2009 (3) TMI 246 - AT - Income Tax

Tribunal Allows Set Off of Unabsorbed Depreciation and Business Loss Against Short-Term Capital Gains Under Section 32

The Tribunal partly allowed the assessee's appeal. It upheld the AO's decision to compute short-term capital gains by deducting the Written Down Value ... Claim set off of unabsorbed depreciation and eligible business loss - Computation of income from short-term capital gains u/s. 50 - Whether AO is right in deducting only the WDV in order to compute the short-term capital gain? - retrospective operation - assessee had been charging depreciation on the assets in the books of account maintained by it from the AY 1985-86 onwards - While filing the return of income for the first time for AY 1995-96 also, the assessee computed the WDV as on 1st April, 1994 and claimed depreciation on the WDV only - However for computing the short-term capital gain u/s. 50, the assessee has sought deduction of original cost instead of the WDV. HELD THAT:- The ld AR contended that there is no decision to support the view that Expln. 5 to s. 32 is retrospective and further submitted that the facts pertaining to Gold Coin Health Food (P) Ltd. are totally different from the instant case. However, we are unable to agree with his contentions, in view of the decision of Hon'ble Supreme Court in the case of Gold Coin Health Food (P) Ltd.[2008 (8) TMI 5 - SUPREME COURT], which lays down the proposition for interpretation of law. Under Art. 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. Hence, in our opinion, the Expln. 5 to s. 32 is clarificatory in nature and hence it will have retrospective operation. Accordingly, the depreciation cannot be taken as 'notionally allowed', but only as 'actually allowed.' Hence the AO is right in deducting only the WDV in order to compute the short-term capital gain. Eligibility of unabsorbed depreciation/business loss for set off against short-term capital gain - As contended by ld AR, the gain arising on sale of depreciable assets is taxed as short-term capital gain in view of the legal fiction created by s. 50. Otherwise, such gain is normally treated as part of business receipt only. The High Court in the case of Shrikishan Chandmal [1965 (4) TMI 117 - MADHYA PRADESH HIGH COURT] has held that the dividend income from shares held as stock-in-trade which is assessable as 'income from other sources', can be set off against brought forward business loss. The Hon'ble Supreme Court in the case of Western States Trading Co. (P) Ltd.[1971 (1) TMI 11 - SUPREME COURT] has also approved the decision of Hon'ble Madhya Pradesh High Court cited above. In view of the propositions laid down in the above, we are of the opinion that the assessee is entitled to claim set off of unabsorbed depreciation and eligible business loss, if any, against short-term capital gain computed u/s 50. Hence we find merit in the contention of the ld AR. In any case, the dispute with regard to the eligibility of set off does not arise in respect of unabsorbed depreciation relating to AY 1996-97 and earlier years, in view of the decision in the case of S & S Power Switchgear Ltd.[2008 (3) TMI 328 - MADRAS HIGH COURT], Accordingly, we direct the AO to allow set off of the eligible amount of unabsorbed depreciation and unabsorbed business loss against the short-term capital gain. The appeal of the assessee is partly allowed. Issues Involved:1. Whether the depreciation can be said to have been 'actually allowed' in earlier years.2. Whether unabsorbed depreciation/unabsorbed eligible business loss can be set off against short-term capital gain computed under Section 50 of the IT Act.Detailed Analysis:1. Depreciation 'Actually Allowed' in Earlier Years:The primary issue was whether the depreciation claimed by the assessee in earlier years can be considered as 'actually allowed' for the purpose of computing short-term capital gains under Section 50 of the IT Act.Arguments by the Assessee:- The assessee argued that as per Section 43(6), only 'depreciation actually allowed' should be deducted to arrive at the Written Down Value (WDV). Since the assessee did not file returns for the assessment years 1985-86 to 1994-95, it cannot be said that depreciation was 'actually allowed' during these years.- The assessee relied on the Supreme Court's decision in CIT vs. Mahendra Mills, where it was held that 'actually allowed' does not mean 'notionally allowed.'Arguments by the Department:- The Department contended that Explanation 5 to Section 32, inserted by the Finance Act, 2001, clarifies that depreciation is mandatory, whether or not claimed by the assessee. This Explanation is retrospective as it is clarificatory in nature.- The Department relied on the Supreme Court's decision in CIT vs. Gold Coin Health Food (P) Ltd., which held that clarificatory amendments have retrospective effect.Tribunal's Findings:- The Tribunal noted that the law regarding depreciation had changed significantly since the decision in Mahendra Mills. The omission of Section 34 and Rule 5AA and the insertion of Explanation 5 to Section 32 indicate that depreciation is mandatory.- The Tribunal concluded that Explanation 5 is clarificatory and thus has retrospective effect. Therefore, depreciation must be considered as 'actually allowed' even if not claimed by the assessee.Conclusion:The Tribunal upheld the AO's decision to deduct the WDV instead of the original cost for computing short-term capital gains, as depreciation should be considered 'actually allowed.'2. Set Off of Unabsorbed Depreciation/Business Loss Against Short-Term Capital Gain:The second issue was whether unabsorbed depreciation and business loss could be set off against short-term capital gains computed under Section 50.Arguments by the Assessee:- The assessee argued that the surplus from the sale of depreciable assets, though taxed as short-term capital gains under Section 50, retains its character as business income. Therefore, unabsorbed depreciation and business loss should be allowed to be set off against this gain.- The assessee cited the Madhya Pradesh High Court's decision in CIT vs. Shrikishan Chandmal and the Supreme Court's decision in Western States Trading Co. (P) Ltd. to support this view.- Additionally, the assessee argued that unabsorbed depreciation accumulated up to the assessment year 1996-97 could be set off against any income, including short-term capital gains, based on the Madras High Court's decision in CIT vs. S & S Power Switchgear Ltd.Arguments by the Department:- The Department maintained that unabsorbed depreciation and business loss could not be set off against short-term capital gains.Tribunal's Findings:- The Tribunal agreed with the assessee, noting that the gain from the sale of depreciable assets is treated as business income and thus eligible for set off against unabsorbed depreciation and business loss.- The Tribunal also upheld the view that unabsorbed depreciation from assessment years prior to 1997-98 could be set off against any income, including short-term capital gains, based on the decision in S & S Power Switchgear Ltd.Conclusion:The Tribunal directed the AO to allow the set off of unabsorbed depreciation and business loss against the short-term capital gains.Other Observations:- The CIT(A) had raised a doubt regarding the assessment of lease rentals under the head 'business.' The Tribunal chose not to comment on this as it was not an issue before the AO or the Tribunal.Final Decision:The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the issue of setting off unabsorbed depreciation and business loss against short-term capital gains, while upholding the AO's computation of short-term capital gains by deducting the WDV.