DCIT vs. Times Guaranty (ITAT Mumbai Special Bench)

Unabsorbed depreciation of AYs 1997-98 to 2001-02 not eligible for relief granted by amended s. 32(2) in AY 2002-03

Till AY 1996-97 unabsorbed depreciation could be set off against income under any head. From AY 1997-98 to 2001-2002 unabsorbed depreciation could be set off only against business income. From AY 2002-2003 onwards unabsorbed depreciation could again be set off against income under any head of income. The question before the Special Bench was whether in AY 2003-04, the unabsorbed depreciation relating to AY 1997-1998 to 1999-2000 could be set off against non-business income. The assessee claimed that law prevailing in the year of set-off should apply and as in AY 2002-03 unabsorbed depreciation is permitted to be set-off against non-business income, that should apply to the earlier years’ brought forward depreciation as well. HELD rejecting the claim:

(i) The amendment made to s. 32(2) w.e.f AY 2002-03 is substantive. A substantive amendment is normally prospective in operation. S. 32(2) is a deeming provision which by legal fiction provides that the unabsorbed depreciation allowance u/s 32(1) is deemed to be depreciation allowance for the succeeding year(s). A deeming provision has to be strictly interpreted and cannot extend beyond the purpose for which it is intended. S. 32(1) deals with depreciation allowance for the current year and s. 32(2) uses the present tense to refer to allowance to which effect `cannot be’ and `has not been’ given. This indicates that s. 32(2) speaks of depreciation allowance u/s 32(1) for the current year starting from AY 2002-03. Brought forward unabsorbed depreciation of earlier years cannot be included within the scope of s. 32(2). If the intention of the legislature had been to allow such b/fd unabsorbed depreciation of earlier years at par with current depreciation for the year u/s 32(1), s. 32(2) would have used past or past prefect tense and not the present tense. Further, the unabsorbed depreciation for the period from AY 1997-1998 to 1999-2000 has been referred to as “unabsorbed depreciation allowance” and given a special name and cannot fall within s. 32(1) in AY 2002-03.

(ii) The substitution of s. 32(2) w.e.f AY 2002-03 is a limited repeal of the old s. 32(2) and its effect is that unabsorbed depreciation of the earlier period is allowable under the new provision but has to be dealt with in accordance with the old provision and is subject to the limitation of being eligible for set-off only against business income and for 8 years.

(iii) The argument that the department having taken a stand in Jai Ushin cannot argue to the contrary is not acceptable. Such limitation if placed on the revenue will also have to apply to assessees. Further, as a Special Bench is constituted to resolve conflict of opinion amongst different Benches it will be too harsh to stop the assessees or the Revenue from arguing the case in the way they like.

(iv) The principle that if two interpretations are possible then the view in favour of the assessee should be adopted cannot be applied in a loose manner so as to debar a superior authority from examining the legal validity of conflicting views expressed by lower authorities. This rule is applicable where the provision in question is such which is capable of two equally convincing interpretations and not otherwise.