Court allows carry forward of old depreciation losses beyond 8-year limit after 2002 law change

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Case Name

Commissioner of Income Tax vs Tamil Nadu Small Industries Corporation Limited (High Court of Madras)

T.C.A.No.236 of 2017

Date: 20th July 2021

Key Takeaways

• Game-changing rule: From assessment year 2002-03 onwards, the 8-year restriction on carrying forward unabsorbed depreciation was completely removed
• Retrospective benefit: Even depreciation from years before 2002-03 (like 1997-98) gets the benefit of unlimited carry forward if it hadn’t expired by 2002-03
• Industry-friendly policy: The change was made to help industries conserve funds for replacing plant and machinery in an era of rapid obsolescence
• Consistent judicial approach: Multiple High Courts have consistently ruled in favor of taxpayers on this issue

Issue

Whether the Income Tax Appellate Tribunal was correct in allowing the assessee to carry forward unabsorbed depreciation from assessment year 1997-98 to assessment year 2008-09, which is beyond the eight-year period that was originally mandated under section 32 (of Income Tax Act, 1961).

Facts

• The Company: Tamil Nadu Small Industries Corporation Limited is a wholly-owned company of the Tamil Nadu Government
• The Timeline: They had unabsorbed depreciation from assessment years 1997-98, 1998-99, and 1999-2000
• The Return: For assessment year 2008-09, they filed their return on September 30, 2008, showing taxable income of Rs. 11,04,22,407/- after setting off business loss of Rs. 10,60,57,641/- against long-term capital gains
• The Reopening: The case was reopened in March 2013 because the tax officer believed the old unabsorbed depreciation couldn’t be carried forward beyond 8 years
• The Appeals: The company won at the Commissioner of Income Tax (Appeals) level, then again at the Income Tax Appellate Tribunal

Arguments

Revenue’s Position (Tax Department):

• Under the old Section 32(2) (of Income Tax Act, 1961) before April 1, 2002, unabsorbed depreciation could only be carried forward for 8 subsequent years
• Since the depreciation was from 1997-98, it should have expired by 2005-06, so it couldn’t be used in 2008-09
• They cited the Calcutta High Court decision in Peerless General Finance & Investment Co. Ltd. v. CIT [2016] 73 taxmann.com 257/242 Taxman 209

Assessee’s Position (Company):

• The 2002 amendment to Section 32(2) (of Income Tax Act, 1961) removed the 8-year restriction completely
• Circular No. 14/2001 dated 22-11-2002 issued by the Central Board of Direct Taxes clarified this change
• Any unabsorbed depreciation available on April 1, 2002 should get the benefit of unlimited carry forward

Key Legal Precedents

The court relied heavily on several important precedents:

1. General Motors India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 364/210 Taxman 20/[2013] 354 ITR 244 (Gujarat High Court)
2. CIT v. Bajaj Hindustan Ltd. [IT Appeal Nos. 134 to 136 and 140, 141 and 148 of 2018, dated 13-6-2018] (Bombay High Court), where the Supreme Court dismissed the Revenue’s special leave petition in Pr. CIT v. Bajaj Hindustan Ltd. [SLP © Diary No. 48020 of 2018, dated 25-1-2019]
3. CIT v. G.T.M. Synthetics Ltd. [2013] 30 taxmann.com 83/[2012] 347 ITR 458 (Punjab & Haryana High Court)
4. Pr. Commissioner of Income Tax v. Gunnebo India (P.) Ltd. [2019] 104 CCH 227 (Bombay High Court)

The court also referenced Circular No. 14/2001 dated 22-11-2002 and Circular No. 794 dated 9-8-2000, which explained the legislative intent behind the amendments.

