notice u/s 142(1) issued on 18.1.2002, declaring nil income. The said return was accompanied by letter dated 30.1.2002 in which it was stated that the employees of the Pure Drinks Group could, not be paid salaries on time and such employees had resorted to Gherao of the management and had taken illegal and unauthorized physical possession of the factory premises and the group central offices situated at Sardar Mohan Singh Building, Cannaughat Lane, New Delhi and as a result complete working of the group from the central offices had been suspended as it was not possible to enter in the building and furnish information as may be sought for by the Assessing Officer. It had further been stated that the assessee, therefore, declared nil income since no business had been conducted by the assessee company during the relevant Assessment year.

The said return had been declared as invalid as per the provisions of section 139(9) as deficiencies pointed out vide letter dated 26.8.2002 & 7.3.2007 regarding non furnishing of profit and loss account, balance sheet, director’s report etc. with the return were not removed.

Mis Pure Drinks (Calcutta) Ltd. one of the assessee of this group of cases having the same address and operating from the same group central offices situated at Sardar Mohan Singh Building, Cannaught Lane, New Delhi had submitted belated return for the Assessment year 2002-03 on 8.3.2007 in which corresponding figures relating to the Financial Year ending on 31.3.2001 had also been given and according to these figures, income of Rs. 3,37,74,7461- has been shown on account of interest relief against loan settlement. This goes to show that this group of companies had made one time settlement with loan creditors and had got interest relief. The assessee-company has thus, failed to disclose such interest relief in its return of income for the Assessment year 2001-02. I have, therefore, reason to believe that income of more than Rs.1 lakh has escaped assessment in this case for the Assessment year 2001-02.”

The assessee took objections to the reopening of the assessment by mainly stating that a notice u/s 142(1) dated 18.1.2002 was issued and the assessee had filed a letter dated 30.1.2002 attaching return of income declaring nil income. Later on a letter dated 7.2.2003 was issued to show cause as to why the return filed be not treated as invalid u/s 139(9). In response to which Mr.Vishawnathan, Manager Taxation appeared on 27.3.2003 and again explained the reasons why various documents could not be filed. Thereafter vide order dated 27.3.2003 returns filed, were held to be invalid. Since no assessment has been made in respect of returns filed u/s 142(1), no action can be taken by the Department by issuing notice u/s 148. Reliance was placed on some case laws. The Assessing Officer did not accept these objections by observing that return filed in response to notice u/s 142(1) was only for the sake of filing of the returns, without any documents despite the assessee having assets and liabilities. Without any document or detailed copies of account, no one could have proceeded to do an assessment and that is why a notice u/s 139(9) was issued. It was further noticed that the case laws cited by the assessee are distinguishable on facts and therefore, notice u/s 148 was validly issued.

6. On appeal, the submissions made before the Assessing Officer were reiterated and the ld. CIT(A) rejected the objections raised by the assessee vide paras 4.7, 4.8 and 4.9 of his order and upheld the action of the Assessing Officer in reopening the assessment. Relevant paras read as under:

“4.7 In view of the facts and circumstances of the case and rival submissions of both the Assessing Officer in his remand report and written submissions of the counsel it is seen that the appellant did not file a return voluntarily u/s 139(1) and the Assessing Officer was within his rights to call for a return u/s 142(1). A return filed u/s 139(1) is a voluntary return and is in contradistinction to a return filed in response to notice u/s 142(1). This is a specific notice served upon the appellant calling for a return of income. Once a return was filed by the appellant in response to the notice u/s 142(1) then the Assessing Officer acted upon the same noticed certain discrepancies and called upon the appellant to rectify the defects within a prescribed period. Once the appellant failed to rectify the defects then the Assessing Officer was within his rights to treat the same as invalid. The position then was as if the appellant had not filed any return at all. The question whether the return filed in response to notice u/s 142(1) was in substance and effect in conformity with or according to the intent and purposes of the Act has to be seen from the facts in each case. The defects pointed out by the Assessing Officer were such which could not be cured therefore, such a defective return had to be treated as invalid.

4.8 The notice u/s 148 requiring the appellant to file a fresh return carries with it an obligation to file fresh return in pursuance of the said notice. In case the appellant feels that the earlier return should be treated for the purposes of reassessment, he may inform the Assessing Officer of his decision to treat his previous return as return filed in response to the notice and the previous return shall be treated as the fresh return submitted in response to the notice. (Ref: Tiwari Kanhiya Ltd V CIT (1985) 154 ITR 109 (Raj), Iqbal Singh Atwal V CIT (1984) 147 ITR 599 (Cal). In the present case also the appellant himself informed the Assessing Officer of his offer to treat the earlier return showing ‘nil’ income as a fresh return in response to the notice u/s 148. The condition precedent for proceeding u/s 147/148 is that the Assessing Officer should have reason to believe that income has escaped assessment nothing more. It is not necessary that assessment should have been finalized u/s 143(3) before it can be reopened. The term escaped assessment includes both non-assessment as well as under assessment. When a person is not assessed to tax though he is liable to be taxed the tax escapes assessment (Ref: Punjab Tractors Ltd V JCIT (2001) 254 ITR 242 (PH). Further in view of the retrospective amendment made by Finance Act 2006 to section 148, the Assessing Officer has been authorized to issue notices u/s 142(1) in all cases where no returns have been filed. Now the dichotomy between a notice issued u/s 142(1) and a notice issued u/s 148 in respect of non-filers (all those who have not filed returns voluntarily before issue of notice) has been removed.

4.9 In view of the discussion supra there is no force in the contentions of the counsel of the appellant and the action of the Assessing Officer in issuing notice u/s 148 and assuming jurisdiction u/s 147 are upheld.”

