Brought forward unabsorbed depreciation can be set-off against income from other sources allowed

Petrofils Cooperative Ltd Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that the assessee is entitled to claim of unabsorbed brought-forward depreciation to be set off against income from other sources as available during the year.

Facts- It is common ground that the issues involved in all the appeals are identical relating to the denial of set off of brought forward unabsorbed depreciation of earlier orders.

It is contended that CIT(A) has erred in law and on facts as has confirmed the rejection of the claim of set off of brought forward unabsorbed depreciation of earlier years on the ground that there is no brought forward unabsorbed depreciation at all.

Conclusion- We have noted that one of the reasons for the CIT(A) denying the benefit of set off of unabsorbed depreciation was the assessee’s acceptance of rejection of set off of brought forward depreciation in Asst.Year 2004-05. The assessee has now demonstrated that it was allowed the claim in Asst.Year 2004-05 by the ITAT.

The other reason, we have noted from the order of the ld.CIT(A) for rejecting the assessee’s claim was that there was no brought-forward depreciation from Asst.Year 2002-03 onwards which he noted from the details submitted by the assessee. The details submitted by the assessee pertained to the unabsorbed depreciation of each year. As per the details there was no unabsorbed depreciation pertaining to Asst.Year 2002-03 to 2005-06 and that does not mean that earlier year depreciation had all being absorbed.

We hold that the assessee is entitled to claim of unabsorbed brought-forward depreciation to be set off against income from other sources as available during the year.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present three appeals have been filed by the assessee against order passed by the Commissioner of Income Tax(Appeals)-1, Vadodara (in short referred to as ld.CIT(A)) under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) of even dated 24.9.2020pertaining to the above three assessment years.

2. It is common ground that the issues involved in all the appeals are identical relating to the denial of set off of brought forward unabsorbed depreciation of earlier orders. Therefore, all the appeals were heard together and are being disposed of by this common consolidated order. For the sake of convenience, we reproduce the grounds raised in the appeals pertaining to the Asst.Year 2006-07 in ITA No.548/Ahd/2020 as under:

1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the rejection of the claim of set off of brought forward unabsorbed depreciation of earlier years on the ground that there is no brought forward unabsorbed depreciation at all.

2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(1) (c) of the IT Act.

3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B, 234C and 234D of the Income Tax Act, 1961.”

3. It was contended that the facts leading to the disallowance of set off of unabsorbed depreciation was identical in all the cases. Therefore, we shall be dealing with the facts in the Asst.Year 2006­07 and our decision rendered therein will apply mutatis mutandis to all the appeals.

Drawing our attention to the facts of the case, the ld.counsel for the assessee pointed out that the present appeal has come up in second round; that in the first round the brought-forward unabsorbed depreciation from earlier years was denied to be setoff in the current year for the reason thatthe assessee had no business activities since 1997-98. The ITAT in the first round held that the assessee was entitled to set off brought-forward unabsorbed depreciation of earlier years against other incomes, even if no business activities was carried out by it. The ITAT relied upon the decision of Hon’ble Apex Court in the case of CIT Vs. Virmani Industries P.Ltd. (1995) 216 ITR O607(SC)in this regard. However, after laying down this proposition, the ITAT went on to hold that since in Asst.Year 2004-05, the assessee had been denied carry forward of depreciation which was upheld by the ld.CIT(A) and the assessee had accepted the decision of the ld.CIT(A) and in the absence of record available as to for which year, the depreciation pertained, the assessee’s claim to set off and brought-forward of unabsorbed depreciation was denied by the Tribunal. Our attention was drawn to the findings of the ITAT in this regard in the first round before it at para 7.1 of its order as under:

“7.1 It appears that the ld.CIT(A) has followed the order in the AY 2004­05, but this issue was not raised by the assessee before the Tribunal in ITA No.170/Ahd/2008(supra). The reasoning given by the ld.CIT(A) is that since the appellant had no business activity since AY 1997-98, depreciation for earlier years cannot be set off from “income from other sources”. In the absence of any business, no income is taxable in business head and, hence, the depreciation of earlier years cannot be allowed under business head. The contention of the ld.counsel for the assessee is that this reason of the authorities below is erroneous in the light of the judgement of the Hon’ble Apex Court rendered in the case of CIT vs. Virmani Industries Pvt.Ltd.(supra). The Hon’ble Supreme Court following the earlier judgement held that if the profits of 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 or gains chargeable under any other head and it is only if some part of the depreciation allowance still remains unabsorbed that it can be carried forward to the next assessment year. The Hon’ble Supreme Court further held that yet another question which has to be answered before we can answer the question concerned in this appeal is whether it is necessary that in the following year the assessee must carry on business, i.e., some or other business, to avail of the benefit of the said sub- section? Two views are possible in this behalf, viz., (1) since the sub­section speaks of unabsorbed depreciation being carried forward to the next year and “added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance” the sub­section necessarily contemplates existence of a business in the following year, and (2) inasmuch as the sub-section not only speaks of adding the unabsorbed depreciation to the depreciation allowance allowed in the following year but also says that in the absence of such allowance, the carried forward depreciation allowance shall be the allowance for that year, it means that 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. We are inclined to adopt the second of the above two views having regard to the decisions of this Court in Jaipuria China Clay Mines (P.) Ltd.’s case (1966) 59 ITR 555 and Rajapalayam Mills Ltd.’s case (1978) 115 ITR 777. We have extracted the relevant observations from both the judgements hereinabove, which say that the unabsorbed depreciation allowance has not only to be set off against other heads of income in the relevant previous year but where it is carried forward, it “stands on exactly the same footing as the current depreciation”. In the present case, the claim of the assessee was declined on the basis that there was no business activity. However, the Hon’ble Apex Court in the case of CIT vs.Virmani Industries Pvt.Ltd.(supra) has held that setting off of the brought forward loss is not restricted only to the business income and it has also been held by the Hon’ble Apex Court that it is not necessary that the assessee carry on any business or profession for availing of benefit of sub-section(2) of section 32 of the Act. In the present case, the facts are different as those were before the Hon’ble Supreme Court in the case of CIT vs. Virmani Industries Pvt.Ltd.(supra). In the case in hand, the assessee-company is under liquidation and, therefore, no activity is being carried out by the assessee. However, the ratio laid down by the Hon’ble Apex Court in the case of CIT vs. Virmani Industries Pvt.Ltd. would be applicable to the extent for availing the benefit u/s.32(2) of the Act. The assessee need not carry on any business or profession. It is not coming out of the records that from which year the depreciation was being carried forward by the assessee and why the assessee has accepted the decision of the ld.CIT(A) in the Asst.Year 2004-05 since no ground against the rejection of claim was raised by the assessee before the Tribunal in ITA No.170/Ahd/2008 for AY 2004-05(supra). In the present year, the CIT(A) has followed the decision rendered in the AY 2004-05. Under these facts, we are unable to accept the claim of the assessee and, therefore, this ground is rejected.

8. In the result, assessee’s appeal in ITA No.411/Ahd/2012 for AY 2006-07 is partly allowed for statistical purposes.”

8. The ld.counsel for the assessee contended that thereafter a Miscellaneous Application was filed by the assessee, wherein the assessee contented that it was in a position to demonstrate details of its claim of unabsorbed depreciation, and therefore, the ITAT modified its earlier order, and restored the issue of claim of depreciation to the file of the AO for decision afresh after verifying the details furnished by the assessee in this regard. Our attention was drawn to order passed by the ITAT in MA no.130 to 133/Ahd/2014 dated 21.9.2015 at para 2-3 of the order as under:

“2. At the outset, ld. Counsel for the assessee submitted that although the Tribunal accepted the contention of the assessee that the assessee is entitled for the depreciation in view of the judgment of Hon’ble Apex Court rendered in case of CIT vs. Virmani Industries Pvt. Ltd. (1995) 216 ITR 0607 (SC), having accepted the contention, however, the Tribunal has observed that it is not coming out of the records that from the order which depreciation was being carried forward by the assessee and why the assessee has accepted the decision of Id. CIT(A) in A.Y. 2004-05 since no ground against the rejection of the claim raised by the assessee before the Tribunal. Ld. Counsel submitted that assessee is entitled for depreciation. This can be verified by the Assessing Officer. On the contrary, Id. Sr. D.R. submitted that assessee has not pointed out any specific mistake into the order of Tribunal. Therefore, the Miscellaneous Application deserves to be dismissed.

