Unabsorbed Depreciation VS Salary

Hello Mukund,

                How are you?

                I beg to differ from your view friend, this is not only my view, in some of the books the same view is presented

As per section the amount of depreciation “shall be added to the amount of the allowance for depreciation for the following previous year and deemed to part of the allowance” so what would happen if there is unabsorbed depreciation, it would be treated or added as current year depreciation and if there is no sufficient business income (i.e. if there is no sufficient income under the business head to take care of current and unabsorbed depreciation) in current year too it could be set-off against other heads of income, but subject to the provision of section 71(2A) it could not be set-off against “Salary”.

The following are extracts of the related sections:

                Section 32(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year⁹¹, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.

Section 71(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss and the assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to have such loss set off against such income.

    Section 72(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.

                The wordings of section 71(2A) is “the net result of the computation under the head “Profits and gains of business or profession” is a loss “.As per Section 32(2) unabsorbed depreciation deemed to be the part of current year depreciation.  So, automatically it would be treated as current year depreciation.

                The unabsorbed depreciation should first come under the head “Business” then only it can be set-off against other heads, but section 71(2A) permits us to set-off against other heads other than salary. The unabsorbed depreciation can not be directly set-off against other heads of income.

Please share your views my beloved friend

Regards

Deepan Chakravarthy.E

Dear Deepan,

 Sorry for the delay in communication. Had some work. so could not turn up to the forum. WIth due respect to the points give by you, i would like to share a few of my findings. Unabsorbed depreciation s covered under an independant section 32(2). The section gives a link to Section 72(2) and 73(3). It does not give a ljnk to section 71(2A)(where it is said that business loss cannot be set off under salaries). Hence, it can be inferred that the statute does not intend to restrict the set off of unabsorbed dep against salaries. had there been an intention to do so, it would have specified the same in 32(2)(As in case of 72(2A).

Dear Mukund

            I agree with you, section 32 is an independent section.  Can you please quote me the sections that empower us to set-off unabsorbed depreciation against any other source of income during the subsequent previous year?

            No where, it is explicitly mentioned. Even the section 32(2), which is linked to Section 72(2) and 73(3), and those sections say only about the order of preference to set-off the current year depreciation, Business Loss and Unabsorbed depreciation. Even those sections are not mentioned about unabsorbed depreciation.

            Unabsorbed depreciation would be classified under the head Business. Business Losses are governed by three sections, Section 71(2A), 72 and 73. If you verify those sections no where mentioned about unabsorbed depreciation and it can not be classified as a loss and it is just allowance with special character.

            If you thoroughly read the section 32, it says about that depreciation allowance could be allowed in any of the subsequent previous years if there was inadequate income during the preceding previous year. It is not only says that it has to be allowed in subsequent previous years and also says it is deemed to be the allowance of the subsequent previous years. By section 32(2), if the previous years’ depreciation form part of subsequent years’ depreciation then loss under the business head is governed by section 71(2A). It empowers to set the business loss of the previous year can be set-f off against any other heads of income other than salary.   

            I think, I am in correctly presented, please share your view.         

Regards

Deepan Chakravarthy.E