7. Before us, the ld. counsel of the assessee submitted that returns filed in response to notice u/s 142(1) declaring nil income was still pending with the Department and therefore, no notice u/s 148 could have been issued. He then referred to the reasons recorded by the Revenue and pointed out that reliance has been placed mainly on the return for next year wherein the assessee had shown income of Rs.3,37,74,746/- on account of interest which was received on waiver of loan. There was no indication or material before the Assessing Officer to reach the conclusion that such waiver would amount to escapement of income. After all there has to be a live nexus between the material and the belief that the income has really escaped the assessment and in this regard he relied on the decision of Hon’ble Supreme Court in case of ITO V. Lakhmani Mewal Das, 103 ITR 437 (SC). He also submitted that reopening was mainly on the basis of change of opinion which is not permissible under the law and in this regard he relied on the decision of Hon’ble Supreme Court in case of CIT V. Kelvinator of India Ltd., 320 ITR 561.

8. On the other hand, the ld. DR for the revenue while supporting the impugned order submitted that since no assessment has been framed against the returns filed earlier and therefore, no opinion can be said to have been formed by the Assessing Officer and therefore, the case was covered by the decision of Hon’ble Supreme Court in case of ACIT V. Rajesh Jhaveri Stock Brokers P Ltd., 291 ITR 500 (SC).

9. We have heard the rival submissions carefully. Section 147 reads as under:

“147. If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to ill assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceeding under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

[Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year.

[Provided [also] that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.]

Explanation 1………………………..

Explanation 2………………………..

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

[(ba)………………………………….

(c)…………………………………….

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(i)……………………………………..

(ii)…………………………………..

(iii)…………………………………

(iv)………………………………..

[(d)……………………………….

[Explanation 3…………………….


[Explanation 4…………………….

A plain reading of the above provisions clearly shows that what is required for reopening Of an assessment is that the Assessing Officer should have some reasons to believe that income has escaped assessment. Explanation 2 to the Section further provides that in certain cases income would be deemed to have escaped assessment. In the case before us, returns which were filed in response to the notice u/s 142(1) was without any supporting document and therefore, they were treated invalid u/s 139(9). Therefore, it is clear that no opinion can be said to have been formed on those returns and therefore the argument that this is change of opinion, is not available to the assessee. Recently this issue has been discussed in detail by the Hon’ble Delhi High Court (FB) in case of CIT V. Usha International Ltd, 348 ITR 485 (Delhi) (FB) where one of the question was what is meant by the term of change of opinion. Hon’ble Court discussed the issue in detail and also considered the decision of Hon’ble Supreme Court in case of CIT V. Kelvinator of India Ltd., 320 ITR 561  and it was opined that wherever no opinion was formed in the original proceedings then same would not be covered under the term ‘change of opinion”. In this regard it was ultimately observed that re-assessment proceedings can be validly initiated if the original return of income is processed u/s 143(1) and no scrutiny assessment is under taken. Recently this issue also came up for consideration of the Hon’ble Punjab & Haryana High Court in case of Arun Kumar Goyal V CIT, ITA No. 54 of 2012 (order dated 21.11.2012). in this case it was contended that the decision of Rajesh Jhavery (supra) has already been distinguished by the Hon’ble Punjab & Haryana High Court in case of CIT V. Paramjit Kaur, 311 ITR 38 (PH). Hon’ble High Court considered the provisions of section 147 and observed at paras 12 to 14 as under:

“12. There is, however, a sea-change after the amendment in Section 147 for determining jurisdictional scope for re-assessment of the escaped income. The Hon’ble Supreme Court in Rajesh Jhaveri’s case (supra) has explained and laid down that under the substituted Section 147 {‘existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment”. It was further held that “so long as the ingredients of Section 147 are fulfilled, the Assessing Officer is free to initiate proceedings u/s 147 and failure to take steps u/s 143(3) will not render the Assessing Officer powerless to initiate re-assessment proceedings even when intimation u/s 143(1) had been issued.”.

13. The expression “reason to believe” thus cannot be restrictively construed to say as if the Assessing Officer is obligated firstly to finally ascertain the factum of escaped income on the basis of admissible evidence and then only to issue shown cause to the assessee. The Hon’ble Supreme Court held that the final outcome of the proceedings initiated u/s 147 is not relevant and what is of relevance is the existence of reasons to make the Assessing Officer believe that there has been underassessment of the assessee’s income for a particular year.

14. It is explicit from the post-amendment decisions cited above that once there are reasons for the Assessing Officer to believe, whether such reasons originate out of the record already scrutinized for otherwise, he shall be within his competence to initiate the re-assessment proceedings. The formation of belief by the Assessing Officer must always be tentative and not a firm or final conclusion as the latter will negate the very object of giving an opportunity of hearing to the assessee as it will amount to post-decisional hearing.”

10. From the above it emerges that only requirement for reopening the assessment is that there should be a reason to believe that income has escaped assessment and such reasons should be prima facie reason and there is no requirement that the Assessing Officer should finally ascertain the factum that the escapement of income at the stage of issuing of notice itself. Even Hon’ble Supreme Court in case of Raymond Woolen Mills V ITO, 236 ITR 34  has clearly held that at the stage of reopening of assessment what is required is that there should be some prima facie material on the basis of which the Department would reopen the case. Head note of the decision reads as under:

“In determining whether commencement of re-assessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. Held, that the case of the Revenue was that the assessee was charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc. However, while valuing its closing stock the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year’s assessment proceedings. The commencement of reassessment proceedings was valid.”

