Belated Return No Bar: ITAT Allows Unabsorbed Depreciation Carry Forward

ACIT Vs Elecon Engineering Company Ltd. (ITAT Ahmedabad)

Ahmedabad Tribunal dismissed Revenue’s appeal, upholding CIT(A)’s finding that loss of Rs.2.38 crore was unabsorbed depreciation allowable to be carried forward, even though return was filed belatedly.

Assessee, engaged in manufacturing of industrial gears & couplings, filed return belatedly u/s 139(4) declaring unabsorbed depreciation of Rs.2.38 crore. CPC initially allowed carry forward in intimation u/s 143(1). AO later passed rectification u/s 154 denying set-off, treating it as business loss that could not be carried forward without filing return within due date u/s 139(1).

CIT(A) examined records & noted that depreciation of Rs.28.88 crore was claimed, while business profit before depreciation was Rs.24.59 crore, resulting in unabsorbed depreciation of Rs.4.29 crore. After set-off of income from other heads, Rs.2.38 crore remained unabsorbed depreciation eligible for carry forward u/s 32(2). He held that section 32(2), unlike section 80, does not mandate filing return within time limit to carry forward depreciation. Relying on precedents including ACIT vs Anil Printers Ltd. (ITAT Mumbai) & CIT vs Govind Nagar Sugar Ltd. (Delhi HC), CIT(A) quashed AO’s rectification.

Tribunal concurred, noting that Revenue itself accepted factual finding that the figure represented unabsorbed depreciation & not business loss. As section 32(2) specifically permits carry forward of unabsorbed depreciation irrespective of due date of return, denial by AO was unjustified.

Accordingly, Tribunal upheld CIT(A)’s order & dismissed Revenue’s appeal.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals), (hereinafter referred to as “CIT(A)”), National Faceless Appeal Centre (hereinafter referred to as “NFAC”), Delhi dated 11.10.2024 passed under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2020-21.

2. Grounds raised by the Revenue are as under:

“i) “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in treating the current year loss of Rs.2, 38,86,742/- as unabsorbed depreciation.

ii) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”

3. The only issue raised by the Revenue is in relation to the treatment of loss incurred by the assessee during the year amounting to Rs.2,38,86,742/- as unabsorbed depreciation. The ground raised by the Revenue appears to be pertaining to a factual matter as to whether the loss returned by the assessee pertained to unabsorbed depreciation or otherwise. Noting so, we shall now proceed to adjudicate the appeal before us.

4. As transpires from the orders of the authorities below, the AO in the present case passed a rectification order u/s.154 of the Act disallowing carry forward of unabsorbed business losses amounting to Rs.2,38,86,742/-. The rectification order notes that the assessee’s return had been processed by the CPC u/s.143(1) of the Act and the assessee’s claim of losses amounting to Rs.2.38 Crores had been allowed. However, the AO noted that the assessee had failed to claim the said loss in a return filed u/s.139(1) of the Act, which was the requirement as per law for claiming the carry forward of business losses. The order notes the assessee to have contended that impugned losses were not business losses but were depreciation losses, which could be allowed to be carried forward even if the return was filed belatedly and hence, there was no mistake in the intimation made u/s.143(1) of the Act requiring rectification in terms of Section 154 of the Act. However, the AO did not agree with the contention of the assesse noting that the assessee had claimed this loss in Schedule CYLA row no (xviii) of the Income Tax Return and accordingly, passed order u/s.154 of the Act denying the carried forward of losses to the tune of Rs.2,38,86,742/-.

5. The Ld. CIT(A), however appreciated the contention made by the assessee before him that the loss for the impugned year was depreciation loss and not business loss and noting the provisions of Section 32(2) of the Act which allowed carry forward of depreciation loss without requirement of claiming the same in a return filed u/s.139(1) of the Act, he held that there was no mistake apparent from the record in allowing assesses claim of carry forward of losses to the tune of Rs. 2.38 Crs. His findings in this regard are contained at para 5 to 5.4 of his order as under:

“5. DECISION:

5.1 Ground no.1, 2 and 3 are related to not allowing carry forward of unabsorbed depreciation amounting to Rs.2,38,86,742/-. In this case, the assessee filed belated return u/s.139(4) on 24.05.2021 for A.Y.2020-21. The due date of filing return was 30.09.2020 which was extended till 15.02.2021. According to AO, the assessee has claimed losses amounting to Rs.2,38,86,742/- of current year which was wrongly allowed by CPC while processing the return u/s.143(1) dated 06.08.2021. The AO issued show cause notice on 28.08.2023 to rectify this mistake and order u/s.154 r.w.s.143(1) was passed on 27.09.2023 in which the claim of loss of set off amounting to Rs.2,38,86,742/- was not allowed as the return was filed late.

5.2 The assessee is contending that this is not carried forward loss but brought forward unabsorbed depreciation which can be set off even if the return is filed belated. Accordingly, the order passed u/s.154 to rectify the carry forward unabsorbed depreciation is wrong and bad in law. The contention of the assessee is being considered here. The appellant is engaged in the business of manufacturing industrial gears, coupling etc. The appellant filed belated return due to disruption caused by Covid-19 pandemic. In the return filed u/s.139(4) on 24.05.2021, the appellant has claimed carry forward of unabsorbed depreciation amounting to Rs.2,38,86,742/-. Intimation u/s.143(1) was issued by CPC on 06.08.2021. CPC suomoto issued another intimation order u/s.154 r.w.s.143(1) on 20.04.2022 in which CPC has correctly shown carry forward of unabsorbed depreciation of Rs.2,38,86,742/-. Thereafter, the AO issued show cause notice for not allowing carry forward of business loss for the reason of return not filed within due date u/s.139(1). The appellant submitted its reply against this notice, however, this claim was denied as the AO considered unabsorbed depreciation as business loss and did not allow the set off. The appellant has quoted the provisions of section 32(2) and made submissions as reproduced below:

“ (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 for that previous year, or owning to the profits of 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 it 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”

7. Section 32(2) of the Act is very clear that full effect of depreciation is not given in the particular assessment year then its unabsorbed depreciation and it will be added to depreciation amount of next assessment year till the depreciation is fully absorbed.

