2012 (2) TMI 649 - AT - Income Tax

Appeal allowed for statistical purposes, remanded for reassessment of unabsorbed depreciation treatment.

ACIT, Circle-1, Muzaffarnagar Versus M/s Pushkar Steels P. Ltd.

The appeal was allowed for statistical purposes, and the matter was remanded to the Assessing Officer to reexamine the treatment of carry forward ... - ISSUES PRESENTED AND CONSIDERED 1. Whether unabsorbed brought forward depreciation (carry-forward depreciation) from earlier assessment years can be set off against income taxed under the head 'Income from Other Sources' in a subsequent assessment year, having regard to sections 32(2), 72(2) and 73(3) of the Income-tax Act. 2. Whether the Tribunal/CIT(A) erred in allowing set-off of unabsorbed depreciation against income from other sources without determining the assessment year of origin of the carried forward depreciation and without applying the legal position as laid down by a Special Bench decision interpreting amendments to section 32(2). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Permissibility of setting off unabsorbed carried forward depreciation against 'Income from Other Sources' Legal framework: Sections 32(1)/(2) (depreciation allowance and carry forward rules), 72(2) (set off of current year business loss against income under any head), and 73(3) (limitations on set off of unabsorbed depreciation) of the Income-tax Act govern the treatment of current and unabsorbed depreciation and the heads of income against which such amounts may be set off. Precedent treatment: A Supreme Court decision was relied upon by the first appellate authority to support the proposition that unabsorbed brought forward depreciation can be set off against income taxed under any head, including 'Income from Other Sources', by a combined reading of sections 32(2), 72(2), 73(3) and related provisions. Conversely, a subsequent Special Bench decision has interpreted the post-amendment regime to restrict the set-off of certain categories of unabsorbed depreciation to profits and gains of business or profession only, depending on the period in which the depreciation arose. Interpretation and reasoning: The Tribunal observed that the lower authorities had allowed set-off of carried forward depreciation against income from other sources based on the Supreme Court decision. However, the Tribunal recognized that the Special Bench decision exhaustively analyzed the legal position across three temporal periods (up to A.Y. 1996-97; A.Y. 1997-98 to 2001-02; and A.Y. 2002-03 onwards) and concluded that the permissibility of set-off depends on (a) whether the unabsorbed depreciation is the 'first unadjusted depreciation allowance' (arising up to A.Y. 1996-97), 'second unabsorbed depreciation allowance' (arising in A.Ys. 1997-98 to 2001-02), or 'third unadjusted depreciation allowance' (arising from A.Y. 2002-03 onwards), and (b) the applicable time-limit and head(s) of income against which carry-forward set-off is permitted. Ratio vs. Obiter: The Tribunal treated the Special Bench synthesis of the law for the three periods as determinative (ratio) for applying limitations on the set-off of carried forward depreciation. The earlier Supreme Court authority was treated as precedent relied upon by the CIT(A), but the Special Bench's later interpretative ruling (addressing statutory amendments and temporal categories) was given precedence for practical application of the law in the assessment process. Conclusions: The Tribunal held that allowance to set off unabsorbed depreciation against income from other sources cannot be accepted without first determining which category (period of origin) the carried forward depreciation belongs to. The correctness of an across-the-board set-off (against income from other sources) depends on the year in which the depreciation was computed and the applicable limitations summarized by the Special Bench. Accordingly, the matter was remitted for fresh examination in light of that decision. Issue 2 - Adequacy of factual and legal determination by assessing authorities regarding year of origin of carried forward depreciation Legal framework: The entitlement to set off carried forward depreciation against different heads of income is not only a question of law but also depends on factual determination of the assessment year for which the depreciation was first computed, since statutory treatment varies by period. Precedent treatment: The Special Bench decision emphasized that the classification and temporal limits for set-off must be applied according to the year of origin of the unabsorbed depreciation; decisions that do not identify the year of origin cannot correctly apply the statutory scheme. The Supreme Court decision relied upon by the lower authority was not treated as displacing the detailed temporal matrix laid down by the Special Bench as to practical application. Interpretation and reasoning: The Tribunal found that neither the Assessing Officer nor the CIT(A) had indicated or examined which assessment year the brought forward unabsorbed depreciation related to. Given the differing permissibility to set off (depending on whether the depreciation was 'first', 'second' or 'third' unabsorbed allowance), the absence of this factual determination rendered the authorities' conclusions incomplete and premature. The Tribunal therefore directed restoration to the file of the Assessing Officer to examine the issue afresh in light of the Special Bench's legal framework. Ratio vs. Obiter: The Tribunal's direction to require identification of the year of origin before applying the set-off rules is part of the operative ratio (procedural requirement and legal application) necessary for correct assessment; its finding that the matter must be re-examined is an essential step to apply the law correctly rather than obiter commentary. Conclusions: The Tribunal allowed the appeal for statistical purposes only and remitted the matter to the Assessing Officer with instructions to determine the year of origin of the carry-forward unabsorbed depreciation and to apply the Special Bench's exposition of the law (the three-period framework and its limits) when deciding whether the depreciation can be set off against income from other sources. Cross-references 1. The conclusion that set-off permissibility depends on the year of origin of the carried forward depreciation follows from the Special Bench's detailed categorization and supersedes a blanket application of earlier authority without temporal analysis. 2. The procedural direction to remit to the Assessing Officer flows from the Tribunal's finding that the lower authorities did not specify the relevant assessment year(s) of the unabsorbed depreciation; factual determination is prerequisite to legal application under sections 32(2), 72(2) and 73(3).