11. Now coming back to the material which was relied for the reasons recorded for reopening the assessment, it is clearly stated that in the return filed by the assessee (which is part of the group of pure drinks companies operating from the same office) had declared income of Rs. 3,37,74,746/- on account of interest relief against the loan statement. In our opinion, this would definitely constitute prima facie material because there was a settlement of loan and the assessee got certain benefits by way of waiver of interest. Now whether some waiver was there or not that would really constitute the income, can be ascertained only after the assessment is reopened. It is to be noted that in case of Raymond Woolen Mills (supra) the information was obtained by the Revenue from the return of subsequent year. In case before us also some information was available from the return of subsequent year which can be validly used by the Revenue. Similarly observations have been made by the Hon’ble Bombay High Court also in case of Multiscreen Media Private Limited V Union of India and another (No. 2), 324 ITR 54 (Bom). In this case it was observed as under:

“Where the Assessing Officer purports to exercise power u/s 147 of the Income-tax Act, 1961 within a period of four years of the end of the relevant Assessment year, the conditions precedent to the exercise of the power, is a reason to believe that any income chargeable to tax has escaped assessment. The expression “reason to believe” must obviously be that of a prudent person and it is on the basis of the reasons recorded by the Assessing Officer that the question as to whether there was a reason to believe that income has escaped assessment, has to be determined. At the same time, the sufficiency of the reasons for reopening an assessment does not fall for determination, at the stage of a reopening of assessment. In CIT V Kelvinator of India Ltd. (2010) 320 ITR 561 the Supreme Court observed that tangible material and not merely a change of opinion can entitle the Assessing Officer to take recourse to the power to reopen assessment. The emphasis is on “mere” in the phrase “mere change of opinion”. A mere change of opinion is not enough. A change of opinion, in other words, is permissible, provided it is grounded on additional or tangible material. The judgment in Ess Ess Kay Engineering Co. P. Ltd. V CIT (2001) 247 ITR 818 (S.C) lays down the principle of law that it would be open to the Assessing Officer to reopen an assessment based on a finding of fact made on the basis of fresh material gathered in the course of assessment for a subsequent Assessment year.”

From above again two major points emerge i.e. at the time of reopening sufficiency of the reasons, does not call for final determination. In other words, full proof is not required that income has escaped assessment at the stage of the reopening and secondly material gathered in the course of subsequent assessment year can be used for reopening the assessment. Therefore, in our opinion, reopening of the assessment has been validly initiated because no opinion was originally formed as returns furnished in response to S. 142(1) were treated invalid in view of the fact that same were not accompanied by any documents. Further the Revenue has prima facie material available in the form of information in the return of income for subsequent year which shows that the income might have escaped assessment.

12. The rd. counsel of the assessee had also made another strong argument that the proceedings for re-assessment could not have been initiated u/s 147 as long as return filed in response to notice u/s 142(1) were pending before the Department. From Explanation (2)(b) to S. 147 it becomes clear that after amendment from 1.4.1989 in cases where the return had been filed but no assessment has been made even then notice can be issued if the Assessing Officer has reason that the income has escaped assessment. Therefore, pendency of return is no more a fetter for reopening the assessment as was held in various decisions rendered prior to amendment made in Section 147 w.e.f. 1.4.1989. In fact identical situation came up for consideration of Hon’ble Punjab & Haryana High Court in case of CIT V. Smt. Shakuntala Devi, 185 Taxman page 8. In that case following question was raised:

“Question – Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that proceedings initiated u/s 147 of the Act were not in accordance with law by ignoring the specific provisions contained in Explanation 2(b) to Section 147 of the Income-tax Act, 1961 substituted by the Direct Tax Laws (Amendment)Act, 1987 with effect from 1.4.1989?”

13. Brief facts in that case were that the assessee filed her return of income on 1.11.2004. Later on the Assessing Officer came across certain material showing escapement of income on which proceedings were initiated u/s 147 of the Act and notice was issued on 18.8.2005. On the basis of this notice and further replies, assessment was completed on 7.12.2006. Above assessment order was challenged before the CIT(A) and inter-alia one of the argument was taken before CIT(A) was that the proceedings u/s 148 could not have been initiated during pendency of assessment and only remedy available to the Assessing Officer was to proceed u/s 143(2) of the Act. The ld. CIT(A) accepted the contention and held reassessment to be invalid. This view was upheld by the Tribunal by relying on the judgment of Hon’ble Calcutta High Court in CESC Ltd. V Dy crT (2003) 263 ITR 402 and judgment of Hon’ble Bombay High Court in CIT V. Rajendra G. Shah (2001) 247 ITR 772 and judgment of this Court in Vipin Khanna V CIT (2002) 255 ITR 220. It was further held that unless return was disposed off, no notice in respect of same would be issued as was held by Hon’ble Supreme Court in Trustees of HEH The Nizam’s Supplemental Family Trust V CIT (2000) 242 ITR 381.

14. From these facts Hon’ble High Court considered the issue at para 8 which is reproduced hereunder:

“8 The judgment relied upon in the impugned orders do not consider the effect of amendment by way of Explanation 2(b) to Section 147. Even if we assume that proceedings could not be initiated u/s 147 in respect of pending assessment, there being no bar in the present case to proceed u/s 143(2), proceedings were valid. It is true that this aspect was not raised by the revenue before the ld. CIT(A) or before the Tribunal but this being purely legal point arising out of the admitted facts, we allow this point to be raised at this stage.”

After these observations reassessment was held to be valid.

15. From this decision it becomes clear that after the amendment to section 147 w.e.f. 1.4.1989 by way of Explanation 2(b) it is not necessary to complete the assessment before issuing a notice u/s 148.

16. The ld. counsel of the assessee had also argued that at best material was available only in case of Pure Drinks (Calcutta) Pvt Ltd. i.e. ITA No. 587/Chd/2011 and it cannot be said that same material was available for other assessees. We find no force in this argument because careful perusal of the reasons recorded by the Assessing Officer, show that interest was waived of various sister companies by a common order passed by the Hon’ble Supreme Court, therefore, at the time of reopening it cannot be said whether interest was really waived or not in a particular case and the same is a matter of investigation. As stated earlier at the time of reopening only prima facie material is required showing that income had escaped assessment.

17. In view of the above discussion we find no force in the submissions of the ld. counsel of the assessee and uphold the initiation of reassessment proceedings and therefore, notice u/s 148 has been validly issued by the Revenue.

