Treatment of unabsorbed depreciation of financial year 1996-97 to 2000-01

Citation: The DCIT Vs M/s Times Guaranty Limited, ITA Nos. 4917 & 4918/Mum/2008

Court: ITAT Mumbai (Special bench)

The unabsorbed depreciation relating to assessment year 1997- 98 to 1999- 2000 is to be dealt with in accordance with the provisions of section 32(2) as applicable for assessment year 1997- 98 to 1999- 2000.

Section 32 of the Income Tax Act (the ITA) dealing with depreciation has gone through several changes from financial year (F.Y.) 1995- 96 to F.Y. 2001- 02. These amendments are be summarized as under:

• Up to F.Y. 1995- 96, the unabsorbed depreciation could be carried forward indefinitely and could be set off against any income of the subsequent years,

• From F.Y. 1996- 97 to 2000- 01, the unabsorbed depreciation could be carried forward up to the following eight years and could only be set off against the business income of the subsequent years,

• From F.Y. 2001- 02, the unabsorbed depreciation could be carried forward indefinitely and could be set off against any income of the subsequent years,

The interpretation of these amendments has been the subject matter of litigation between the revenue authorities and taxpayers. Recently, the Special Bench of Mumbai Tribunal (ITAT-SB) has given a ruling on this issue which is discussed hereunder.

Issue before the Tribunal

Whether in framing the assessment for F.Y. 2002-03 and 2003-04, the unabsorbed depreciation relating to F.Y. 1996- 97 to 1998-  99 is to be set off in accordance with the provisions of section 32(2) of the ITA as applicable for F.Y. 1996- 97 to 1998- 99 as claimed by the revenue or the same has to be set off in accordance with the said provisions as applicable to F.Y. 2002- 03 and 2003- 04 as claimed by the taxpayers?

Observations and Ruling of the Tribunal

After considering the statutory amendments in Section 32 of the ITA and some judicial precedents, the ITAT-SB has held that the unabsorbed depreciation relating to F.Y. 1996- 97 to 1998- 99 is to be dealt with in accordance with the provisions of section 32(2) of the ITA as applicable for F.Y. 1996- 97 to 1998- 99 and not in accordance to the provisions applicable in year of set off.

In its ruling, the ITAT- SB have also expressed views on the applicability of the amendments in Section 32 of the ITA and its effects thereafter on the unabsorbed deprecation pertaining to three different blocks of periods. The observations of ITAT-SB may be summarized as under