Judgement

The Madras High Court dismissed the Revenue’s appeal and decided in favor of the assessee. Here’s their reasoning:

Key Legal Logic:

• The court interpreted that from assessment year 2002-03, if the eight years’ period had not lapsed, then the assessee would be entitled to carry forward the loss without any restriction on the time limit
• Paragraph 30.2 of Circular No. 14/2001 clearly stated that “the restriction of 8 years for carry forward and set-off of unabsorbed depreciation was dispensed with, with a view to enable the industries to conserve sufficient funds to replace plant and machinery”
• Any unabsorbed depreciation available to an assessee on April 1, 2002 (A.Y. 2002-03) would be dealt with according to the amended provisions of section 32(2) (of Income Tax Act, 1961)

Final Order:

The Tax Case Appeal was dismissed with no costs awarded.

FAQs

Q1: Does this mean all old depreciation can be carried forward indefinitely?

A: Not exactly. Only unabsorbed depreciation that was still within its 8-year limit as of April 1, 2002 gets the benefit of unlimited carry forward. If it had already expired by then, it’s gone forever.

Q2: Why did the law change in 2002?

A: The government wanted to help industries conserve funds to replace plant and machinery, especially given how quickly technology becomes obsolete these days.

Q3: What about the Calcutta High Court decision that went against taxpayers?

A: The court noted that the Supreme Court had dismissed the special leave petition against similar favorable decisions, indicating the law is settled in favor of taxpayers.

Q4: Can this depreciation be set off against any type of income?

A: Yes, under the amended provisions, unabsorbed depreciation can be set off against income from any source, not just business income.

Q5: Is this decision binding on other cases?

A: This Madras High Court decision is binding within its jurisdiction and persuasive elsewhere. Multiple High Courts have reached similar conclusions, creating a strong precedent.

Challenging the order passed in I.T.A.No584/Mds/2016 in respect of the Assessment Year 2008-09 on the file of the Income Tax Appellate Tribunal, Chennai, "A" Bench, the Revenue has filed the above appeal.

2.The assessee Company is a wholly owned Company of Government of Tamil Nadu. It filed its return of income for the Assessment Year 2008-09 on 30.09.2008, declaring taxable income of Rs.11,04,22,407/- after setting off loss from business of Rs.10,60,57,641/- with the long term capital gains. The case was taken up for scrutiny and assessment under Section 143(3) (of Income Tax Act, 1961) was completed on 22.09.2010 with assessed income of Rs.58,48,39,921/- by making

additions. The case was re-opened by issuing notice under Section 148 (of Income Tax Act, 1961)

on 08.03.2013 for the reason that the unabsorbed depreciation pertains to

Assessment Years 1997-98, 1998-99 and 1999-2000, was allowed in the

assessment order though not allowable beyond 8 years and also can be

set off only against income under the head 'business income'. As per

Section 32(2) (of Income Tax Act, 1961) prior to amendment dated 01.04.2002, the unabsorbed

depreciation can be carried forward only for 8 subsequent year and set

off only against the business income and hence, not an allowable claim.

The re-opened assessment order was completed on 05.03.2014.

Aggrieved over the order of assessment, the assessee preferred an appeal

before the Commissioner of Income Tax (Appeals) and the Appellate

Authority allowed the appeal. Aggrieved over the order passed by the

Commissioner of Income Tax (Appeals), the Revenue preferred an

appeal before the Income Tax Appellate Tribunal and the Tribunal

dismissed the appeal. Challenging the order passed by the Tribunal, the

Revenue has filed the above appeal.

3.The above Tax Case Appeal was admitted on the following

substantial question of law:

“Whether the direction of the Tribunal on the

Assessing Officer to set off the unabsorbed depreciation

pertaining to Assessment Year 1997-98 is bad, when

according to the appellant the intention of the legislature was

not to carry forward the unabsorbed depreciation beyond

eight years from the year of computation?”

