Itxa/853/2018 Of Bond Safety Belts (Dissolved) v. The Deputy Commissioner Of Income Tax Circle 12 (2)

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 853 OF 2018 Bond Safety Belts (Dissolved)]Through its erstwhile partners]Michael Pereira and Jennifer Fernandes]‘Bakhtavar’, Opp. Colaba Post Office]Colaba, Mumbai – 400 005.].. Appellant v/s. The Deputy Commissioner of Income Tax]Circle 12(2), 1st Floor, Room No.123]Aayakar Bhavan, M.K. Road]Mumbai – 400 020.].. Respondent … Mr. Niraj Sheth i/b. Mr. Atul Jasani, for the Appellant. Mr. Suresh Kumar, for the Respondent. … CORAM : K. R. SHRIRAM & KAMAL KHATA, JJ. DATED : 27TH SEPTEMBER 2023. ORAL JUDGMENT : (PER K. R. SHRIRAM, J.) 1. Though there are three substantial questions of law proposed,effectively, we need to consider only the first two substantialquestions of law which read as under: 1/16 “(i)Whether, on the facts and in the circumstances ofthe case and in law, the Tribunal ought to have allowed adeduction for write-off of debit balances in SundryCreditors’ account of Rs. 18,264/- and deposits ofRs. 20,190/-? (ii)Whether, on the facts and in the circumstances ofthe case and in law, the Tribunal was justified in denyingset-off of unabsorbed depreciation pertaining to theAssessment Years 1996-97 to 2001-02 aggregatingRs. 13,89,661/- against short term capital gains? 2. The counsel agreed that instead of admitting and framingsubstantial question of law, the Court could hear the Appealfinally at this stage itself.substantial question of law, the Court could hear the Appealfinally at this stage itself. 3. Appellant Bond Safety Belts (Dissolved) was a partnership firmand it came to be dissolved with effect from 6th December 2014.The Appeal therefore is filed through the erstwhile partners.and it came to be dissolved with effect from 6th December 2014.The Appeal therefore is filed through the erstwhile partners. 4. The firm had filed its return of income for the Assessment Year(“AY”) 2010-2011 declaring total income of Rs.2,02,07,915/-which was arrived at after claiming deduction for write off ofdebit balances amounting to Rs.1,29,039.75/-. This includedsundry creditors of Rs.18,262.45 and deposits to various utilitiesamounting of Rs. 20,190/-.(“AY”) 2010-2011 declaring total income of Rs.2,02,07,915/-which was arrived at after claiming deduction for write off ofdebit balances amounting to Rs.1,29,039.75/-. This includedsundry creditors of Rs.18,262.45 and deposits to various utilitiesamounting of Rs. 20,190/-. 5. The firm also had claimed as set-off against income, ofunabsorbed depreciation amounting to Rs.39,19,416/- whichincluded unabsorbed depreciation of Rs.13,89,661/- pertaining toAY 1996-97 to 2001-02. The depreciation of Rs. 39,19,416/- wasset-off against net short term capital gains of Rs.2,41,27,331/-and hence, the total income declared was Rs.2,02,07,915/-.unabsorbed depreciation amounting to Rs.39,19,416/- whichincluded unabsorbed depreciation of Rs.13,89,661/- pertaining toAY 1996-97 to 2001-02. The depreciation of Rs. 39,19,416/- wasset-off against net short term capital gains of Rs.2,41,27,331/-and hence, the total income declared was Rs.2,02,07,915/-. 6. The Assessing Officer (“AO”) passed an assessment order dated28th March 2013 under Section 143(3) of the Income Tax Act,1961 (“the Act”) wherein he disallowed Rs.77,264/- out of theamount of Rs.1,29,039/-. It is stated in the Appeal that it is notclear how this amount of Rs.77,264/- was arrived at but it wasdisallowed under Section 36(2)(i) of the Act.28th March 2013 under Section 143(3) of the Income Tax Act,1961 (“the Act”) wherein he disallowed Rs.77,264/- out of theamount of Rs.1,29,039/-. It is stated in the Appeal that it is notclear how this amount of Rs.77,264/- was arrived at but it wasdisallowed under Section 36(2)(i) of the Act. 6. The Assessing Officer (“AO”) passed an assessment order dated28th March 2013 under Section 143(3) of the Income Tax Act,1961 (“the Act”) wherein he disallowed Rs.77,264/- out of theamount of Rs.1,29,039/-. It is stated in the Appeal that it is notclear how this amount of Rs.77,264/- was arrived at but it wasdisallowed under Section 36(2)(i) of the Act.28th March 2013 under Section 143(3) of the Income Tax Act,1961 (“the Act”) wherein he disallowed