Confirmation of addition on account of income arising out of waiver of interest by the Banks under the head “income from other sources”

18. During the assessment proceedings the Assessing Officer it was noticed that the assessee had generated income by way of relief in interest, therefore, a query was raised that why same should not be taxed. It was submitted that all the group companies except Mohan Bottling Co. entered into one time full and final settlement with the banks in terms of order of the Hon’ble Supreme Court dated 30.3.2001 read with letter dated 2.5.2001 of M/s Pure Drinks (New Delhi) Ltd. with respect to all group companies. Through this settlement it was agreed that the assessee would pay a sum of Rs. 3,94,37,364/- as full and final claim of the banks. It was pointed out that interest on bank loans was never claimed by the assessee as deduction and not allowed by the revenue since Assessment year 1994-95. In this regard the details were filed. It was pointed out that balance sheet as on 31.3.1998 which was filed along with return reflected a liability of Rs. 7,32,63,022/- but the said liability included the provision for interest also. Since the interest was neither claimed nor allowed, therefore, there cannot be any remission of trading liability and accordingly the same was not taxable u/s 41(1) of the Act. It seems that the assessee also made claims in respect of un-claimed interest for earlier years which was denied because according to the Assessing Officer the claim of the interest by the assessee should have invariably be made in the year to which deduction pertains However, Assessing Officer observed that the assessee has itself shown this amount as income. In this background ultimately the interest income was charged to tax under the head “income from other sources” and the relevant portion of para 3.1 is reproduced as under:

“3.1 Keeping in view the above discussion, I am inclined to reject the claim of the assessee in respect of interest not claimed/disallowed in the earlier years and income of the assessee for the year under consideration is taken at Rs. 3,37,74,746/- after allowing the expenses claimed by the assessee in the profit and loss account as shown in the comparative figure for the Assessment year 2002-03.Income of the assessee is assessed under head “income from other sources” against which no B/F loss as well as claim of depreciation is allowed, as the assessee has no business income during the year as the income has been assessed under the head “income from other sources”.

19. On appeal before the ld. CIT(A), it was mainly contended that the Assessing Officer has wrongly invoked Section 41(1) because there was no cession /remission of trading liability, the deduction of which has not been claimed/allowed in the earlier years. It was further submitted that the Assessing Officer failed to consider the provisions of section 41(5) of the Act which clearly stated that the income arising as per Section 41(1) has to be set off and treated as income under the head “business”. The Assessing Officer failed to appreciate that if the income u/s 41(1) is to be treated as deemed business income and in this regard reliance was placed on some case laws. The ld. CIT(A) did not find force in the submissions and decided the issue against the assessee vide para 5.5 which is as under:

“5.5 In view of the facts and circumstances of the case and rival submissions of both the Assessing Officer in his remand report and written submissions of the counsel it is seen that sec 41(1) of the Act applies to such cases where the business or profession for which deduction had been a Id in the past is in existence or not, even today. One of the conditions for the recourse to this section was that there should be actual allowance (not sufficient to say that this expenditure could have been allowed in an earlier year) of some expenditure/trading liability in the assessment of an earlier year (Ref: Ethyl Saxena (Decd.) V CIT (1984) 146 ITR 518 (Del), Ramesh Narain Saxena V CIT (1996) 220 ITR 19 (SC). The Assessing Officer has rightly held that it is essential to record a finding that the amount had been actually allowed as a deduction in some earlier year in the absence of which the amount will not be assessable (Ref: CIT V. Lal Textile Finishing Mills (P) Ltd. (1989) 180 ITR 45 (PH), CIT V. Tulsi Ram Karam Chand (1981) 130 ITR 968 (PH), Express Newspaper (P) Ltd. V CIT (1997) 227 ITR 325 (Mad). The appellant was absolved of the liability by the judicial pronouncement of the Hon’ble Apex Court whose decision was final and thus the liability of the appellant had ceased to exist. Once the excess provision of interest on the borrowings having been written back as a result of the loan settlement, then the amount of such a relief has rightly been taxed u/s 41(1). The remission was a positive conduct as the part of the bankers though the cessation resulted from a decision of the Hon’ble Supreme Court. The appellant having been absolved of the liability by a judicial pronouncement, the same could be said to have finally ceased because the decision of the Hon’ble Apex Court is final (Ref: J.K. Synthetics Ltd V ITO (1976) 105 ITR 864 (All), Union of India V. J.K. Synthetics Ltd. (1993) 199 ITR 14 (S.C), Investors Corporation V. CIT (1993) 201 ITR 378 (Cal). When there was no deduction of the amount of loan/interest at any stage in the computation of appellant’s income then there can be no liability for incurring such a deduction. The relief on the loan settlement would not be income falling u/s 28(iv) especially when the appellant is not in business. The waiver of interest would be ‘income from other sources’ though section 41(1) relates to computation of business income. However, section 57 would make section 41(1) applicable even for computing ‘income from other sources’ as it is not necessary for the appellant to be in business for the purposes of section 41(1)but only for section 28(iv) (Ref: CIT V. Chetan Chemicals Pvt Ltd. (2004) 267 ITR 770 (Guj). Section 41(1) would have application for the year when the dispute has finally been resolved. Where a business has been discontinued and income from business in some form or the other is received after such discontinuance, then it would be deemed to be ‘income from other sources’ and assessable as such (Ref: CIT V. Ganga Sugar Mills Ltd. (1986) 160 ITR 933 (Pat), CIT V. Jacobs (1986) 160 ITR 570 (Ker).”

20. Before us, the ld. counsel of the assessee carried us through the assessment order and pointed out that income has been finally assessed under the head ‘income from other sources’. In fact the assessee had never claimed the interest on the bank loans and the same was not allowed also, therefore, there was no question of application of S. 41(1). However, at the same time merely remission of trading liability would not give rise to income. He contended that before introduction of S. 41(1) the settled position of law was that the remission of trading liability would not be includible in taxable income. In this regard he mainly relied on the decision of Kings Bench Division in case of British Mexican Petroleum Company V. Jakson reported 16 TC 570 (KB). He pointed out that this decision has been followed by various High Courts in India. In this regard he relied on the decision of Hon’ble Patna High Court in case of CIT V. Rohtas Industries Ltd. 68 ITR 141 (Pat) and the decision of Hon’ble Bombay High Court in case of Mohsin Rehman Penkar, 16 ITR 183 (Bom). The ld. counsel of the assessee further argued that normally speaking remission of trading liability cannot be treated as income but the situation got changed after introduction of S. 2(24)(v) of the Act. S. 2(24) defines income which is inclusive in nature and clause (v) specifically provides that sum chargeable as income u/s 41 which means that sum chargeable as income u/s 41 has to be treated as income. Section 41 is placed in Chapter IV D which deals with the computation of business income, therefore, such remission of trading liability could not have been charged under the residuary head of income from other sources. He also pointed out that income was shown just to balance the books because otherwise liability could not have been squared up against the bank.