3. We have heard the rival contentions and perused the material on record. The contention of the Id. Counsel for the assessee is that the assessee would be in a position to demonstrate before the Assessing Officer in respect of the claim of depreciation. There is not dispute with regard to the fact. It has been held by the Hon’ble Apex Court in case of CIT vs. Virmani Industries Pvt. Ltd. (supra) even if there is no activity being carried out by the assessee is a particular year, however, he would be entitled to set off the carried forward depreciation from earlier years. Therefore, after considering the totality of the fact, we deem it proper to modify our order dated 27.06.2014 in ITA Nos. 411/Ahd/2012, 2661/Ahd/2013, 2662/Ahd/2013 & 2088/Ahd/2012 and restore the issue of claim of depreciation to the file of Assessing Officer for decision afresh. After verifying from the details furnished by the assessee, decide the issue in light of judgment of the Hon’ble Supreme Court rendered in case of CIT Vs. Virman Industries P.Ltd. (supra). In light of above, we hereby modify our order accordingly.

5. The ld.counsel for the assessee contended that in consequence to the direction of the ITAT, the AO considered the matter afresh in the second round and went on to deny the claimof set off of brought-forward unabsorbed depreciation distinguishing the assessee’s case from that of CIT Vs. Virman Industries P.Ltd. (supra) rendered by the Apex Court. He drew our attention to para -2.6 of the assessment order as under:

“2.6 Facts of the assessee’s case can be distinguished from the facts of the cases of M/s Virmani Pvt. Ltd and M/s Estate & Finance Ltd. The assessee in hand i.e. M/s Petrofils Co-operative Society Ltd. is a co-operative society and was engaged in the manufacturing of polymer filament yarn and was making heavy losses and therefore the Central Registrar of co-operative society has appointed the Liquidator to windup the society vide order dtd. 11.04.2001. The assesssee is under the process of liquidation and no activity is carried out by the assessee. During the year under consideration, it has shown income from interest and income from house property. Out of such income, the assessee had claimed large amount of expenses to the tune of Rs. 1,48,10,000/- as deficit in liquidators accounts. Thus, the ratio decided in the cases of M/s Virmani Pvt. Ltd and M/s Estate 85 Finance Ltd are not applicable in assessee’s case.”

6. The ld.counsel for the assessee thereafter pointed out in Asst.Year 2004-05, assessee’s claim of set off of brought-forward unabsorbed depreciation was allowed bythe ITAT in the second round before it in Revenues appeal in ITA No.1465/Ahd/2017 vide order dated 27.11.2019 along with Revenues appeal for Asst.Year 2009-10, 2011-12 & 2012-13 in a combined order. Copy of the order was placed before us, and it was pointed out that following the decision of Hon’ble Apex Court in the case of CIT Vs. Virmani Industries P.Ltd. (pra) and the decision of Hon’ble Gujarat High Court in the case of General Motors India P.Ltd. Vs. DCIT, 354 ITR 244 (Guj), the assesee’s claim for carry forwarded of unabsorbed depreciation was allowed, to be set off against income from other sources. Our attention was drawn to the relevant finding of the ITAT as under:

We find that the order of the CIT(A) is inconsonance with the decision of the Hon’ble Supreme Court in the case of CIT vs. Virmani Industries Pvt. Ltd. (1995) 215 ITR 60 (SC) and the decision of the Hon’ble Gujarat High Court in case of General Motors India P. Ltd. vs. DCIT 354 ITR 244 (Guj). The Hon’ble Gujarat High Court in CIT Ivs. Gujarat Themis Bios Ltd. Tax Appeal No. 3 of 2014 has also (expressed the view that claim of the assessee for carry forward of unabsorbed depreciation vs to be allowed to be carried forward to the succeeding assessment years without any fetters of limitation of 8 years placed as per erstwhile provisions of Section 32(2) of the Act. The CIT(A) in our view has rightly reversed the action of the AO and directed him to allow the set off of unabsorbed depreciation allowance carried forward from earlier years against ‘income from other sources’ after necessary verifications of quantum of brought forward unabsorbed depreciation. We see no error in the order of the CIT(A). We thus decline to interfere.”

7. The ld.counsel for the assessee therefore contended that since initially assessee’s claim was denied by the ITAT since the denial of claim in Asst.Year 2004-05 was not contested by the assessee, and the assessee now having been allowed its claim in Asst.Year 2004­05, there was no reason for the AO to deny the claim of set off of brought-forward unabsorbed depreciation against other incomes in the impugned year.

