Unabsorbed depreciation set-off remains available against assessed income; later restrictions on search-related undisclosed income do not apply retrospectively.

Unabsorbed depreciation carried forward under Section 32(2) retains the character of current year depreciation and can be set off under the statutory carry-forward scheme against eligible income, including an addition treated as unaccounted stock, subject to the Act's limits. The later restrictions on set-off for search-related undisclosed income, including Section 79A and the amended Section 115BBE regime, did not apply to the assessment year in question because they were introduced later and were not relevant to the assessment made. The assessee was therefore entitled to the set-off and the addition had to be reduced accordingly.

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Issues: (i) Whether unabsorbed depreciation could be set off against the addition made as unaccounted stock, and whether it could be treated as current year loss for the purpose of set-off; (ii) Whether the later provisions relating to denial of set-off in cases of search-related undisclosed income affected the assessee's claim for the assessment year in question.

Issue (i): Whether unabsorbed depreciation could be set off against the addition made as unaccounted stock, and whether it could be treated as current year loss for the purpose of set-off.

Analysis: Unabsorbed depreciation carried forward under Section 32(2) assumes the character of current year depreciation. The claim for set-off had to be examined along with the scheme of carry forward and set-off under Section 72, which permits adjustment against other income as well, subject to the statutory limits. The authorities had proceeded on the footing that the addition represented deemed income and therefore could not be adjusted against depreciation loss, but the relevant statutory provisions governing set-off were not properly considered.

Conclusion: The assessee was entitled to set off the unabsorbed depreciation against the income assessed in the year in question.

Issue (ii): Whether the later provisions relating to denial of set-off in cases of search-related undisclosed income affected the assessee's claim for the assessment year in question.

Analysis: The restriction introduced by Section 79A was not applicable, as it came into force only from 01.04.2022. The argument based on Section 115BBE also did not assist the revenue because the assessment was not made under that provision. The later amendment denying set-off of loss under Section 115BBE(2) was not relevant to the assessment year under appeal.

Conclusion: The later provisions did not bar the assessee's claim for set-off.

Final Conclusion: The assessee succeeded on the substantial questions of law, and the addition could be reduced by giving effect to the set-off of unabsorbed depreciation.

Ratio Decidendi: Unabsorbed depreciation carried forward under the Act retains the character of current year depreciation and may be set off against eligible income under the statutory scheme, while later restrictions on set-off do not apply to earlier assessment years unless expressly made applicable.

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