21. On the other hand, the ld. DR for the revenue strongly relied on the order of the Assessing Officer and the ld. CIT(A) and submitted that after interest waiver by the Bank, same has to be treated as income of the assessee. He further submitted that though the Assessing Officer has charged income from other sources but the ld. CIT(A) has rightly invoked S. 41(1) of the Act even u/s 56.

22. We have heard the rival submissions carefully in the light of the material on record as well as decisions cited by the parties. In fact if we look at the Old Income tax Act, 1922 we find that originally there was no provision equivalent to S. 41(1) which means that remission of trading liability could not be charged because there was no specific provision. This position obtained because of the decision of Kings Bench Division in case of British Mexican Petroleum Company V. Jakson reported 16 TC 570 (KB). In that case the assessee-company entered into a contract with another company for purchase of petroleum for a period of 20 years. The assessee-company was effected by slump in petroleum industries and was unable to meet its liabilities under the contract for oil supply. There was an outstanding amount of pound 10,73,281/-and pound 12,70,232/- as on 30.6.1921 and 30.9.1921. Through another agreement dated 25.11.1921, the assessee-company paid to the producing company a sum of pound 3,25,000/- and the balance amount remaining was released. The Crown contended that release amount should be brought into account in computing assessee’s company’s profit for the purpose of income tax and corporation profit tax. When the matter reached House of Lords, it was held as under:

“Held, that the amount remitted should not be included as a receipt in the account for the eighteen months to the 31st December, 1922, and that the account for the year to the 30th June, 1921, should not be reopened and adjusted by reference to the remission.”

Further Lord Thankerton observed in his concluding remark as under:

“I am unable to see how the release from a liability, which liability has been finally dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted.”

Lord Macmillan observed as under:

“I say so far the short and simple reason that the Appellant Company did not, in those eighteen months, either receive payment of that sum or acquire any right to receive payment of it. I cannot see how the extent to which a debt is forgiven can become a credit item in the trading account for the period within which the concession is made.”

23. Later on Hon’ble Bombay High Court had to consider similar question in case of Mohsin Rehman Penkar (supra). In that case the assessee used to borrow money from one Shri Dharkar and in 1932 he mortgaged certain properties to Shri Dharkar to secure payment of Rs. 17,500/- found to be due and owing to Dharkar. The assessee after 1932 continued to claim the permissible deduction on account of deduction on this amount which was allowed by the Department till 1943. About a sum of Rs. 15,000/- had been claimed by the assessee as deduction for interest allowed to him and the total liability became about Rs. 29,059. On 24.6.1944 the assessee paid a sum of Rs. 15,000 to Shri Dharkar who accepted the sum in full and final settlement of his claim against the assessee. This means Shri Dharkar remitted balance of Rs. 14,059/- and gave up his claim of that amount. The income tax authorities took the view that a sum of Rs. 14,059/- is income for which the assessee was liable to pay tax. When the dispute reached before the Hon’ble Bombay High Court, the decision in case of British Mexican Petroleum Company was relied on behalf of the assessee. Hon’ble High Court following that decision observed as under:

“Here too the real attempt on the part of the Department is to reopen assessment of the assessee for the earlier years. What they are really challenging is that the ‘deduction allowed to the assessee in the previous years in respect of interest which he was liable to pay was not a proper deduction allowed to him. .That attempt on the part of the department cannot be allowed to succeed.”

In fact the held column reads as under:

“Section 2(24), rws 10(3) of the Income-tax Act, 1961 (Corresponding to sections 2(6C), rws 4(3)(vii) of the Indian Income-tax Act, 1922) – Income -Definition of -Assessee borrowed certain amount from ‘D’ – Though no interest was actually paid to ‘D’ but inasmuch as assessee maintained his accounts on accrual basis interest payable to ‘0’ was allowed – During relevant accounting year, assessee arrived at settlement with ‘0’ whereby assessee paid a lump sum amount to ‘0’ and balance was remitted by ‘D’ – ITO as well as Tribunal held that remitted sum was income liable to tax in assessee’s hands – Whether mere remission which leads to discharge of liability of debtor can never become income for purpose of taxable – Held, yes – Whether, therefore, sum in question was not income of assessee – Held, yes.”.

The above decision along with the decision of British Mexican Petroleum Company (supra) has been followed by Hon’ble Patna High Court in the case of CIT V. Rohtas Industries Ltd.(supra) and by other High Courts also.

