Sec 32(2) amended by FA, 2001applies to Unabsorbed depreciation of prior period

Brief of case:

Any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A. Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A. Y. 2001-02 got carried forward to the assessment year 2002-03and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever.

Fact of the case:

The Assessee is a subsidiary of EPCOS A.G. Germany and during the assessment year under consideration the respondent was engaged in the business of manufacturing and sale of soft ferrites components. The Assessee filed its return of income for the assessment year 2004-05 on 01-11-2004 declaring a total loss of Rs. 18,67,08,427/-. In the said return the assessee claimed, inter alia, carry forward unabsorbed deprecation for AY. 1994-95, AY. 1995-96 and AY. 1996-97 as per following details: SI. No. Assessment Year Amount (Rs.)

Since the total income was negative it was not possible for the respondent to claim set

off of the aforesaid unabsorbed depreciation against the income for the relevant year and hence in the return the same was claimed to be carried forward. The details of brought forward loss in respect of the aforesaid assessment years have been reported by the Tax Auditors in Annexure – XI of the Tax Audit Report for the relevant year.

The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Act were issued to the Respondent. The assessment was completed under section 143(3) of the Act vide order dated 27-12-2006 determining a total loss of Rs. 18,01,39,205/-. In the aforesaid order under section 143(3) the Ld. Assistant Commissioner of Income Tax (hereinafter referred to as the ‘then AO’) had disallowed certain expenses and/or claims of the Respondent. In the said Order the then AO had not discussed about the allowability of carry forward of the aforesaid unabsorbed Subsequently, the Ld. Income Tax Officer (hereinafter referred to as ‘AO’) issued notice under section 148 on 3 1-03-2011 initiating reassessment proceedings. Thereafter, as per specific request of the Respondent, reasons for re­opening of assessment were provided to the Respondent vide letter dated 19-10-2011. In the said letter the AO has contended that the Respondent is not entitled to carry forward the depreciation loss for AY. 1994-95~ 996-97 as per the amended provisions applicable for the said assessment year.

For A.Y.2005-06 the Assessee filed its original return of income for the assessment year under consideration on 31-10-2005 declaring a total loss of Rs. 18,85,68,536/-. Subsequently, the said return was revised on 30-03-2007 declaring a total loss of Rs. 19,97,11,536/-. In the said return the appellant had claimed, inter alia, carry forward of unabsorbed deprecation for A. Y. 1997-98 amounting to Rs. 3,24,68,197/-. Since the total income was negative it was not possible for the respondent to claim set off of the aforesaid unabsorbed depreciation against the income for the relevant year and hence in the return the same was claimed to be carried forward. The details of brought forward loss in respect of the aforesaid assessment year have been reported by the Tax Auditors in Annexure – X of the Tax

Audit Report for the relevant year.

The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Act were issued to the Respondent. The assessment was completed under section 143(3) of the Act vide order dated 16-12-2008 determining a total loss of Rs. 19,75,82,785/-. In the aforesaid order under section 143(3) the Ld. Deputy Commissioner of Income Tax (hereinafter referred to as the ‘then AO’) had disallowed certain expenses and/or claims of the Respondent. In the said Order the then AO had not discussed about the allowability of carry forward of the aforesaid unabsorbed depreciation. Subsequently, the Ld. Income Tax Officer (hereinafter referred to as ‘AO’) has issued notice under section 148 on 3 1-03-2011 initiating reassessment proceedings. Thereafter, as per specific request of the Respondent, reasons for re­opening of assessment were provided to the Respondent vide letter dated 19-10-2011. In the said letter the AO has contended that the Respondent is not entitled to carry forward the depreciation loss for A.Y. 1997-98 as per the amended provisions applicable for the said assessment years

Contention of aseessee

Before CIT(A) the Assessee relied on the decision of the Gujarat High Court in the case of.General Motors India Pvt. Ltd. -vs.- DCIT (Guj.) (2013) 354 ITR 244

