Tribunal allows indefinite carry forward of unabsorbed depreciation under Income Tax Act.

The Tribunal upheld the assessee's appeal, allowing indefinite carry forward of unabsorbed depreciation under the Income Tax Act. It relied on the legislative intent behind the Finance Act 2001 amendment to enable conservation of funds for asset replacement. The Tribunal dismissed the revenue's appeal and quashed the Assessing Officer's rectification order under Section 154, stating that the issue of unabsorbed depreciation carry forward was not suitable for rectification. The decision affirmed the CIT(A)'s ruling and was pronounced on December 4, 2015.

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Issues Involved:
1. Entitlement to carry forward unabsorbed depreciation from Assessment Year (AY) 1996-97 and earlier.
2. Legality of adjusting unabsorbed depreciation under Section 154 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Entitlement to Carry Forward Unabsorbed Depreciation:
The core issue is whether the assessee can carry forward unabsorbed depreciation of Rs. 2,61,32,164/- from AY 1996-97 and earlier years. The assessee filed the return for AY 2007-08 declaring income under "profits and gains from business or profession" and sought to set it off against brought forward business losses from AY 1999-2000. The Assessing Officer (AO) initially allowed the set-off of unabsorbed depreciation from AY 1983-84 to 1992-93 but later, in a rectification order under Section 154, disallowed the carry forward of unabsorbed depreciation up to AY 1996-97, citing an 8-year limit for set-off starting from AY 1997-98.

The CIT(A) allowed the appeal of the assessee, relying on the decision of the Gujarat High Court in General Motors India Pvt Ltd vs DCIT, which held that unabsorbed depreciation as of April 1, 2002, should be governed by the amended Section 32(2) of the Act, allowing indefinite carry forward. The Tribunal upheld this view, emphasizing the legislative intent behind the Finance Act 2001 amendment, which aimed to enable indefinite carry forward of unabsorbed depreciation to conserve funds for asset replacement.

2. Legality of Adjusting Unabsorbed Depreciation under Section 154:
The AO issued a notice under Section 154, claiming a mistake in the set-off of unabsorbed depreciation. The assessee argued that the AO should have prioritized setting off brought forward business losses from AY 1997-98 onwards. The AO, however, disallowed the carry forward of unabsorbed depreciation for AYs 1996-97 and earlier, and for AYs 1997-98 to 1999-2000, allowing it only for AYs 2000-01 and 2001-02.

The Tribunal noted that the issue of unabsorbed depreciation carry forward is highly debatable and not suitable for rectification under Section 154, which is meant for obvious and patent mistakes. Citing the Supreme Court's decision in T.S. Balaram, ITO vs Volkart Bros, the Tribunal held that the AO erred in using Section 154 for this issue.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to allow the carry forward of unabsorbed depreciation for an indefinite period as per the amended Section 32(2) of the Act by the Finance Act 2001. The Tribunal also quashed the AO's rectification order under Section 154, deeming the issue too debatable for such proceedings.

Order Pronounced:
The order was pronounced in the open court on December 4, 2015.

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