Rs.77,264/- out of theamount of Rs.1,29,039/-. It is stated in the Appeal that it is notclear how this amount of Rs.77,264/- was arrived at but it wasdisallowed under Section 36(2)(i) of the Act. 7. The AO also disallowed set-off of the unabsorbed depreciation ofRs.13,89,661/- that pertained to AY 1996-97 to 2001-02. TheAO had relied upon a decision of the Special bench of theTribunal in the case of DCIT v/s. Times Guaranty Limited [ITANo.4947 and 4198/Mum/2008] where the Tribunal had heldthat depreciation was available for carry forward only for aperiod of 8 years and set off only against business income.Aggrieved by the said assessment order the firm-Assessee3/16Rs.13,89,661/- that pertained to AY 1996-97 to 2001-02. TheAO had relied upon a decision of the Special bench of theTribunal in the case of DCIT v/s. Times Guaranty Limited [ITANo.4947 and 4198/Mum/2008] where the Tribunal had heldthat depreciation was available for carry forward only for aperiod of 8 years and set off only against business income.Aggrieved by the said assessment order the firm-Assessee3/16 preferred an Appeal before the Commissioner of Income Tax(Appeals) [“CIT(A)”]. The said Appeal was partly allowed. Insofaras deduction in respect of sundry creditors of Rs.18,264/- anddeposits of Rs.20,190/-, the CIT(A) held that the Assessee had notfurnished any evidence to show that the same was the lossincurred during the current assessment year. He also disallowedCST of Rs.1,935.81/- on the ground that the same was not shownas income earlier. 8. As regards set-off of depreciation of Rs.13,89,661/- is concerned,it was submitted on behalf of the Assessee, relying on a judgmentof Gujarat High Court in General Motors (India) Pvt. Ltd. v/s.DCIT 1, that the unabsorbed depreciation pertaining to the yearsin question can be set-off against the profits and gains ofsubsequent assessment years against income under any head. Thissubmission was not accepted by CIT(A). The Assessee thereforepreferred an Appeal before the Income Tax Appellate Tribunal(“ITAT”) against the order dated 21st January 2015 passed byCIT(A). 9. The ITAT dismissed the Appeal by holding that the CIT(A) wasjustified into concluding that the Assessee has failed to filejustified into concluding that the Assessee has failed to file1(2012) 25 taxmann.com 364 (Gujarat) 4/16 evidence in respect of claim of deduction on account of right ofsundry creditors and deposits and as regards unabsorbeddepreciation the Gujarat High Court in General Motors (supra)has held that unabsorbed depreciation of the years in questioncould be set-off only against the profits and gains of subsequentassessment years. 10.Since the Assessee felt the ITAT had misread the judgmentin General Motors (supra) a MA was filed which has beensubsequently dismissed.in General Motors (supra) a MA was filed which has beensubsequently dismissed. 11.Mr. Sheth stated that he would not press the substantialquestion No.1 proposed as quoted above due to the amounts beingsmall. We make it clear that we have not expressed any opinionon that question.question No.1 proposed as quoted above due to the amounts beingsmall. We make it clear that we have not expressed any opinionon that question. 10.Since the Assessee felt the ITAT had misread the judgmentin General Motors (supra) a MA was filed which has beensubsequently dismissed.in General Motors (supra) a MA was filed which has beensubsequently dismissed. 11.Mr. Sheth stated that he would not press the substantialquestion No.1 proposed as quoted above due to the amounts beingsmall. We make it clear that we have not expressed any opinionon that question.question No.1 proposed as quoted above due to the amounts beingsmall. We make it clear that we have not expressed any opinionon that question. 