4.When the appeal is taken up for hearing, Mr.M.Swaminathan,

learned Senior Standing Counsel assisted by Ms.V.Pushpa, learned

Junior Standing Counsel, fairly submitted that the question of law that

arise for consideration in the above appeal has already been decided

against the Revenue and in favour of the assessee in the judgment dated

06.07.2021 made in T.C.A.No.62 of 2015 [The Commissioner of

Income Tax, Trichy Vs. M/s.KMC Speciality Hospitals India Ltd.,

(Formerly Sea Horse Hospitals P. Ltd.,) No.6, Royal Road, Trichy]

wherein this Bench held as follows:

"Whether, on the facts and in the circumstances of

the case, the Tribunal was right in holding that the

assessee is entitled for carry forward of the

depreciation loss pertaining to the assessment year

1997-98 to the present assessment year 2006-07,

which is beyond the eight year period mandated

under the provisions of section 32 (of Income Tax Act, 1961)?"

4.The short issue, which falls for consideration, is as

to whether, in the facts and circumstances of the case, the

Tribunal was right in permitting the assessee to carry

forward the depreciation loss pertaining to the assessment

year 1997-98 to the present assessment year namely 2006-

07, which is beyond the eight year period mandated under

the provisions of section 32 (of Income Tax Act, 1961).

5.The revenue is before us by referring to the decision

of the High Court of Calcutta in the case of Peerless General

Finance & Investment Co. Ltd. v. CIT [2016] 73

taxmann.com 257/242 Taxman 209 and submitting that an

identical issue was considered by the Calcutta High Court

wherein the assessee was not granted relief. It is further

submitted that the said decision of the Calcutta High Court

was tested for its correctness by the Hon'ble Supreme Court

and the special leave petition filed against the judgment of

the Calcutta High Court was dismissed in the decision in

Peerless General Finance & Investment Co. Ltd. v. CIT

[2016] 73 taxmann.com 258/242 Taxman 173/380 ITR 165

(SC).

6.After elaborately hearing the learned Senior

Standing Counsel appearing for the appellant-Revenue, we

are of the considered opinion that the reliance placed on the

decision in the case of Peerless General Finance &

Investment Co. Ltd. (supra), would, in no manner, assist the

case of the Revenue. We say so after referring to Circular

No. 14/2001 dated 22-11-2002 issued by the Central Board

of Direct Taxes, which are Explanatory Notes on Provisions

relating to Direct Taxes. Paragraph 30 of the said circular

deals with modification of provisions relating to

depreciation.

7.For better appreciation, we quote paragraphs 30.1 to

30.5 of the said circular as hereunder :

"30.1 Under the existing provisions of section 32 (of Income Tax Act, 1961)

of the Income-tax Act, carry forward and set-off of

unabsorbed depreciation is allowed for 8 assessment

years.

30.2 With a view to enable the industry to

conserve sufficient funds to replace plant and machinery,

specially in an era where obsolescence takes place so

often, the Act has dispensed with the restriction of 8

years for carry forward and set-off of unabsorbed

depreciation. The Act has also clarified that in

computing the profits and gains of business or

profession for any previous year, deduction of

depreciation under section 32 (of Income Tax Act, 1961) shall be mandatory.

30.3 Under the existing provisions, no deduction

for depreciation is allowed on any motor car

manufactured outside India unless it is used (i) in the

business of running it on hire for tourists, or (ii) outside

India in the assessee's business or profession in another

country.

30.4 The Act has allowed depreciation allowance

on all imported motor cars acquired on or after 1st April,

2001.

30.5 These amendments will take effect from the

1st April, 2002, and will, accordingly apply in relation to

the assessment year 2002-2003 and subsequent years."

8. From paragraph 30.2 of the above circular, it is

clear that the restriction of 8 years for carry forward and set-

off of unabsorbed depreciation was dispensed with, with a

view to enable the industries to conserve sufficient funds to

replace plant and machinery.

9. The learned Senior Standing Counsel appearing for

the Revenue would point out that those amendments took

place with effect from 1-4-2002 and would accordingly

apply in relation to the assessment year 2002-03 and the

subsequent years whereas in the assessee's case, the

depreciation loss, which they sought to carry forward is for

the assessment year 1997-98.

