2002 (9) TMI 88 - HC - Income Tax

High Court allows set-off of unabsorbed depreciation against income under Income-tax Act

The High Court allowed the assessee to set off unabsorbed depreciation against income taxed under section 56 of the Income-tax Act, 1961, ruling in favor ... '1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that unabsorbed depreciation of an earlier year could not be allowed to be set off against the income taxed under section 56 (sic) of the Income-tax Act, 1961? - 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the allowance of only 10 per cent. of the total expenditure incurred by the assessee as expenditure for earning the income that was the subject-matter of tax?' we are of the opinion that the Tribunal was not right in holding that the unabsorbed depreciation carried forward from earlier years could not be allowed against the income assessed under section 56 of the Act under the head 'Income from other sources'. Consequently, the first question is answered in the negative, i.e., in favour of the assessee and against the Revenue. - As regards the second question, Mr. Aggarwal, learned counsel for the assessee, submits that the assessee, at whose instance, the reference has been made, is not interested in getting an answer from this court on the question. Accordingly, the second question is returned unanswered. Issues:1. Allowance of unabsorbed depreciation against income taxed under section 56 of the Income-tax Act, 1961.2. Allowance of only 10% of total expenditure as expenditure for earning taxable income.Issue 1: Allowance of unabsorbed depreciation against income taxed under section 56:The case involved an assessee-company engaged in the manufacturing business, which ceased operations due to the withdrawal of a foreign collaborator. The Assessing Officer assessed the income under 'Income from other sources' instead of 'Profits and gains of business,' disallowing most expenses and depreciation. The Commissioner of Income-tax (Appeals) allowed set off of unabsorbed depreciation against income from other sources, reducing assessable income to nil. The Tribunal dismissed the appeal regarding expenses but disallowed setting off unabsorbed depreciation against income from other sources. The High Court referred to a Supreme Court case where it was held that unabsorbed depreciation can be set off against income from all heads specified in the Act, not limited to business income. Consequently, the High Court ruled in favor of the assessee, allowing the set off of unabsorbed depreciation against income under section 56.Issue 2: Allowance of only 10% of total expenditure as expenditure for earning taxable income:The Assessing Officer disallowed most expenses, allowing only 10% as deduction, resulting in a higher assessed income. The Commissioner of Income-tax (Appeals) affirmed this decision. However, the High Court did not delve into this issue as the assessee was not interested in obtaining an answer on this question. Therefore, the second question remained unanswered. The reference was disposed of with no order as to costs.This judgment clarifies the applicability of setting off unabsorbed depreciation against income from various sources and highlights the importance of legal precedents in interpreting tax laws for the benefit of taxpayers.