12.As regards the 2nd substantial question of law proposed onthe unabsorbed depreciation, a Division Bench of this Court inPCIT vs. Gunnebo India Pvt Ltd.2, dismissed the appeal byfollowing the judgment in General Motors (supra). The HighCourt while considering the appeal in Gunnebo (supra), hasthe unabsorbed depreciation, a Division Bench of this Court inPCIT vs. Gunnebo India Pvt Ltd.2, dismissed the appeal byfollowing the judgment in General Motors (supra). The HighCourt while considering the appeal in Gunnebo (supra), has 2ITA No. 1337 of 2016 dated 11th February 2019(unreported) quoted the relevant portion of the order of ITAT which haddismissed the revenue’s appeal where ITAT has held that as perthe provisions of Section 32(2) of the Act read with Sections 70,71 and 72 of the Act it becomes very clear that the totaldepreciation comprising of the depreciation of the relevantassessment year along with the unabsorbed depreciation of theearlier years becomes the total current year’s depreciation whichis allowed to be set-off against income under any head of incomeincluding long term capital gain and hence did not find anyreason to interfere with the order of CIT(A). The High Court hasalso quoted relevant paragraph from General Motors (supra)where there is reference to a Circular No. 14 of 2001 issued bythe CBDT where the Court has held that the unabsorbeddepreciation was available for carry forward and set-off in thesubsequent assessment year. Paragraph 3 and 4 of Gunnebo(supra) read as under: “3.The Revenue carried the matter in appeal. The AppellateTribunal dismissed the appeal of the Revenue making thefollowing observations- “16. We have observed that the current year'sdepreciation is allowed to be set off against theincome from business as well as against the otherheads of income and unabsorbed depreciation incarry forward and become part of the depreciation of the subsequent year and the total depreciationbecomes current year's depreciation as per section32(1) of the Act, which is allowed to be set offagainst the income under any head of income. Asper the provisions of section 32(2) of the Act r.w.s.70, 71 and 72 of the Act, it becomes very clear thatthe total depreciation comprising of thedepreciation of the relevant assessment year alongwith the unabsorbed depreciation of the earlieryears becomes the total current year's depreciationwhich is allowed to be set off against income under any head of income including Long Term CapitalGain.Accordingly, we find no reason to interferewith the order of CIT(A) qua this issue and the sameis hereby upheld. We also hold that as perprovisions of section 72 of the Act, the unabsorbedbusiness loss ( other than speculative loss) of earlieryears shall be allowed to be set off only against theprofits and gains from business carried on by theassessee of the current year and so on. We orderaccordingly. However, our above decision withrespect to ground no. (i) and (ii) raised in memo ofappeal filed by Revenue should be read inconjunction with and subject to our findings withrespect to ground no. (iii) and (iv) which aredecided by us in the preceding para's of this orderand the computation shall be made accordingly." any head of income including Long Term CapitalGain.Accordingly, we find no reason to interferewith the order of CIT(A) qua this issue and the sameis hereby upheld. We also hold that as perprovisions of section 72 of the Act, the unabsorbedbusiness loss ( other than speculative loss) of earlieryears shall be allowed to be set off only against theprofits and gains from business carried on by theassessee of the current year and so on. We orderaccordingly. However, our above decision withrespect to ground no. (i) and (ii) raised in memo ofappeal filed by Revenue should be read inconjunction with and subject to our findings withrespect to ground no. (iii) and (iv) which aredecided by us in the preceding para's of this orderand the computation shall be made accordingly." 4. Having heard the learned counsel for parties and havingperused the documents on record, we do not find any error inthe order of the Appellate Tribunal. Gujarat High Court in thecase of General Motors India (P) Ltd. (supra) had consideredsomewhat similar issue, of course in the backdrop of thassessee's challenge to a notice of reopening of the assessmentThe Gujarat High Court had held and observed as under - depreciation is deductible in the first place from theincome of the business to which it relates. If suchdepreciation amount is larger than the amount ofthe profits of that business, then such excess comesfor absorption from the profits and gains from anyother business or business, if any, carried on by theassessee. If a balance is left even thereafter, thatbecomes deductible from out of income from