Depreciation allowance carried forward under Section 32(2) can only offset business profits, not other income sources

Kerala HC dismissed the writ petition challenging carry forward of depreciation allowance. The court held that depreciation allowance carried forward under Section 32(2) of the Income Tax Act, though deemed business loss under Sections 71 and 72, can only be set off against profits from business or profession, not against income from other sources. The petitioner's argument that Section 72 is subject to Section 71 was rejected, as Section 32(2) expressly makes carry forward subject to Section 72 provisions.

---

---

Issues:
1. Interpretation of Section 32 and Section 72 of the Income Tax Act, 1961 regarding carry forward and set off of depreciation allowance.
2. Validity of the order passed under Section 154 of the Income Tax Act, 1961 denying full set off of unabsorbed depreciation.
3. Whether the depreciation allowance can be set off against income from sources other than profits or gains of business or profession.

Analysis:

Issue 1: Interpretation of Section 32 and Section 72
The petitioner claimed a carry forward loss of Rs. 1,14,60,832 as unabsorbed depreciation, seeking full set off. The petitioner argued that Section 32(2) allows for the carry forward of depreciation allowance to the next year. However, the respondent contended that Section 72 restricts the set off of such depreciation allowance only against profits or gains of business or profession. The court analyzed the provisions of Section 32(2) and Section 72, concluding that the depreciation allowance carried forward is deemed a business loss under Section 72 and can only be set off against business income, not income from other sources.

Issue 2: Validity of the Section 154 Order
The petitioner filed a rectification application under Section 154 of the Income Tax Act, which was rejected. The petitioner challenged the order, seeking relief through a writ petition. The court examined the grounds for rectification and found that the denial of full set off of unabsorbed depreciation was in accordance with the provisions of Section 72. The court held that there was no error in the order passed under Section 154, dismissing the petitioner's claim for relief.

Issue 3: Set Off Against Income from Other Sources
The petitioner argued that Section 71 allows for the set off of business losses, including depreciation allowance, against income from any other source. However, the court held that Section 72 specifically limits the set off of depreciation allowance to profits or gains of business or profession. The court rejected the petitioner's contention that Section 72 is subject to Section 71, emphasizing that the carry forward of depreciation allowance is governed by the restrictions outlined in Section 72.

In conclusion, the court found no merit in the petitioner's arguments and dismissed the writ petition, upholding the denial of full set off of unabsorbed depreciation under the Income Tax Act, 1961.

---