24. This situation continued for sometime but in 1955 S. 10(2A) was introduced in 1922 Act which is corresponding to S. 41(1). Careful perusal of S. 41(1) shows that what can be brought to tax is an amount for which deduction has been made in respect of such loss, expenditure or trading liability incurred by the assessee which has been allowed as deductible by the Revenue and later such amount has been remitted. In other words, if an amount has been claimed as expenditure or loss in a particular year and which has been allowed and later on if the assessee receives the benefit of such amount by way of remission/cessation then such amount would be deemed to be the income of the assessee. Therefore, for bringing a particular item of remission or cessation liability under the provisions of section 41(1) it has to be proved that such remission was on account of expenditure loss etc. or simply it was on the revenue side which was claimed by the assessee and also allowed by the Department. The simple logic of this provision is that businessman who gets benefit of a particular deduction and later on he is not required to pay on account of that deduction then he should pay tax on such benefit. However, it is required to be noticed that S. 41 is part of Chapter IV under the section ‘D’ – “profit and gains of business or profession” which means this provision can be used for the purpose of computing the business income but the same can not be allowed to be transported to section ‘F’ of Chapter IV which deals with “income from other sources”. The reason for the same can be found in the total scheme of the Act. Various incomes which are part of the total income have been classified in five heads of income u/s 14 then various provisions have been made under various sections of Chapter IV from “A” to “F” for various heads. Every head is self contained in the sense that the provision for computing under a particular head which are contained in the provisions maintained under particular head. For example in case of income under the head “salary” even the advance salary can also be assessed as income but this provision can not be used for the purpose of computing income under “business and profession” . Similarly under the head “income from house property” notional rent in some situations where property could not be let out for whole of the year, would be subject to tax and the annual value is to be determined u/s 23 but in case of income under “business and profession” normally notional income can never be assessed. These examples can be multiplied. This clearly shows that computing provisions of one head of income can be used for the purpose of computing income under that head only and cannot be used for computing income under another head. Therefore, remission of particular income u/s 41 can be taxed only under the head “business income” and this provision can not be read for computing the income under the head “income from other sources and we are of the opinion that remission of interest by the bank can not be charged to tax as income from other sources. Therefore, we do not find any force in the submissions of the ld. DR for the revenue that first appellate authority has rightly invoked S. 41 while computing income under the head ‘income from other sources’. Therefore, in our opinion, the amount of remission on account of interest cannot be charged as income under the head ‘income from other sources’ because there is no provision for the same. In any case this is only notional income because no deduction was ever claimed by the assessee and income was reflected just to square up the account of the bank.

25. As far as taxability of this amount u/s 41 is concerned, it was contended that the assessee has not claimed deduction on account of interest and the same has not been allowed by the Department. However, perusal of the assessment order or appellate order do not show that there is a finding to this effect. Therefore, we remit this issue back to the file of Assessing Officer with the direction to verify whether any deduction on account of interest towards bank was claimed and allowed and then decide the issue in accordance with law.

Rejection of claim for setting off of /adjustment of unabsorbed depreciation of earlier years.

26. Brief facts are that the claim for carry forward of set off of unabsorbed depreciation was not allowed by the Assessing Officer by simply stating that the assessee has no business income during the year as income has been assessed under the head “income from other sources”.

27. On appeal before the ld. CIT(A) certain arguments were made which were sent to the Assessing Officer for his remand report and in the remand report it was stated by the Assessing Officer that as per provisions of section 72(2) and 73(3) of the Act, the carry forward and set off of unabsorbed depreciation was not admissible to the assessee because the company had failed to file return for Assessment year 1999-2000 and 2000-01. This reply was confronted to the ld. counsel of the assessee who in the rejoinder submitted that the Assessing Officer had failed to appreciate that the assessee was claiming benefit of set off of the carry forward business loss I unabsorbed depreciation determined upto Assessment year 1998-99 and therefore, no cognizance was required to be taken for the lapse of not filing return for Assessment year 1999-2000 and 2000-01 due to suspension of business. In this regard reliance was placed on following case laws:

Anant Mills Co. Ltd. V CIT, 212 ITR 72 (Guj)

Virmani Industries, 216 ITR 607 (S.C)

CIT V. Subhullaxmi, 249 ITR 795 (S.C)

Haryana Hotels Ltd. 276 ITR 521 (PH)

28. After considering the submissions, the ld. CIT(A) observed that unabsorbed depreciation of the earlier year can be set off of against income from the other sources of current year provided there is clear cut specific finding given by the Assessing Officer in the assessment order that the claim of depreciation is allowable and carry forward unabsorbed depreciation as per section 32(2) is admissible. However, despite this observation he refused to allow the set off of unabsorbed depreciation by observing that it would be futile claim of benefit of set off of unabsorbed depreciation in the course of assessment proceedings of the subsequent year i.e. year under consideration when the assessment of earlier year had not determined unabsorbed depreciation. In this regard he relied on the decision of Hon’ble Madras High Court in case of Sri Rajarathinam Transports Pvt Ltd V CIT, 199 ITR 203 (Mad).

29. Before us, the ld. counsel of the assessee submitted that depreciation which cannot be allowed in a particular year because of insufficiency of profit, would become part of the current depreciation in the next year as per S. 32(2). There are no conditions that such business should be continued. Such depreciation is allowable even against the income under other heads and in this regard he relied on the decision of Hon’ble Supreme Court in case of CIT V. Virmarli Industries Ltd (supra). He also submitted that Hon’ble Punjab & Haryana High Court in case of CIT V. Haryana Hotels Ltd (supra) already explained the difference between the provisions regarding carry forward of business loss and unabsorbed depreciation and has held that depreciation may not be specified in a particular year.

30. On the other hand, the ld. DR for the revenue strongly supported the order of the ld. CIT(A).

31. We have heard the rival submissions carefully. Section 32(2) reads as under:

“32(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable far that previous year, or owing to the profits ar gains chargeable being less than the allowance, then, subject to the provisions of sub-section (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.]

The plain reading of the above clearly shows that if the depreciation cannot be fully adjusted against profits and gains chargeable in the relevant year because of insufficiency of the profits then the same would be addled to the depreciation of the following year. This means that unabsorbed depreciation which can not be set off in a particular year, would become current year’s ,depreciation in the following year and there is no restriction against such set off. Therefore, un-absorbed depreciation which is carry forward as current depreciation u/s 32(2) is clearly available for setting off.

32. Hon’ble Supreme Court in case of CIT V. Varmani Industries (supra) has explained the difference between the business loss and unabsorbed depreciation and has held that unabsorbed depreciation is allowable even against income from other heads. It was also observed that it was not necessary that same business should be carried on even in the subsequent year. It was also observed that even assets on which such unabsorbed depreciation got generated need not be in existence in the subsequent year. The observation of the Hon’ble Supreme Court are as under:

“The words “no profits or gains chargeable for that year” in section 32(2} of the Income-tax Act, 1961, are not confined to profits and gains derived from business. They refer to the totality of the profits or gains computed under the various heads and chargeable to tax. It is, therefore, clear that effect must be given to depreciation allowance first against the profits and gains of the particular business whose income is being computed under section 28 and if the profits of that business are not sufficient to absorb the depreciation allowance, the allowance to the extent to which it is not absorbed would be set off against the profits of any other business and if a part of the depreciation allowance still remains unabsorbed, it would be liable to be. set off against the profits and gains chargeable under any other head and it is only if some part of the depreciation allowance still remains that it can be carried forward to the next assessment year. But where any Dart of the depreciation allowance remains unabsorbed after being set off against the total income chargeable to tax, it can be carried forward to the following year and set off against the year’s income and so on for succeeding years. The method adopted by the statute for achieving this result is that the 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 and is thus allowable as a deduction (see pp. 616E, 617A – E).