anysource under any of the other heads of incomeduring that year. In case there is a still balance leftover, it is to be treated as unabsorbed depreciationand it is taken to the next succeeding year. Wherethere is current depreciation for such succeedingyear the unabsorbed depreciation is added to thecurrent depreciation for such succeeding year andis deemed as part thereof. If, however, there is nocurrent depreciation for such succeeding year, theunabsorbed depreciation becomes the depreciationallowance for such succeeding year. We are of theconsidered opinion that any unabsorbeddepreciation available to an assessee on 1st April,2002 (asst. yr. 2002-03) will be dealt with inaccordance with the provisions of s. 32(2) asamended by Finance Act, 2001. And once theCircular No. 14 of 2001 clarified that therestriction of 8 years for carry forward and set offof unabsorbed depreciation had been dispensedwith, the unabsorbed depreciation from asst, yr.1997-98 up to the asst. yr. 2001-02 got carriedforward to the asst. yr. 2002-03 and became partthereof, it came to be governed by the provisions ofs. 32(2) as amended by Finance Act, 2001 and wereavailable for carry forward and set off against theprofits and gains of subsequent years, without anylimit whatsoever.” (emphasis supplied) 13.In the appeal at hand, the ITAT, in the impugned order,after relying on General Motors (supra), has incorrectly come to aconclusion that the Asssessee has claimed set-off of the impugnedunabsorbed depreciation against the income under the headcapital gain which is not permissible. This is totally contrary tothe conclusion of the co-ordinate bench of the ITAT in Gunnebo(supra) where, as quoted above, the ITAT has held that theunabsorbed depreciation of earlier years become the total currentyear depreciation which is allowed to be set-off against incomeunder any head of income including long term capital gain. 14.The CBDT issued a Circular No. 14 of 2001 and therelevant portion of the said circular reads as under: “Modification of provisions relating to depreciation30.1 Under the existing provisions of section 32 of theIncome-tax Act, carry forward and set off ofunabsorbed depreciation is allowed for 8 assessmentyears. 14.The CBDT issued a Circular No. 14 of 2001 and therelevant portion of the said circular reads as under: “Modification of provisions relating to depreciation30.1 Under the existing provisions of section 32 of theIncome-tax Act, carry forward and set off ofunabsorbed depreciation is allowed for 8 assessmentyears. 30.2 With a view to enable the industry to conservesufficient funds to replace plant and machinery,specially in an era where obsolescence takes place sooften, the Act has dispensed with the restriction of 8years for carry forward and set off of unabsorbeddepreciation. The Act has also clarified that incomputing the profits and gains of business orprofession for any previous year, deduction ofdepreciation under section 32 shall be mandatory. 30.3 Under the existing provisions, no deduction fordepreciation is allowed on any motor carmanufactured outside India unless it is used (i) in thebusiness of running it on hire for tourists, or (ii) outsidein the assessee’s business or profession in anothercountry. 30.4 The Act has allowed depreciation allowance onall imported motor cars acquired on or after 1[st] April,2001. 30.5 These amendments will take effect from the 1[st]April, 2002, and will, accordingly, apply in relation tothe assessment year 2002-03 and subsequent years.” 15. Therefore, the intent of the amendment was for enablingthe industry to conserve sufficient funds to replace plant andmachinery and accordingly dispense with the restriction of 8years for carry forward and set-off of unabsorbed depreciation.The purpose of amendment in Section 32(2) of the Act by FinanceAct 2001 should be interpreted purposively and harmoniouslywith the intent as it appears from CBDT circular. Whileconstruing taxing statutes, rule of strict interpretation has to beapplied giving fair and reasonable construction to the language ofthe Section without leaning to the side of the Assessee or Revenue.But if the legislature fails to express clearly and the Assesseebecomes entitled for a benefit within ambit of the Section, thebenefit accruing