Unabsorbed Depreciation Under Section 32(2) Can Offset Income From Any Head, Including Other Sources

The ITAT Ahmedabad held that brought forward unabsorbed depreciation under section 32(2) can be set off against income from any head, including "Income from other sources," regardless of whether business activity was carried out in the relevant year. The tribunal found that the lower authorities erred in denying the set-off solely because no business was conducted, as this is not a condition precedent under the Act. The CIT(A)'s confirmation of disallowance was set aside, and the AO was directed to allow the set-off of unabsorbed depreciation for the assessment year 2015-16. The assessee's appeal was allowed.

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ISSUES:

Whether the brought forward unabsorbed depreciation can be set off against the current year's total income despite no business activity being carried out during the relevant assessment year.Whether the absence of business activity disentitles the assessee from claiming set-off of unabsorbed depreciation under section 32(2) of the Income-tax Act, 1961.Interpretation and application of sections 32(2) and 72(2) concerning carry forward and set-off of unabsorbed depreciation and business losses.

RULINGS / HOLDINGS:

The Court held that unabsorbed depreciation "becomes part of the current year's depreciation" by virtue of the statutory fiction under section 32(2), and its set-off is not conditional upon carrying on business during the year of set-off.The Court rejected the view that the absence of business activity disentitles the assessee from claiming set-off of unabsorbed depreciation, holding such interpretation as "contrary to the scheme of the Act and judicially settled law."Section 72(2) mandates that business loss shall be set off first against business income, but does not restrict the operation of section 32(2) which allows unabsorbed depreciation to be set off against income under any head, including "income from other sources."The order denying set-off of brought forward unabsorbed depreciation was set aside, and the Assessing Officer was directed to allow the set-off of Rs. 2,46,533/- against the total income assessed for the year under appeal.

RATIONALE:

The Court applied the statutory framework of sections 32(2) and 72(2) of the Income-tax Act, 1961, which respectively govern the carry forward and set-off of unabsorbed depreciation and business losses.Section 32(2) creates a legal fiction that unabsorbed depreciation from an earlier year "shall be added to the depreciation allowance of the following year and deemed to be part of that year's depreciation."The Court relied on binding Supreme Court precedents, including CIT v. Virmani Industries Pvt. Ltd. and CIT v. Jaipuria China Clay Mines (P) Ltd., which unequivocally held that unabsorbed depreciation can be set off against total income regardless of business activity in the year of set-off.The Court also referred to the Madras High Court decision in CIT v. SPEL Semiconductor Ltd., which affirmed that unabsorbed depreciation assumes the character of current year's depreciation and can be set off against income under any head, even in the absence of business activity, and clarified the interplay between sections 32(2) and 72(2).The Court rejected the Revenue's contention that section 72(2) restricts the set-off of unabsorbed depreciation against income from other sources, emphasizing that section 72(2) applies only to the sequence of set-off between business loss and unabsorbed depreciation against business income.

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