8. The ld.DR however relied on the order of the ld.CIT(A) at para 8- 8.2 of the order as under:

“8. Ground No.2 relates to disallowance of claim of set off of brought forward unabsorbed depreciation and also not allowing carrying forward of such unabsorbed depreciation to subsequent years. From the record, it transpires that this is the 2nd round of appellate proceedings in this case. In the first round, my predecessor has rejected this ground vide appellate order dated 08.02.2012. Appellant carried the matter before the ITAT, but could not succeed. Claim of brought forward depreciation was rejected in ITA No. 411/Ahd/2012 dated 27.06.2014. Once again, appellant filed MA No.130 to 133/Ahd/2014 in ITA No. 411/Ahd/2012, 2661/Ahd/2013, 2662/Ahd/2013 & 2088/Ahd/2012 for AY 2006-07 to 2009-10. In the MA Ld. Counsel for the appellant submitted that the appellant would be in a position to demonstrate its case before the AO in respect of claim of depreciation. Citing the judgment of Hon’ble Supreme “Court, passed in the case of CIT vs Virmani Industries, ITAT held that even if there is no business activity being carried out by the appellant in a particular year, however, he would be entitled to set off of carry forward depreciation from earlier years. At para 2 of the order, the Hon’ble ITAT has clearly observed that “it is not coming out of record” that which depreciation was being carried forward by the appellant and why the appellant has accepted the decision of the Ld. CIT(A) for AY 2004-05 since, no ground was raised before ITAT against rejection of said claim. Ld. Counsel reiterated that the appellant is entitled for depreciation and that can be verified by AO. Hence, the matter was set aside before the AO.

8.1 While going through the assessment order u/s 143(3) rws 254 dated 21.04.2016 for the AY 2006-07, I find that appellant has filed submission on 19.02.2016 against notice u/s 142(1) dated 12.02.2016 and the same is reproduced at Para 2.2 of the order. According to the appellant’s submission, claim of unabsorbed depreciation in tabular data is as under:

It is seen that there is no claim of unabsorbed depreciation to be carried forward from AY 2002-03 onwards. The appeal related to AY 2006-07 wherein, the above tabular data duly submitted by the appellant does not suggest any brought forward unabsorbed depreciation for AY under consideration. Therefore, I fail to understand why the appellant has raised the issue qf unabsorbed depreciation before the Tribunal and subsequently before the

8.2 Further, from the assessment order, it is seen that the appellant has not explained the acceptance of rejection of set off of brought forward depreciation in AY 2004-05. During the appellate proceedings, appellant did not submit anything on this aspect. I also find that the Hon’ble tribunal in MA filed by appellant bearing No. 130 to 133/Ahd/2014 dated 21.09.2015 has also raised the issue of acceptance of rejection of brought forward unabsorbed depreciation for AY 2004-05. Ld Counsel of the appellant has time and again referred the order of the tribunal to allow the set off of brought forward unabsorbed depreciation. Since, there was specific direction of the tribunal for the appellant to demonstrate that it was entitled for set off of brought forward depreciation and the fact that appellant has accepted the rejection of claim of brought forward set off of depreciation hence, there is no reason to claim brought forward depreciation in subsequent year including the assessment year under consideration. Considering the factual position, decision rendered in CIT vs Virmani Industries cannot be applied blindly. Ld AR has emphatically argued the case relying on this judgment. Reliance on this judgment cannot be considered in isolation as it would violate the direction of the Hon’ble tribunal in its order dated 21.09.2015. Therefore, I refuse to allow any relief on this count. Ground No.2 is dismissed.”

9. We have heard rival contentions. We have noted that one of the reasons for the ld.CIT(A) for denying benefit of set off of unabsorbed depreciation was the assessee’s acceptance of rejection of set off of brought forward- depreciation in Asst.Year 2004-05. The assessee has now demonstrated before us, that it was allowed this claim in Asst.Year 2004-05 by the ITAT in its order passed in ITA No.1465/Ahd/2017 dated 27.11.2019. This basis for the Revenue rejecting the assessee’s claim to set off of unabsorbed depreciation in the present year therefore does not survive. The other reason, we have noted from the order of the ld.CIT(A) for rejecting the assessee’s claim was that there was no brought-forward depreciation from Asst.Year 2002-03 onwards which he noted from the details submitted by the assessee. The details submitted by the assessee pertained to the unabsorbed depreciation of each year. As per the details there was no unabsorbed depreciation pertaining to Asst.Year 2002-03 to 2005-06 and that does not mean that earlier year depreciation had all being absorbed. The ld.CIT(A) has mis-appreciated facts of the case, and in view of the same, we hold that the assessee is entitled to claim of unabsorbed brought-forward depreciation to be set off against income from other sources as available during the year.

10. In the result, all the appeals of the assessee are allowed in the above terms.

Order pronounced in the Court on 29^th March, 2023 at Ahmedabad.