to the Assessee cannot be denied. Therefore, as10/16 stated in General Motors (supra) with which we are in respectfulagreement, if current depreciation is deductible in the first placefrom the income of the business to which it relates and suchdepreciation amount is larger than the amount of the profit ofthat business, then such excess comes for absorption from profitand gains from any other business or business, if any, carried onby the Assessee. If a balance is left even thereafter, that becomesdeductible from out of income from any source under any of theother heads of income during that year. In case there is still abalance leftover, it is to be treated as unabsorbed depreciation andtaken to the next succeeding year. 16.Paragraph No. 35 to 38 of General Motors (supra) reads asunder: 35. Section 32(2) of the Act was amended by Finance Act,2001 and the provision so amended reads as under :- “Where, in the assessment of the assessee, full effectcannot be given to any allowance under sub-section(1) in any previous year, owing to there being noprofits or gains chargeable for that previous year, orowning to the profits or gains chargeable for thatprevious year, owing to the profits or gains to theprofits or gains chargeable being less than theallowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) ofsection 73, the allowance or the part of theallowance to which effect has not been given, as the 11/16 case may be, shall be added to the amount of theallowance for depreciation for the followingprevious year and deemed to be part of thatallowance, or if there is no such allowance for thatprevious year, be deemed to be allowance of thatprevious year, and so on for the succeeding previousyears.” 11/16 case may be, shall be added to the amount of theallowance for depreciation for the followingprevious year and deemed to be part of thatallowance, or if there is no such allowance for thatprevious year, be deemed to be allowance of thatprevious year, and so on for the succeeding previousyears.” 36. The purpose of this amendment has been clarified byCentral Board of Direct Taxes in the Circular No. 14 of 2001.The relevant portion of the said Circular reads as under :- “Modification of provisions relating to depreciation 30.1 Under the existing provisions of section 32 ofthe Income- tax Act, carry forward and set off ofunabsorbed depreciation is allowed for 8 assessmentyears. 30.2 With a view to enable the industry to conservesufficient funds to replace plant and machinery,specially in an era where obsolescence takes place sooften, the Act has dispensed with the restriction of 8years for carry forward and set off of unabsorbeddepreciation. The Act has also clarified that incomputing the profits and gains of business orprofession for any previous year, deduction ofdepreciation under section 32 shall be mandatory. 30.3 Under the existing provisions, no deduction fordepreciation is allowed on any motor carmanufactured outside India unless it is used (i) in thebusiness of running it on hire for tourists, or (ii)outside in the assessee’s business or profession inanother country. 30.4 The Act has allowed depreciation allowance onall imported motor cars acquired on or after 1[st]April, 2001. 30.5 These amendments will take effect from the 1[st]April, 2002, and will, accordingly, apply in relationto the assessment year 2002-03 and subsequentyears.” 37. The CBDT Circular clarifies the intent of the amendmentthat it is for enabling the industry to conserve sufficient fundsto replace plant and machinery and accordingly theamendment dispenses with the restriction of 8 years for carryforward and set off of unabsorbed depreciation. Theamendment is applicable from assessment year 2002-03 andsubsequent years. This means that any unabsorbeddepreciation available to an assessee on 1[st] day of April, 2002(A. Y. 2002-03) will be dealt with in accordance with theprovisions of section 32(2) as amended by Finance Act, 2001and not by the provisions of section 32(2) as it stood before thesaid amendment. Had the intention of the Legislature been toallow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years evenafter the amendment of section 32(2) by Finance Act, 2001 itwould have incorporated a provision to that effect. However, itdoes not