THE bone of contention before the Apex Court is - Whether when unabsorbed depreciation of earlier years is carried forward it loses its identity by getting merged with the current year depreciation when it comes to claiming the same. YES is the answer.
Facts of the case
The assessee company is engaged in the business of manufacturing paper. It had filed its return for the Assessment Year 1991-92 declaring its income as 'Nil'. In fact, the income for that year after showing exemptions, deductions and additions, which were to be made in terms of Sections 28 onward relating to computation of the business income, was arrived at 2,87,15,912. The assessee had unabsorbed investment allowance of previous years. It also had unabsorbed depreciation of the earlier years. In its income-tax return, however, it chose to carry forward investment allowance and claimed set off of the said unabsorbed investment allowance to the extent of 2,87,15,912, thereby showing the returned income as 'Nil'. According to the Assessing Officer, it was not the investment allowance, but unabsorbed depreciation of the earlier years which had to be set off first by giving priority to the unabsorbed depreciation. Therefore, instead of allowing the assessee to carry forward investment allowance, the Assessing Officer adjusted the unabsorbed depreciation of the earlier years and accepted 'Nil' income return as filed by the assessee, but on the aforesaid basis.
On appeal, the CIT(A) ruled against the assessee. The assessee approached the Tribunal. The Tribunal also confirmed the order of the Commissioner (Appeals). The assessee, still not satisfied, approached the Madras High Court. Even the High Court affirmed the view taken by the authorities below and dismissed the appeal of the assessee.
On appeal, the Apex Court held that,
++ it has been the consistent view of the Courts that unabsorbed depreciation allowance should be allowed before the unabsorbed investment allowance. To put it differently, unabsorbed depreciation is to be given precedence and is allowed to be set off first. Some of the High Courts had earlier taken the view that this would be so even if the assessee had not claimed the unabsorbed depreciation. It is the necessary consequence of the scheme of various provisions of the Act. Section 32A of the Act, which deals with investment allowance, was inserted by the Finance Act, 1976 with effect from 01.04.1976. According to Circular No. 202 dated 05.07.1976 issued by CBDT, the combined effect of the provisions of Sections 32, 32A, 33, 33A and 72 is that in a case where there are allowances in the nature of depreciation allowance, investment allowance, development rebate, development allowance and losses, such allowances and losses would be deductible in the order suggested, in cases where the profits are insufficient to absorb all of them;
++ it emerges from sub-section (3) of Section 32A that unabsorbed investment allowance takes precedence over current investment allowance. However, this Court in Mahendra Mills took the view that since the provision for depreciation is a benefit which enures to the assessee, if the assessee does not wish to avail of that benefit for some reason, such a benefit cannot be forced upon him. In that case, the Court held that the language of the provisions of Sections 32 and 34 of the Act is specific and admits of no ambiguity. Section 32 allows depreciation as deduction, subject to the provisions of Section 34. Section 34 provides that deduction under Section 32 shall be allowed only if the prescribed particulars have been furnished. It was specifically held that there is no mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The provision for claim of depreciation is certainly for the benefit of the assessee. If he does not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Income under the head "Profits and gains of business or Profession" is chargeable to income-tax under Section 28 and income under Section 29 is to be computed in accordance with the provisions contained in Sections 30 to 43A. The argument that since Section 32 provides for depreciation it has to be allowed in computing the income of the assessee cannot, in all circumstances, be accepted in view of the bar contained in Section 34. If Section 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under Section 32 cannot be allowed. Section 29 is, thus, to be read with reference to other provisions of the Act. It is not in itself a complete code;
+ this principle, thus, is grounded in the reasoning that there is no provision by which depreciation could be fictionally deemed to have been claimed and granted and it is to be specifically claimed by the assessee. Further, when claiming of depreciation is a privilege given to the assessee, it cannot be turned into a disadvantage even when the assessee does not claim the depreciation. Therefore, option in this behalf rests with the assessee;
