The claim of depreciation by taxpayers and its denial by the tax authorities has been the subject matter of constant litigation. Frequent changes in the provisions related to depreciation in the Income Tax Act have contributed to multiple interpretations and different decisions, distinguishing one from the other.
This article seeks to analyse the recent decision of the Mumbai Tribunal Special Bench in the case of Times Guaranty Ltd ('assessee'). Before we analyse this decision, it is imperative to know the background of various amendments carried out in the provisions related to set off of unabsorbed depreciation.
Up to assessment year 1996-97, unabsorbed depreciation was considered as the depreciation allowance of the succeeding year(s) and, thus, had an indefinite life for set-off against any head of income.
From assessment year 1997-98 to 2001-02 ('intervening period'), the law was amended and unabsorbed depreciation of a particular year was permitted to be carried forward for a period of eight years only, for a set-off against profits and gains of business or profession.
The law existing prior to the intervening period was reinstated with effect from assessment year 2002-03.
In this case, the assessee had claimed set off of unabsorbed depreciation determined in assessment year's 1997-98 to 1999-2000, against income under the head 'Income from other sources' in its return of income for assessment year's 2003-04 and 2004-05. The tax officer disapproved the above claim. The assessee's claim was allowed by the Commissioner (Appeals). The tax department filed an appeal before the Tribunal against the order of the CIT(A).
Before the Tribunal, it was contended by the assessee that the law as existing on the first day of the relevant assessment year is applicable. As set-off was being claimed in assessment year's 2003-04 and 2004-05, section 32(2) would be applicable as per which unabsorbed depreciation of earlier years was to be considered as part of current year's depreciation allowance and allowed to be set-off against income under any head.
The assessee also relied on the decision of Delhi Tribunal in case of Jai Ushin Ltd versus DCIT (305 ITR 210 (AT)) wherein the department had taken a stand that the law amended by the Finance Act, 2001 should prevail, which was upheld therein. Lastly, it was argued by the assessee that in view of the difference of opinion between various Benches of the Tribunal, it is clear that two interpretations were possible. Therefore, relying on the judgement of the Supreme Court in the case of Vegetable Products Ltd (88 ITR 192), view in favour of assessee should be followed.
On the other hand, the tax department argued that the amendment took place by Finance Act, 2001 and, hence, the assessee could not claim set off of unabsorbed depreciation relating to the intervening period against the income under any head except profits and gains of business or profession.
It was also contended that the income tax return (ITR) provides for year-wise brought forward depreciation for set-off purpose. It was argued that if the legislature wanted to treat unabsorbed depreciation for assessment year's 1997-98 to 2001-02 as part of current year depreciation, then there was no need for having a separate column in the ITR form for set off on year-wise basis.
It was held by the Tribunal that from the language of section 32(2), it is manifest that this is a substantive provision and not a procedural one. It is a settled legal position that an amendment to a substantive provision is normally prospective, unless expressly stated otherwise or it appears to by necessary implication. Nowhere do the Notes on clauses or Memorandum explaining the provision of the Finance Bill, 2001 indicate that the substitution of sub-section (2) of section 32 is retrospective.
The amendment implies that the directive of the deeming provision of section 32(2) shall apply only when the assessment of the assessee from assessment year 2002-03 onwards is made, in which depreciation allowance for the current year cannot be given full effect to owing to inadequacy of profits.
The Tribunal rejected the assessee's argument of taking favourable interpretation on the ground that this principle of favourable interpretation is applicable only where there exists a logical and bonafide doubt about the interpretation of a provision and not otherwise.
Thus, it was held that the unabsorbed depreciation of the intervening period, which remained to be adjusted beyond assessment year 2001-02, can be set off only against income under the head 'Profits and Gains of Business or Profession' for a maximum period of eight years.
This decision of the Special Bench will have far-reaching implications on those taxpayers who have accumulated unabsorbed depreciation of the years prior to assessment year 2002-03. We are right now in assessment year 2010-11. And, on the basis of this ruling, the unabsorbed depreciation of assessment year 2001-02 and prior years would lapse, if not already exhausted.
On a plain reading of the amended provisions, it would be noticed that it refers to unabsorbed depreciation of ''any previous year'' carried forward. It is a moot question whether the outcome would have been different, if this had been brought to the notice of the Bench.