CIT v. Jaipuria china CLAY MINES (P.) LTD. [1966] 59 ITR 555 (SC) and Rajapalayam mills LTD. v. CIT [1978] 115 ITR 777 (SC) /allowed,

In order to avail of the benefit of section 32(2), it is not necessary that the business carried on in the following previous year should be the same business as was carried on in the preceding previous year. In the absence of any words to that effect, no such requirement ought to be read into the said sub-section. A look at section 72 shows that where Parliament intended to provide such a limitation, it did so expressly. Section 72 of with carry /onward and set off of business loss. The proviso to clause : of sub-section (1) of section 72 expressly provides that such a course i permissible only where “the business or profession for which, the loss to originally computed continued to be carried on by him in the previous year relevant for that assessment year”. In the absence of any words-that effect, it must be held that, for availing of the benefit of section 32 it is not necessary that the business carried on in the following year : the same business as was carried on in the previous year. The other question is whether the assets which earned the depreciation in the preceding year should exist and should continue to be used for the purpose of business in the following year. In the absence of any words in the said sub-section to that effect, one cannot read this requirement also into the said subsection. This is evident from the words “or if there is no such allowance for that previous year, be deemed to be. the allowance for the previous. year” occurring in the sub-section. In the following year the assessee need not carry on any business or profession for availing of the benefit of sub- section (2) of section 32 (see pp. 617s – H, 618A, B, E)”

33. Further Hon’ble Punjab & Haryana High Court in case of CIT V. Haryana Hotels Ltd (supra) has clearly observed that there was no provision under the Act which makes it mandatory for the assessee to file return for carry forward and set off of unabsorbed depreciation which is to be invoked by the Assessing Officer as in the case of carry forward business loss. The head note reads as under:

“A reading of section 32(2) of the Income-tax Act, 1961 makes it clear that a carry forward unabsorbed depreciation allowance is deemed to be part of and stands on the same footing as current depreciation, i.e., in the assessment of the assessee, if full effect cannot be given to any allowance in any previous year owing to there being no profits or gains chargeable for that previous year, the allowance or part of the allowance to which effect has not been given, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be Dart of the said allowance. Only business losses of earlier years which are notified by the Assessing Officer are allowed to be carry forward and set off from the current year’s income. There is no provision under the Act which makes it mandatory for the assessee to file a return for carry forward and set off of unabsorbed depreciation which is to be notified by the Assessing Officer as in the case of unabsorbed business loss. Thus, from a reading of the provisions of the Act, the distinction between unabsorbed depreciation and unabsorbed business loss for the purposes of set off and carry forward is clear.”

34. However, at the same time the provisions of Section 32(2) was amended twice w.e.f. 1.4.1997 by Finance Act (No. 2 of 1996) and against on 1.4.2002 by Finance Act, 2001. Certain restrictions were introduced against set off of such unabsorbed depreciation. Controversy also arose in this respect. Ultimately the matter traveled to the Special Bench of the Tribunal in case of DCIT V. Times Guaranty Ltd. (2010) 4 ITR (Trib ) 210 (Mum)(SB). In this case it was held as under:-

“Under section 32(2) of the Income-tax Act, 1961, prior to its substitution, by the Finance (No. 2) Act, 1996 with effect from April 1,1997 the current depreciation under section 32(1) could be adjusted against income under any head including “Capital gains” and “Income from house property” in the same year. If there remained some unadjusted depreciation allowance, that was carried forward in the following year(s) for set off against income under any other heads just like current depreciation allowance under section 32(1) pertaining to such year.

Under sub-section (2) of section 32 as substituted by the Finance (No. 2) Act, 1996, with effect from April 1,1997, the scope of set-off of the brought forward unabsorbed depreciation allowance was restricted to the income under the head “Profits and gains of business or profession”. Under clause (i) of substituted sub-section (2), the unabsorbed depreciation allowance could be set off against “profits and gains” of any business or profession carried on by the assessee for that assessment year. Under clause (ii) of sub-section (2) if the unabsorbed depreciation allowance could not be wholly set off under clause (i), the amount not so set off could be set off from the “income under any other head”, if any, assessable for that assessment year.

The provision for carry forward and set-off of unabsorbed depreciation for any number of years against income under any head, was further diluted by way of clause (iii)(b) to section 32(2) restricting the right to set-off of unabsorbed depreciation for a period of not more than eight assessment years succeeding the assessment year in which the allowance was first computed. This part of the provision did not deal with the treatment of unadjusted brought forward depreciation allowance for and up to the assessment year 1996-97. The Finance Minister clarified the amendment as prospective inasmuch as the cumulative unabsorbed depreciation brought forward as on April 1, 1997, could be set off against taxable profits or income under any other head for the assessment year 1997-98 and seven subsequent assessment years. In other words the period of eight years under clause (iii)(b) of section 32(2) came to be reckoned from assessment year 1997-98 irrespective of the fact that the unadjusted brought forward depreciation arose in an earlier assessment year. Thus, on the strength of the clarification given by the Finance Minister, the unadjusted depreciation brought forward up to April 1,1997 became eligible for set off not only against the business income but also against income under other heads in eight assessment years.

Two like expressions are used in sub-section (2), viz, firstly, “profits or gains ” in the main part of sub-section (2) and then, “profits and gains” in clause (i). The expression “profits and gains” as used in clause (i) or (iii) (a) refers only to income under the head “Profits and gains of business or profession”.