10. The proper manner, in which, the modification has

to be understood, is to the effect that from the assessment

year 2002-03, if the eight years' period was not lapsed, then

the assessee would be entitled to carry forward the loss

without any restriction on the time limit. This aspect has

been dealt with elaborately in the decision of the Division

Bench of the Gujarat High Court in the case of General

Motors India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com

364/210 Taxman 20/[2013] 354 ITR 244 wherein the

relevant portions are as follows :

"37.The CBDT Circular clarifies the intent of the

amendment that it is for enabling the industry to

conserve sufficient funds to replace plant and machinery

and accordingly the amendment dispenses with the

restriction of 8 years for carry forward and set-off of

unabsorbed depreciation. The amendment is applicable

from assessment year 2002-03 and subsequent years.

This means that any unabsorbed depreciation available

to an assessee on 1st day of April, 2002 (A.Y. 2002-03)

will be dealt with in accordance with the provisions of

section 32(2) (of Income Tax Act, 1961) as amended by Finance Act, 2001 and not

by the provisions of section 32(2) (of Income Tax Act, 1961) as it stood before the

said amendment. Had the intention of the Legislature

been to allow the unabsorbed depreciation allowance

worked out in A.Y. 1997-98 only for eight subsequent

assessment years even after the amendment of section

32(2) by Finance Act, 2001 it would have incorporated a

provision to that effect. However, it does not contain any

such provision. Hence keeping in view the purpose of

amendment of section 32(2) (of Income Tax Act, 1961), a purposive and

harmonious interpretation has to be taken. While

construing taxing statutes, rule of strict interpretation has

to be applied, giving fair and reasonable construction to

the language of the section without leaning to the side of

assessee or the revenue. But if the legislature fails to

express clearly and the assessee becomes entitled for a

benefit within the ambit of the section by the clear words

used in the section, the benefit accruing to the assessee

cannot be denied. However, Circular No. 14 of 2001 had

clarified that under section 32(2) (of Income Tax Act, 1961), in computing the

profits and gains of business or profession for any

previous year, deduction of depreciation under section

32 shall be mandatory. Therefore, the provisions of

section 32(2) (of Income Tax Act, 1961) as amended by Finance Act, 2001 would

allow the unabsorbed depreciation allowance available

in the A.Ys. 1997-98, 1999-2000, 2000-01 and 2001-02

to be carried forward to the succeeding years, and if any

unabsorbed depreciation or part thereof could not be set

off till the A.Ys. 2002-03 then it would be carried

forward till the time it is set-off against the profits and

gains of subsequent years.

38.Therefore, it can be said that, current

depreciation is deductible in the first place from the

income of the business to which it relates. If such

depreciation amount is larger than the amount of the

profits of that business, then such excess comes for

absorption from the profits and gains from any other

business or business, if any, carried on by the assessee. If

a balance is left even thereafter, that becomes deductible

from out of income from any source under any of the

other heads of income during that year. In case there is a

still balance left over, it is to be treated as unabsorbed

depreciation and it is taken to the next succeeding year.

Where there is current depreciation for such succeeding

year the unabsorbed depreciation is added to the current

depreciation for such succeeding year and is deemed as

part thereof. If, however, there is no current depreciation

for such succeeding year, the unabsorbed depreciation

becomes the depreciation allowance for such succeeding

year. We are of the considered opinion that any

unabsorbed depreciation available to an assessee on 1st

day of April 2002 (A.Y. 2002-03) will be dealt with in

accordance with the provisions of section 32(2) (of Income Tax Act, 1961) as

amended by Finance Act, 2001. And once the Circular

No. 14 of 2001 clarified that the restriction of 8 years for

carry forward and set-off of unabsorbed depreciation had

been dispensed with, the unabsorbed depreciation from

A.Y.1997-98 upto the A.Y. 2001-02 got carried forward

to the assessment year 2002-03 and became part thereof,

it came to be governed by the provisions of section 32 (of Income Tax Act, 1961)

(2) as amended by Finance Act, 2001 and were available

for carry forward and set-off against the profits and gains

of subsequent years, without any limit whatsoever."

