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No set off if business not carried out in assessment year

AIT News Network

CHENNAI. Special bench of ITAT AIT-2006-198-ITAT has ruled that if the business from which the depreciation claim arose is not carried out in any of the assessment years, the assessee would not be entitled to the set off.

The Special Bench was constituted for considering the following question :

“In view of the provisions of section 32(2)(iii) whether it is possible to set off the brought forward depreciation loss against capital gains?”

T H E R U L I N G:

The position prior to 1.4.1997 as contained in sections 32, 70, 71 72 of the Act have all been incorporated into section 32(2) of the Act itself with effect from 1.4.1997. The law maker thus having incorporated the provisions of sections 70, 71 and 72 of the Act in section 32 of the Act and has made this section a comprehensive in itself.
- The facts of the case as it exist are that the claim of depreciation for set off relates to assessment year 1997-98 and the business to which it was related to is still continuing. The assessment year involved is 1999-2000. it is thus clear that the present case of the assessee do not fall into section 32(2)(i) which permits setting off of unabsorbed depreciation against profits and gains of any business of the same assessment year. Sec. 32(2)(ii) is also not attracted in the case of the assessee because of the same reason, viz. the unabsorbed depreciation is not of the same assessment year as 1999-2000 but is of 19997-98. It is only in the event of the depreciation remaining wholly unabsorbed for the assessment year 1999-2000, that the assessee could insist for adjustment or set off of such unabsorbed portion of the depreciation against income from any other head including capital gains. This being not the fact of the present case, the claim of the assessee that unabsorbed depreciation should be allowed to be adjusted against capital gains is incorrect because this provision is not attracted to the facts of the present case.
- The facts of the present case, as they are, attract the provisions of sec32(2)(iii) of the Act. This is because the unabsorbed depreciation is for the assessment year 1997-98 and the assessment year before us is 1999-2000. The unabsorbed depreciation being two years older to the present assessment year all that the assessee would be entitled to is carry forward of the said unabsorbed depreciation to be set off against the profits and gains of the business to which this depreciation is related to is still carried on and will be allowed to be carried forward for set off for the following six assessment years because already two assessment years have lapsed.
  - In the present case before us the assessment year 1999-2000, and the depreciation allowance is for the assessment year 1997-98 which the assessee is claiming for set off against the income for the present assessment year.
    - It is absolutely clear that it is only section 32(2)(iii) of the Act, that is operational in the case of the assessee. On that basis all that the assessee could claim is for carry forward of the unabsorbed depreciation for six more successive assessment years to be adjusted against the income from profits and gains from the same business from which the depreciation claim arose and the assessee would be entitled to carry this act for the next six assessment year in which the assessee is claiming the set off of the unabsorbed depreciation.
      - The clear condition that is laid down in this section is that in the assessment year in which the assessee is claiming the set off of the unabsorbed depreciation, assessee must be carrying on that business and the income from that business must exist.
        ( Click here for full text of ruling AIT-2006-198-ITAT )