++ but the issue in the present case is somewhat different, namely, when the depreciation allowance is not claimed, can it be said that the assessee has failed to claim and in that case what would be the position? According to us, there is no question of failing to claim. Situation in such an event would be that depreciation is not claimed at all and, therefore, the position mentioned in Mahendra Mills's case would follow. To this extent we find that it was a wrong question posed by the High Court, which led to a wrong answer;
++ however, the matter does not rest there. In the present case, the assessee in fact claimed the depreciation allowance insofar as it pertained to the current year. At the same time, it did not want to claim the set off of the unabsorbed depreciation allowance of the previous years. In such situation, the question is as to whether it is open to the assessee to invoke the provisions of Section 32 of the Act by claiming depreciation of the current year, but at the same time choose not to make a claim of set off of unabsorbed depreciation allowance of the previous years. As noted above, by legal fiction unabsorbed depreciation becomes depreciation of the year in question and gets added to the depreciation of the current year. If that be so, is it the right of the assessee to partly invoke the provisions of Section 32 when it comes to depreciation of the current year and still claim that it has right not to claim unabsorbed depreciation allowance?;
++ on a plain reading of Section 32, it does not appear to be the position. Once the entire depreciation, namely, unabsorbed depreciation allowance of the previous year gets merged into the depreciation of the current year, it would become an integral part thereof. Legal fiction makes it one whole thereby making it possible to the assessee to claim set off of unabsorbed carried forward depreciation as well. A fortiorari, bifurcation thereof with option to claim depreciation of current year only and contending at the same time that portion of unabsorbed carried forward depreciation is not to be thrusted upon him as it is not claimed, would not be permissible;
++ notwithstanding the above, the endeavour of the counsel for the assessee is to show that the assessee has such a right. In this direction it is argued that though by legal fiction unabsorbed depreciation allowance is carried forward to the assessment year in question and becomes a part of depreciation allowance of that year, it retains its identity inasmuch as it is brought forward only because of deeming provision which is to be applied to that limited extent and no further. In order to support this hypothesis, the counsel referred to the judgment in Commissioner of Income-Tax, Kanpur v. Mother India Refrigeration Industries P. Ltd. 2002-TIOL-133-SC-IT-LB where nature of carried forward depreciation allowance on application of deeming provision is explained by the Court;
++ we do not understand as to how the judgment cited helps the assessee. On the contrary, it goes against the assessee while answering the question which has arisen in the instant appeals. Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to the assessee to bifurcate the two again and exercising its choice to claim the depreciation of the current year under Section 32(1) of the Act and take a position that since unabsorbed depreciation of the previous years is not claimed, it cannot be thrusted upon the assessee. The position would have been different if the assessee had not claimed any depreciation at all. However, once the depreciation is claimed and while giving deductions the depreciation is to be set off against the profits of the current year prior to the unabsorbed carried forward investment allowance, it is the entire depreciation, namely, the depreciation of the current year as well as the unabsorbed carried forward depreciation, which is to be taken into account as by virtue of the fiction created under Section 32(2) of the Act, carried forward depreciation also partakes the character of depreciation of the current year. This scrambled egg cannot be unscrambled now. Otherwise, it would amount to negating the legal fiction that is created by the said provision, even to the limited extent. In fact, the case falls within the ambit of the said limited extent of legal fiction and gets covered by it;
++ once we read the provision in the aforesaid manner, the aid of other interpretative tools which is sought to be taken by the counsel for the assessee, namely, the provision is to be given liberal construction; the scheme of the Act envisages giving preference in the matter of deduction from income to those expiring by afflux of time, etc. would become irrelevant and pales into insignificance;
++ the upshot of the aforesaid discussion is to decide the question formulated against the assessee and in favour of the Revenue, though for our reasons contained in this judgment. The appeals are, accordingly, dismissed with costs.
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