11. A similar issue was considered by a Division

Bench of the Bombay High Court in the case of CIT v. Bajaj

Hindustan Ltd. [IT Appeal Nos. 134 to 136 and 140, 141

and 148 of 2018, dated 13-6- 2018] following the decision

in the case of CIT v. Hindustan Unilever Ltd. [2016] 72

taxmann.com 325/[2017] 394 ITR 73 (Bom.). The special

leave petition filed by the Revenue against the above

decision was dismissed by the Hon'ble Supreme Court in the

decision in Pr. CIT v. Bajaj Hindustan Ltd. [SLP (C) Diary

No. 48020 of 2018, dated 25-1-2019].

12. In the decision of the Punjab & Haryana High

Court in the case of CIT v. G.T.M. Synthetics Ltd. [2013] 30

taxmann.com 83/[2012] 347 ITR 458], an identical issue

was considered in the following terms :

'8. The effect of omission of the aforesaid proviso

was enumerated by the Central Board of Direct Taxes,

vide Circular No. 794 dated 9-8-2000 [(2000) 245 ITR

(Statute)] 21 that the unabsorbed depreciation allowance

could be set-off against the income under any other head

even where the business was not carried on.

Clause 22 of the said circular which is relevant is

as under:

"22. Requirement of continuance of same

business for set-off of unabsorbed depreciation

dispensed with:

22.1 Under the existing provisions of sub-

section (2) of section 32 (of Income Tax Act, 1961), carried

forward unabsorbed depreciation is allowed to be set-

off against profits and gains of business or profession

of the subsequent year, subject to the condition that the

business or profession for which depreciation

allowance was originally computed continued to be

carried on in that year. A similar condition in section

72 for the purpose of carry forward and set-off of

unabsorbed business loss was removed last year.

22.2 With a view to harmonise the provisions

relating carry forward and set-off of unabsorbed

depreciation and unabsorbed loss, the Act has

dispensed with the condition of continuance of same

business for the purpose of carry forward and set-off

of unabsorbed depreciation.

22.3 This amendment will take effect from 1st

April, 2001, and will, accordingly, apply in relation to

the assessment year 2001-2002 and subsequent years."

9. The CIT(A) and the Tribunal, thus, rightly

allowed unabsorbed depreciation relevant to the

assessment year 1996-97 to be set-off against the income

from long term capital gains and income from other

sources for the assessment year 2001-2002.'

13. Recently, in the decision of a Division Bench of

the Bombay High Court in the case of Pr. Commissioner of

Income Tax v. Gunnebo India (P.) Ltd. [2019] 104 CCH

227, the issue was considered in favour of the assessee after

referring to the decision of the Division Bench of the

Gujarat High Court in the case of General Motors India (P.)

Ltd., wherein the relevant portions read thus :

"3. The Revenue carried the matter in appeal. The

Appellate Tribunal dismissed the appeal of the Revenue

making the following observations- "16. We have

observed that the current year's depreciation is allowed

to be set-off against the income from business as well as

against the other heads of income and unabsorbed

depreciation in carry forward and become part of the

depreciation of the subsequent year and the total

depreciation becomes current year's depreciation as per

section 32(1) (of Income Tax Act, 1961), which is allowed to be set-off

against the income under any head of income. As per the

provisions of section 32(2) (of Income Tax Act, 1961) r.w.s. 70 (of Income Tax Rules, 1962), 71 and

72 of the Act, it becomes very clear that the total

depreciation comprising of the depreciation of the

relevant assessment year along with the unabsorbed

depreciation of the earlier years becomes the total current

year's depreciation which is allowed to be set off against

income under any head of income including long term

capital gain. Accordingly, we find no reason to interfere

with the order of CIT(A) qua this issue and the same is

hereby upheld. We also hold that as per provisions of

section 72 (of Income Tax Act, 1961), the unabsorbed business loss

(other than speculative loss) of earlier years shall be

allowed to be set-off only against the profits and gains

from business carried on by the assessee of the current

year and so on. We order accordingly. However, our

above decision with respect to ground nos. (i) and (ii)

raised in memo of appeal filed by Revenue should be

read in conjunction with and subject to our findings with

respect to ground nos. (iii) and (iv) which are decided by

us in the preceding para's of this order and the

computation shall be made accordingly."