8. Please refer below table to calculate unabsorbed depreciation :-

9. From the above table its apparent that full effect of depreciation was not given in AY 2020-21 and its eligible to carry forward unabsorbed loss. The observation of the AO that its business loss and not unabsorbed depreciation is factually incorrect.

10. Further, set-off and carry forward of depreciation is governed by section 32(2) of the Act and not under section 80 of the Act. Section 32(2) of the Act provides that where any depreciation allowance or part of it cannot be given effect to in a particular year due to shortage of profits, then such allowance or part thereof respectively shall be carried forward and shall be treated as part of depreciation of the subsequent year and so on for the succeeding years. Neither section 139(3) nor section 32 lay down any pre-requisite of filing the return of income within prescribed time limit for carry forward of such unabsorbed depreciation.

5.3 The contention of the appellant is found to be correct as the set off and carry forward of depreciation is governed by section 32(2) of the IT Act and not u/s.80. Section 32(2) of the Act provides that where any depreciation allowance or part of it cannot be given effect in any particular year due to shortage of funds then such unabsorbed depreciation allowance shall be carried forward and treated as part of depreciation of subsequent year and shown for succeeding years. Section 139(3) or section 32 does not require the condition of filing return of income within prescribed time limit for carry forward of unabsorbed depreciation. The appellant has also relied on various judicial pronouncement mentioned in submission above. The decisions relied upon by the appellant are reproduced below:

“11. We rely on ITAT Mumbai Bench judgement on ACIT vs. Anil Printers Limited 2016 68 taxmann.com 365 wherein it was held that section 80 requires that return be filed as per section 139(3) to carry forward losses within due date as envisaged under section 139(1). However, section 32(2) is not included within ambit of section 80.

12. Further, reliance also placed on decision of Delhi High Court in case of CIT vs Govind Nagar Sugar Ltd (Delhi HC) (334 ITR 13) wherein Delhi High Court held that:

13. “17. From the above, it comes out that the effect of section 32(2) is that unabsorbed depreciation of a year becomes part of depreciation of subsequent year by legal fiction and when it becomes part of current year depreciation it is liable to be set off against any other income, irrespective of the fact that the earlier years return was filed in time or not.”

5.4 Respectfully following the decisions of Hon’ble High Court and ITAT relied upon by the appellant. It is held that the unabsorbed depreciation is required to be set off against the current year income even if the return is not filed within due date. Accordingly, it is held that there is no mistake apparent from record as specified u/s.154 and order passed by the AO u/s.154 r.w.s. 143(1) dated 27.09.2023 is bad in law and quashed. These grounds of the appeal are allowed.”

6. It is evident from the order of the Ld.CIT(A) above that he has accepted the assessee’s contention that the loss carried forward pertained to unabsorbed depreciation and not business loss after considering the facts demonstrated by the assessee from its return of income in this regard, that while the depreciation claimed by the assessee during the year was Rs.28.88 Crs., the profits from business of the assessee before claim of depreciation was Rs.24.59 Crs. That therefore in effect, the assessee had losses on account of unabsorbed depreciation of Rs.4.29 Crs which after setting off income from house property, capital gain and other sources, remained to be carried forward to the tune of Rs.2.38 Crs. The Ld.CIT(A) categorically noted the facts to reveal the loses as pertaining to unabsorbed depreciation.

7. During the course of hearing before us, Ld. Counsel for the assesse demonstrated from the return of income filed from the impugned year at Schedule UD of unabsorbed depreciation and allowance u/s. 35(4) of the Act that the amount of Rs.2,38,86,742/- was reflected therein at page 71 of the paper book. Our attention was also drawn to Schedule CFL (P.B 69) being details of losses to be carried forward to the future years where it was demonstrated that no such amount of Rs.2.38 Crs was reflected.

8. Ld. DR also fairly conceded before us that the Ld. CIT(A)’s finding of fact that the impugned loss carried forward by the assessee pertained to unabsorbed depreciation was correct.

9. In the light of the same, we see no merit in the ground raised by the Revenue agitating the finding of fact of the Ld. CIT(A) that the current year’s loss of Rs.2.38 Crores carried forward by the assessee related to unabsorbed depreciation.

10. Further the Revenue has not raised any ground challenging the finding of the Ld. CIT(A) that in terms of Section 32(2) r.w.s. 80 of the Act, the assessee is not required to claim unabsorbed depreciation in a return filed u/s.139(1) of the Act for being eligible to carry forward the same for set off in the succeeding years. Be that so, even the Ld. DR was unable to point out any infirmity in the finding of the Ld. CIT(A) as aforesaid, nor was she able to controvert the decision relied upon by the Ld. CIT(A) in support of its findings.

11. In view of the above, we do not find any merit in the ground raised by the Revenue. The order of the Ld.CIT(A) is, therefore, upheld.

12. In the result, appeal filed by the Revenue is dismissed.

This Order pronounced on 28/08/2025