Absence of Unabsorbed Depreciation in Earlier Years doesn’t bar Set off of Unabsorbed Depreciation against Income from Other Sources: ITAT

The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, held that the absence of unabsorbed depreciation in earlier years does not bar set off of unabsorbed brought forward depreciation against income from other sources.

The assessee M/s Petrofils Co-operative Society Ltd., manufacturer of polymer filament yarn, is under liquidation due to heavy losses and no activity is being carried out. They claimed set off for brought forward unabsorbed depreciation of Assessment Year (AY) 2006-07. However, the Commissioner of Income Tax (Appeals) [CIT(A)] rejected the claim since no business activities were carried out since 1997-98.

The counsel for the assessee Shri Mehul K. Patel, pointed out that this was the second round of appeal. In the first one, the ITAT held that the assessee was entitled to set off of brought-forward unabsorbed depreciation of earlier years against other incomes, even if no business activities were carried out. This was held relying on the decision of the Supreme Court in the case CIT v. Virmani Industries P.Ltd.

However, after this, the ITAT went on to hold that since in AY 2004-05 the assessee had accepted the decision of denial of carry forward of depreciation by the CIT(A) and since the record for which year the depreciation pertained is absent, the assessee’s claim was denied by the Tribunal.

The assessee then filed a Miscellaneous Application (MA) demonstrating details of claim of unabsorbed depreciation. The ITAT modified its earlier order and restored the issue of claim to the Assessing officer (AO) for decision afresh after verifying the details furnished. This was after referring Virmani’s case and General Motors India P.Ltd. v. DCIT, where it was expressed that claim of the assessee for carry forward of unabsorbed depreciation is to be allowed to be carried forward to the succeeding assessment years without limitation of 8 years placed as per provisions of Section 32(2), Income Tax Act.

The AO considered the matter afresh in the second round and denied the claim again, distinguishing the facts of assessee’s case from Virmani’s case.

The counsel for the assessee contended that since the claim of set off was finally allowed in AY 2004- 05, there was no reason for the AO to deny the claim of set off of brought-forward unabsorbed depreciation against other incomes in the impugned year.

The counsel for the respondent-state, Shri B.P. Makwana, contended that no claim of unabsorbed depreciation is to be carried forward from AY 2002-03 onwards. The tabular data submitted by the appellant does not suggest any brought forward unabsorbed depreciation for the AY under consideration. And since the previous rejection was accepted by the assessee, he sees no reason in claiming it in the subsequent years.

This tribunal after hearing both sides observed that, one of the reasons for the CIT(A) denying the claim was assessee’s acceptance of rejection of set off of brought forward depreciation in AY 2004-05. The assessee however has demonstrated that the claim was allowed by the ITAT after producing the MA.

The other reason was that there was no brought forward depreciation from AY 2002-03 onwards. The details submitted pertained to the unabsorbed depreciation of each year, which showed no unabsorbed depreciation in AY 2002-03 to 2005-06 but that does not mean that earlier year depreciation had all been absorbed.

The single member bench of ITAT Ahmedabad, consisting of Smt. Annapurna Gupta (Accountant Member) held that, even in the absence of unabsorbed depreciation in earlier year, the assessee is entitled to set off unabsorbed brought-forward depreciation against income from other sources in the impugned year.

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