Section 32(2) was again substituted by the Finance Act, 2001 with effect from April 1, 2002 restoring the provision as prevailing prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1,1997.

Sub-section (2) of section 32 is a substantive provision and not a procedural one. It is settled legal position that the amendment to a substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere seen either from the Notes on Clauses or Memorandum explaining the provision of the Finance Bill 2001, that substitution of sub-section (2) of section 32 is retrospective. Therefore, the substantive provision contained in section 32(2) as substituted by the Finance Act, 2001 with effect from April 1, 2002, is prospectively applicable to the assessment year 2002-03 onwards.

Section 32(2) is a deeming provision and by a legal fiction, the amount of depreciation allowance under section 32(1) which is not fully absorbed against income for that year is deemed to be part of the depreciation allowance for the succeeding year(s). A deeming provision cannot be extended beyond the purpose for which it is intended. Section 32(1) deals with depreciation allowance for the current year. It is only when the assessment of the assessee from assessment year 2002-03 onwards is made in which depreciation allowance for the curr6’nt year under section 32(1) cannot be given full effect, owing to the inadequacy of profits, that the directive of the deeming provision under section 32(2) shall apply.

Wherever there is mention of loss under a particular head for the current year which is sought to be set off against the income under the same head or other heads of the income for that very year, the words “cannot be” and “has not been” have been brought into play. The words, “cannot be” and “has not been” used in the present tense in section 32(2) suggest that the reference to depreciation allowance under section 32(1), which could not be adjusted due to inadequacy of profits, is for the current year alone starting from assessment year 2002-03 onwards. The brought forward unabsorbed depreciation of earlier years cannot be included within the scope of section 32(2).

In section 32(2) the depreciation allowance for the current year to which full effect cannot be given due to the paucity of profits, has been referred to as “unabsorbed depreciation allowance”. Such unabsorbed depreciation allowance for the assessment years 1997-98 to 2001-02 strictly comes under section 32(2) as “unabsorbed depreciation allowance”. As the language of this deeming provision does not talk of any brought forward “unabsorbed depreciation allowance” or depreciation allowance which could not be given effect to in the earlier years that resultantly became part of section 32(2), there is no question of expanding the scope of the legal fiction.

The purpose of a legal fiction in section 32(2) is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year. In other words the object of the provision is to treat the whole or part of the depreciation allowance under section 32(1), which could not be adjusted in the first year, as the current depreciation under section 32(1) in the second year. In the second year, such depreciation of first year becomes part and parcel of depreciation under section 32(1) of the second year. If again in the second year, the total of depreciation under section 32(1) (including the amount of allowance which came from first year and became depreciation under section 32(1) in the second year) cannot be absorbed, it shall become current depreciation for the third year to be dealt with in the same manner as the amount of depreciation in the third year and so on. Once the unabsorbed depreciation for the first year is given the character of current depreciation in the second year, the purpose of section 32(2) is fulfilled. The “unabsorbed depreciation allowance” of the period after substitution by the Finance (No. 2) Act, 1996 cannot be given the character of current depreciation in the assessment years after substitution with effect from April 1, 2002.

CIT V. MOTHER INDIA REFRIGERATION INDUSTRIES P. LTD. [1985] 155 ITR 711 (SC) relied on.

Therefore, the law prevailing as on the 1st April of the assessment year 2002-03 and subsequent years does not permit the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 to assume the character of depreciation under section 32(1) in these assessment years.

If there is both repeal of the old provision and simultaneous insertion of a new provision in its place, it is called “substitution”.

But for the relaxation given by the Finance Minister in Parliament, the brought forward unadjusted depreciation of the period prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1,1997 would have elapsed. There is no such concession given by the Finance Minister while substituting the provisions of section 32(2) with effect from April 1, 2002. Therefore, the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 cannot be treated as the current depreciation in the assessment years under consideration.

The position can be summed up as follows:

For the assessment years 1997-98 to 2001-02 brought forward unadjusted depreciation allowance for and up to assessment year 1996-97 (the “first unadjusted depreciation allowance”), 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. Current depreciation for the year under section 32(1) (for each year separately starting from assessment years 1997-98 up to 2001-02) can be set off firstly against business income and then against income under any other head. The amount of current depreciation for assessment years 1997-98 to 2001-02 which cannot be so set off, the “second unabsorbed depreciation allowance”, shall be carried forward for a maximum period of eight assessment years from the assessment year immediately succeeding the assessment year for which it was first computed, to be set off only against the income under the head “Profits and gains of business or profession”. For the assessment year 2002-03 onwards the “first unadjusted depreciation allowance” can be set off up to assessment year 2004-05, that is, the remaining period out of maximum period of eight assessment years against income under any head. The “second unabsorbed depreciation allowance” can be set off only against the 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. Current depreciation for the year under section 32(1), for each year separately, starling from assessment year 2002-03 can be set off against income under any head. The amount of depreciation allowance not so set off (the “third unadjusted depreciation allowance’? shall be carried forward to the following year. The “third unadjusted depreciation allowance” shall be deemed depreciation under section 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.”

35. From the above it is clear that unabsorbed depreciation for the block of Assessment year 1997-98 to 2001-02 which could not have been set off earlier, cannot be allowed to be set off now. Therefore, we set aside the order of the ld. CIT(A) and remit the matter back to the file of Assessing Officer with a direction to only allow set off of unabsorbed depreciation which is outside the block of Assessment year 1997-98 to 2001-02.

Levy of interest u/s 234A and 234B

36. The last issue is regarding levy of interest u/s 234A and 2348 which is of consequential nature and therefore, the Assessing Officer is directed to levy interest as per the provisions of the Act.

37. Since the facts in this case i.e. ITA No. 587/Chd/2011 are identical with the facts of other appeals i.e. ITAs No. 588, 589, 590 & 591 and therefore, this decision would apply to those appeals also.

38. In the result, appeal of the assessee in ITA No. 586/Chd/2011 is dismissed, appeals in ITAs No. 587, 588, 589, 590 & 591/Chd/2011 are partly allowed for statistical purposes.

(Order pronounced on 27.2.2013)

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