4. Having heard the learned counsel for parties and

having perused the documents on record, we do not find

any error in the order of the Appellate Tribunal. Gujarat

High Court in the case of General Motors India (P.) Ltd.

(supra) had considered somewhat similar issue, of course

in the backdrop of the assessee's challenge to a notice of

reopening of the assessment. The Gujarat High Court had

held and observed as under -

"38 Therefore, it can be said that, current

depreciation is deductible in the first place from the

income of the business to which it relates. If such

depreciation amount is larger than the amount of the

profits of that business, then such excess comes for

absorption from the profits and gains from any other

business or business, if any, carried on by the assessee.

If a balance is left even thereafter, that becomes

deductible from out of income from any source under

any of the other heads of income during that year. In

case there is a still balance left over, it is to be treated

as unabsorbed depreciation and it is taken to the next

succeeding year. Where there is current depreciation

for such succeeding year the unabsorbed depreciation

is added to the current depreciation for such

succeeding year and is deemed as part thereof. If,

however, there is no current depreciation for such

succeeding year, the unabsorbed depreciation becomes

the depreciation allowance for such succeeding year.

We are of the considered opinion that any unabsorbed

depreciation available to an assessee on 1st April,

2002 (asst. yr. 2002-03) will be dealt with in

accordance with the provisions of section 32(2) (of Income Tax Act, 1961) as

amended by Finance Act, 2001. And once the Circular

No. 14 of 2001 clarified that the restriction of 8 years

for carry forward and set-off of unabsorbed

depreciation had been dispensed with, the unabsorbed

depreciation from asst. yr. 1997-98 up to the asst. yr.

2001- 02 got carried forward to the asst. yr. 2002-03

and became part thereof, it came to be governed by the

provisions of section 32(2) (of Income Tax Act, 1961) as amended by Finance

Act, 2001 and were available for carry forward and

set-off against the profits and gains of subsequent

years, without any limit whatsoever."

14. In our considered view, the above decisions

will clearly enure to the benefit of the respondent -

assessee.

15. Accordingly, the above tax case appeal is

dismissed and the substantial question of law is

answered against the Revenue. No costs.”

5.Mr.K.Ravi, learned counsel appearing for the

respondent submitted that in view of the ratio laid down by

the Hon'ble Division Bench of this Court in the judgments in

[2021] 127 taxmann.com 805 (Madras) and [2020] 122

taxmann.com 212 (Madras), cited supra, the above appeal

may be dismissed.

6.Having regard to the submissions made by the

learned counsel on either side, following the ratio laid down

in [2021] 127 taxmann.com 805 (Madras) [Harvey Heart

Hospitals Ltd. Vs. Assistant Commissioner of Income Tax]

and [2020] 122 taxmann.com 212 (Madras)

[Commissioner of Income Tax, Chennai Vs. Sanmar

Speciality Chemicals Ltd.], the question of law is decided

against the Revenue and in favour of the assessee.

Accordingly, the Tax Case Appeal is dismissed. No costs.”

5.Mr.A.Thiagarajan, learned senior counsel appearing for the

respondent submitted that in view of the ratio laid down by the Hon'ble

Division Bench of this Court in the judgment made in T.C.A.No.62 of

2015, cited supra, the appeal may be dismissed.

6.Having regard to the submissions made by the learned counsel

on either side, following the ratio laid down in the judgment dated

06.07.2021 made in T.C.A.No.62 of 2015, cited supra, the question of

law is decided against the Revenue and in favour of the assessee.

Accordingly, the Tax Case Appeal is dismissed. No costs.

Index : Yes/No [M.D., J.] [R.H., J.]

Internet : Yes