contain any such provision. Hence keeping in viewthe purpose of amendment of section 32(2) of the Act, apurposive and harmonious interpretation has to be taken.While construing taxing statutes, rule of strict interpretationhas to be applied, giving fair and reasonable construction tothe language of the section without leaning to the side ofassessee or the revenue. But if the legislature fails to expressclearly and the assessee becomes entitled for a benefit withinthe ambit of the section by the clear words used in the section,the benefit accruing to the assessee cannot be denied.However, Circular No. 14 of 2001 had clarified that underSection 32(2) as amended by Finance Act, 2001 would allowthe unabsorbed depreciation allowance available in the A. Y.1997-98, 1999-2000, 2000-01 and 2001-02 to be carriedforward to the succeeding years, and if any unabsorbeddepreciation or part thereof could not be set off till the A. Y. 2002-03 then it would be carried forward till the time it is setoff against the profits and gains of subsequent years. 2002-03 then it would be carried forward till the time it is setoff against the profits and gains of subsequent years. 38. Therefore, it can be said that, current depreciation isdeductible in the first place from the income of the business towhich it relates. If such depreciation amount is larger than theamount of the profits of that business, then such excess comesfor absorption from the profits and gains from any otherbusiness or business, if any, carried on by the assessee. If abalance is left even thereafter, that becomes deductible fromout of income from any source under any of the other heads ofincome during that year. In case there is a still balance leftover, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is currentdepreciation for such succeeding year the unabsorbeddepreciation is added to the current depreciation for suchsucceeding year and is deemed as part thereof. If, however,there is no current depreciation for such succeeding year, theunabsorbed depreciation becomes the depreciation allowancefor such succeeding year. We are of the considered opinionthat any unabsorbed depreciation available to an assessee on1[st] day of April 2002 (A. Y. 2002-03) will be dealt with inaccordance with the provisions of section 32(2) as amended byFinance Act, 2001. And once the Circular No. 14 of 2001clarified that the restriction of 8 years for carry forward andset off of unabsorbed depreciation had been dispensed with,the unabsorbed depreciation from A.Y. 1997-98 upto the A. Y.2001-02 got carried forward to the assessment year 2002-03and became part thereof, it came to be governed by theprovisions of section 32(2) as amended by Finance Act, 2001and were available for carry forward and set off against theprofits and gains of subsequent years, without any limitwhatsoever. (emphasis supplied) In effect what it means is the depreciation amount has to be 14/16 (a) first against profits and gains from business; (b) excess of depreciation from any other business of theAssessee;Assessee; (c) even if that leaves a surplus then from out of income fromany source under any of the other heads of income duringthat year.any source under any of the other heads of income duringthat year. (d) If still there is a balance leftover, it is to be treated asunabsorbed depreciation and it is taken to the nextsucceeding year.unabsorbed depreciation and it is taken to the nextsucceeding year. 17.Otherwise it would leave a peculiar situation inasmuch aslike the case at hand, there is no profit from business because theoperation of the business had been stopped and to pay off theliabilities other investments or other assets have been disposedleading to capital gains on which capital gains tax has to be paidon the one hand and on the other there will be unabsorbeddepreciation perennially pending. 18.Accordingly we hereby quash and set aside the order ofITAT on this issue. We hold that ITAT was not justified. AssesseeITAT on this issue. We hold that ITAT was not justified. Assessee should be permitted to set off of the unabsorbed depreciation15/16 pertaining to A.Y 1005-97 to 2001-02 aggregating to Rs.13,89,661/- against short term capital gains. 19.Appeal accordingly disposed. (KAMAL KHATA, J.) (K.R. SHRIRAM, J.)