SARFAESI enforcement and unabsorbed depreciation: possession sale is not a transfer, and carried-forward depreciation continues without the old limit.

Enforcement of a secured asset under SARFAESI does not by itself amount to a transfer of ownership by the borrower; the lender's taking possession and sale are recovery measures, so short-term capital gains were not chargeable on that basis. The adjustment or waiver of loan dues in that enforcement process was also not treated as taxable income under the provisions invoked. On unabsorbed depreciation, the amended section 32(2) removed the earlier eight-year restriction from assessment year 2002-03 onwards, so depreciation carried forward from earlier years and available on 1 April 2002 could be carried forward and set off without time limit.

---

---

Issues: (i) Whether the taking over and sale of secured assets by the secured creditor under the SARFAESI mechanism resulted in a transfer by the assessee giving rise to short-term capital gains under the Income-tax Act; (ii) Whether unabsorbed depreciation pertaining to assessment years 1997-98 to 2001-02 was available for carry forward and set off in the assessment year under appeal.

Issue (i): Whether the taking over and sale of secured assets by the secured creditor under the SARFAESI mechanism resulted in a transfer by the assessee giving rise to short-term capital gains under the Income-tax Act.

Analysis: The secured creditor's powers under section 13 of the SARFAESI Act were held to be enforcement powers for recovery of dues and not a transfer of ownership. Taking possession of mortgaged assets did not vest title in the lender; it only enabled sale for realisation of the debt. The Court distinguished the earlier authority relied upon by the revenue side on the basis that the factual and legal setting there was different. Since ownership in the secured assets never passed to the lender, the assessee could not be treated as having effected a transfer merely because the assets were taken over and sold in enforcement proceedings. The waiver and adjustment of the loan dues in this context was also not treated as taxable income under the provisions invoked by the revenue side.

Conclusion: The addition of short-term capital gains was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether unabsorbed depreciation pertaining to assessment years 1997-98 to 2001-02 was available for carry forward and set off in the assessment year under appeal.

Analysis: The amended section 32(2), as introduced by the Finance Act, 2001 and explained by the CBDT circular, removed the eight-year restriction for unabsorbed depreciation from assessment year 2002-03 onwards. Unabsorbed depreciation available on 1 April 2002 became governed by the amended provision and could be carried forward and set off without any time limit. The Court followed the settled interpretation that the benefit extended to accumulated depreciation falling within the amended regime, including the depreciation carried forward from the years in question.

Conclusion: The assessee was entitled to carry forward and set off the unabsorbed depreciation, and the disallowance was deleted.

Final Conclusion: The appeal succeeded in full, with both disputed additions set aside and the assessee granted the claimed tax relief.

Ratio Decidendi: Enforcement of security interest under SARFAESI does not by itself transfer ownership of the secured asset to the creditor, and unabsorbed depreciation available on the commencement of the amended section 32(2) is allowable for carry forward and set off without the earlier eight-year limit.

---