Assessee has to claim unabsorbed c/f depreciation if he has claimed depreciation allowance for current year

V.Vivek Rajan

Brief Facts of the Case and Question of Law

Brief Facts

The assessee is engaged in the business of manufacturing paper. For the AY 1991-92 it filed its return of income u/s 139, the relevant details are as under

The manner of assessment by the Assessing Officer was under

 Question of Law

1. Whether it is open to the assessee to claim depreciation for the current year and not claim unabsorbed depreciation of the previous years.
2. Whether it is unabsorbed investment allowance which is to be allowed as set off in computing the income of the assessee or unabsorbed depreciation.

Contention of the Assessee

The assessee was not satisfied with the treatment of setting off of unabsorbed depreciation instead of investment allowance. The CIT(Appeals), ITAT and the Madras High Court dismissed the appeal of the assessee.

The contention was that in the absence of any claim by the assessee towards depreciation allowance, the assessing authority could not erroneously assume that such a claim would not be in compliance with the provision of the Income-tax Act, 1961 ( The Act) and thrust the deduction of carrying forward depreciation allowance in the light of assessee claiming set off of investment allowance. To add, the assessee contended that its option shall prevail.

It was also contended that if the provision of the law was not very clear and was susceptible to two interpretations, one which was more beneficial to the assessee had to be given effect to.

Contention of the Revenue

The revenue was of the contention that since unabsorbed depreciation allowance gets precedence over unabsorbed investment allowance under the provisions of the Act, which has also been held by various High Courts, it is the unabsorbed depreciation allowance which would be set off first.

The reference was also made to CBDT Circular No. 202 dated 05.07.1976. Accordingly the combined effect of the provisions of Sections 32, 32A, 33 , 33A and 72 is that in a case where there are allowances in the nature of depreciation allowance, investment allowance, development rebate, development allowance and losses, such allowances and losses would be deductible in the order given below, in cases where the profits are insufficient to absorb all of them

1. Current year’s depreciation – Section 32(1)
2. Carried forward losses of earlier years – Section (72(1))
3. Unabsorbed depreciation of earlier years – Section (32(2))
4. Unabsorbed development rebate of earlier years – Section 33(2)(ii)
5. Current development rebate – Section 33 (2)(i)
6. Unabsorbed development allowance of earlier years – Section 33A(2)(ii)
7. Current development allowance – Section 33 A(2)(i)
8. Unabsorbed investment allowance of earlier years – Section 32A(3)(ii)
9. Current investment allowance – Section 32A(3)(ii)

Held by the Apex Court

Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to the assessee to bifurcate the two again and claim depreciation for the current year and not claim the unabsorbed depreciation of previous years thereby contending that it cannot be forced upon the assessee.

The position would have been different if the assessee had not claimed any depreciation at all. Once the depreciation is claimed, while giving deductions, the depreciation is to be set off against profits of the current year prior to the unabsorbed carried forward investment allowance.

The depreciation said above shall be the entire depreciation namely the depreciation of the current year as well as unabsorbed carried forward depreciation. This is because of the fiction created by the Section 32(2) by which carried forward depreciation merges with the depreciation of the current year by partaking the latters character.

This scrambled egg cannot be unscrambled now. If done, it would amount to negating the legal fiction that is created by the said provision, even to the limited extent. This case falls within the ambit of limited extent of the legal fiction and is covered by it.

The Apex Court citing the above points upheld the contentions of the revenue and dismissed the appeals by the assessee with costs.

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