(Guj.) wherein, the Hon’ble Gujarat High Court has held that unabsorbed depreciation from AY. 1997-98 up to AY. 2001-02 got carried forward to AY. 2002-03 and became part thereof and it came to be governed by the provisions of sec. 32(2) as amended by the Finance Act, 2001 and were available for carry forward and set off against income of subsequent years without any limit. The relevant extracts of the judgment is as under:

“We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A. Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A. Y. 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. “

Contention of AO

The AO in coming to the above conclusion by placing reliance on the special bench decision of ITAT Mumbai in the case of DCIT Vs. Times Guartee Ltd. (2010) 40 SOT 14 (SB)(Mum) wherein it was held the provisions of Sec.32(2) as substituted by the Finance Act, 2001 w.e.f. 1st April, 2002, which is reinforcement of the provision as existing in the first period i.e., prior to 1st April, 1997. Thus the law as existing in the second period w.e.f. 1st April, 1997 was completely taken back and as a result of that the provision as prevailing in the first period was restored. From the language of the sub-s. (2) of s. 32 it is manifest that it is a substantive provision and not a procedural one. It is settled legal position that the amendment to substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. The special Bench summarised its conclusions thus:

“The legal position of current and brought forward unadjusted/unabsorbed depreciation allowance in the three periods, is summarized as under :

1. In the first period (i.e. upto asst. yr. 1996-97) (i) current depreciation, that is the amount of allowance for the year under s. 32(1), can be set off against income under any head within the same year. (ii) amount of such current depreciation which cannot be so set off within the same year as per (i) above shall be deemed as depreciation under s. 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.

2. In the second period (i.e. asst. yrs. 1997-98 to 2001-02). (i) brought forward unadjusted depreciation allowance for and upto asst. yr. 1996-97 (hereinafter called the ‘First unadjusted depreciation allowance’), which could not be set off upto asst. yr. 1996-9 7, shall be carried forward for set off against income under any head for a maximum period of eight assessment years starting from asst. yr. 1997-98. (ii) current depreciation for the year under s. 32(1) (for each year separately starting from asst. yr. 1997-98 upto 2001-02) can be set off firstly against business income and then against income under any other head. (iii) amount of current depreciation for asst. yrs. 1997-98 to 2001-02 which cannot be so set off as per (ii) above, hereinafter called 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’.

3. In the third period (i.e. asst. yr. 2002-03 onwards). (i) ‘first unadjusted depreciation allowance’ can be set off upto asst. yr. 2004- 05, that is, the remaining period out of maximum period of eight assessment years (as per B(i) above) against income under any head. (ii) ‘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. (iii) current depreciation for the year under s. 32(1), for each year separately, starting from asst. yr. 2002-03 can be set off against income under any head. Amount of depreciation allowance not so set off (hereinafter called the ‘Third unadjusted depreciation allowance’) shall be carried forward to the following year. (iv) the ‘Third unadjusted depreciation allowance’ shall be deemed as depreciation under s. 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.

Judgement of Honourable ITAT

It was pointed out in the case of General Motors India Pvt. Ltd. has been followed by the Hon’ble Gujarat High Court in the case of CIT -vs.- Gujarat Themis Biosyn Ltd. (2014) 44 taxmann.com 204 (Guj.). In this case the Hon’ble High Court upheld the view taken by the ITAT wherein, following the decision of the Hon’ble Gujarat High Court in the case of General Motors Ltd., it was held that carry forward of unabsorbed depreciation concerning AY. 2001-02 and assessment years prior thereto can be set off in subsequent years without any set time limit.

After considering the rival submissions and are of the view that in the light of the decision of the Hon’ble Gujarat High Court in the case of General Motors India Pvt. Ltd. which has the effect of overruling the decision of the Special Bench in the case of Times Gurantee and also on the basis of other decisions referred by the Assessee before CIT(A), the order of the CIT(A) does not call for any interference.  Accordingly, the appeals by the revenue are dismissed.

Since the appeals by the revenue are dismissed, the cross objections in which theAssessee has challenged the validity of initiation of reassessment proceedings u/s.147 of the Act in AY 2004-05 & 2005-06 are challenged, does not require any adjudication and is dismissed as not requiring adjudication.

In the result, the appeals as well as the cross objections are dismissed.