Depreciation Set Off Against ‘Profits Or Gains’: HC

The Kerala High Court has held that depreciation can only be set off against ‘profits or gains’ and not against ‘income from any other sources’.

The bench of Justice Gopinath P. has observed that even if the depreciation allowance under Section 32 of the Income Tax 1961 Act, which was carried forward in terms of sub-section (2) of Section 32, is deemed to be a business loss for the purposes of Sections 71 and 72, it can be set off only against profits or gains of any business or profession and it cannot be set off against income from any other sources.

Background

The petitioner/assessee filed its return of income, which was processed under Section 143(1) of the 1961 Act. The assessee received the intimation. According to the petitioner, though it had claimed a carry forward loss of Rs.1,14,60,832/-, only an amount of Rs.21,71, 999/- was allowed.

The amount of Rs.1,14,60,832 forms part of unabsorbed depreciation. The petitioner filed an application for rectification under Section 154 of the Income Tax 1961 Act, claiming that full set off of the unabsorbed depreciation had to be granted and the denial of that benefit to the petitioner is illegal.

The petition filed by the petitioner was rejected by finding no ground for rectification.

The petitioner referred to the provisions of Section 32(2) of the Income Tax 1961 Act to contend that where in the assessment of an assessee, full effect cannot be given to any depreciation allowance, the depreciation allowance is permitted to be carried forward to the next year.

A reading of Section 72 of the Income Tax 1961 Act will indicate that where such loss in the form of depreciation is carried forward to the next year, it can be set off even against income arising from heads other than ‘profits or gains of business or profession’.

The denial of set off cannot be sustained and therefore order under Section 154 is liable to be set aside and the matter is to be remitted for fresh consideration of the Assessing Authority.

The department contended that Section 32 forms part of the provisions that deal with the computation of income from profits and gains of business or profession. Though the provisions of Section 32(2) permit the carry forward of such depreciation allowance where it cannot be fully set off owing to there being no profit or gains in any particular year, the provisions of Section 72 clearly indicate that even if such depreciation allowance is to be termed a loss in terms of Section 71 of the 1961 Act, the same can be set off only against income or gains from business or profession and not against any other head. There is absolutely no mistake in the order passed under Section 154 of the Income Tax 1961 Act and the petitioner has not made out any ground to set aside the order.

The petitioner referred to the provisions of Section 71(2) and (2A) to contend that where there is any loss arising out of business or profession including depreciation allowance the same can be set off against any other head of income and the provisions of Section 72 are always subject to the provisions of Section 71.

Relevant Provisions

Section 32 of the Income Tax 1961 Act deals with depreciation, thus forms part of the provisions for computation of income from profits and gains of business or profession.

The right under Section 32(2) is specifically made subject to the provisions of Sections 72(2) and 72(3) of the Income Tax 1961 Act.

Section 72 states that even if the depreciation allowance under Section 32 of the 1961 Act, which was carried forward in terms of sub-section (2) of Section 32, is deemed to be a business loss for the purposes of Sections 71 and 72, it can be set off only against profits or gains of any business or profession and it cannot be set off against income from any other sources.