Set off of unabsorbed depreciation against salary income?

[vyakul]

Can unabsorbed depreciation be set off against salary income?.
Section 71(2A) restricts loss under the head business or profession to be set off against salary income.
The question is, Does this loss includes unabsorbed depreciation?
I also like to bring few section that provides a preferential treatment for unabsorbed depreciation
Section 79 - Unabsorbed depreciation to be carried forward whereas the business loss is prohibited to be carried forward
Section 80 - In case of belated return, the limitation to file on due date relates only to business loss and not for unabsorb depreciation.
can the similar benefit also be provided for setting off the unabsorbed depreciation against salary income?

I also append the extract of section 72 and  71(2A) .
The wording in section 72
(1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71,
is similar to
The wording in section 71(2A)
(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss and the assessee has income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income

Both provide for " Under the head Profits and gains of business or profession".
Hence to conclude
If the benefit is given u/s 79 and also for 80, Why cannot the same benefit be extended for this section 71 (2A)
Pls respond with your views. :)
Regards
Sathya
vyakul@gmail.com

[brett_lee38]

Dear freind for your case the provisions of section 32(2) would be applicable which provide that unabsorbed depricaiton shall be deemed to be the depriciation of the current year and hence in my opinion it can be setoff with the salary income also.Further it is suggested that the decision of special bench in the case of Southern Travells reporeted in 104 TTJ 750 (SB) is relevant to understand the contraversy.

PCYADAV(Del)
09891142038

[vyakul]

Yes, The depreciation under section 32 (2) is clearly defined.
The question or discussion point is that, is such depreciation can be set off against salary income?
Section 32 talks about how the depreciation to be treated and not on set off and it refers to Section 72 (2).
So Explicit clarity is not provided as to whether depreciation or unabsorbed dep could be set off against salary income.
In my opinion it is possible, I seek the other members opinion on this?
Any contrary view enhances the scope of discusison :)
sathya
vyakul@gmail.com

[trramanathan]

What section 71(2A) prohibits is only the set off of loss under the head profits and gains of business or profession against salary and such loss will not include the unabsorbed depreciation of the current year which is dealt with in section 32(2) separately and can be set off against salary income.

In so far as unabsorbed depreciation is concerned the scheme of section 32(2) is that unabsorbed depreciation is first to be set off against income from other businesses and thereafter to be set off against income from other heads in the same year. The balance of unabsorbed depreciation is thereafter to be carried forward and aggregated with the depreciation of the subsequent year and if there is no depreciation in the subsequent year, to be treated as the depreciation of the subsequent year. Therefore one can see that the deprecation that is brought forward from an earlier year becomes a part of the depreciation of the current year. This would therefore mean that the brought forward unabsorbed depreciation which becomes a part of the current depreciation would get the same treatment as the current depreciation and can be set off against the salary income except that the brought forward unabsorbed deprecation cannot be set off before set off of current depreciation on the basis of the law laid down by the Supreme Court in CIT v Mother India Refrigeration Industries Private Limited [1985] 155 ITR 711 (SC). In the light of the above discussion it can be seen that even the brought forward unabsorbed deprecation can be set off against the current year's salary income notwithstanding the provisions of section 71(2A). In this context a reading of the decision of the Supreme Court in CIT v Virmani Industries Private Limited [1995] 216 ITR 607 (SC) though rendered prior to the insertion of section 71(2A) would be of help.

[sivaiah G]

I, personally, cannot subscribe to the argument that depreciation or unabsorbed depreciation can be set off against salary income since it is not covered by sec. 72. Income of the assessees is computed under five heads. needless to mention that depreciation comes under business head. Therefore, depreciation, either current or unabsorbed comes under this head and to that extent loss will be arrived. Section 32 also comes in between  section 30 to 38 thorugh which varisous expenses incurred by the assessee are allowable. Therefore, the depreciation either current or brought forward will be computed under the head business and after arriving at a loss under this head the will go to adjust the income arrived under other heads. Income is to be computed as per the provisions of the act. If sections 70 to 80 are not there in the statute then there is no possibility claiming any set off. Therefore, the income is to be first arrived at under each head and then set off. Therefore, the depreciation cannot be set off against salary. If courts decideds otherway, then it will be accepted.   

[vyakul]

sir
Do You in a want to say that depreciation or unabsorbed depreciation cannot be set off against any income including salaries?
sathya

[sivaiah G]

I think I have communicated my conclusion at the end of my uploading. That is unabsorbed or current depreciation cannot be set off against salaries as per the restriction enacted through 71(2A) of the Act.

[Bhumin]

hi Vyakul,
According to me unabsorbede depre can be setoff against salary.
I am also in same view as you are looking for.

Apparently, there is another software - WINMAN, which allows the unabsorbed depreciation to be set off against salary & set off has been accepted by department as well.

Clarification of section 32(2)

The words no profits or gains chargeable for that year in section 32(2) of the Income-tax
Act, 1961, are not confined to profits and gains derived from business. They refer to the totality
of the profits or gains computed under the various heads and chargeable to tax. It is, therefore,
clear that effect must be given to depreciation allowance first against the profits and gains of
the particular business whose income is being computed under section 28 and if the profits of
that business are not sufficient to absorb the depreciation allowance, the allowance to the
extent to which it is not absorbed would be set off against the profits of any other business and
if a part of the depreciation allowance still remains unabsorbed, it would be liable to be set off
against the profits and gains chargeable under any other head and it is only if some part of
the depreciation allowance still remains that it can be carried forward to the next assessment
year. But where any part of the depreciation allowance remains unabsorbed after being set off
against the total income chargeable to tax, it can be carried forward to the following year and
set off against the year's income and so on for succeeding years. The method adopted by the
statute for achieving this result is that the carried forward depreciation allowance is deemed to
be part of and stands on exactly the same footing as the current depreciation for the assessment
year.



There is wrong belief that unabsorbed depreciation cannot be set off against salary. But, this comment is to explain my view that it can be set off against salary. Business Loss cannot be set off against salary income (As per Section 71(2A)). However, unabsorbed depreciation is covered under section 32(2).



My conclusion is:
•   Unabsorbed depreciation is covered under an independent section 32(2).
•    The section gives a link to Section 72(2) and 73(3). It does not give a link to section 71(2A)(where it is said that business loss cannot be set off under salaries).
•    Hence, it can be inferred that the statute does not intend to restrict the set off of unabsorbed depreciation against salaries had there been an intention to do so, it would have specified the same in 32(2)(As in case of 72(2A).

[pawansingla]

Though you have detailed arguments. But there is one direct judgement of One ITAT reported in DTR holding otherwise. I don,t remember the citation.

[JB]

Kindly see the Chennai ITAT decision in case of Chandrakumar (129 TTJ 489). The ITAT has denied such set off after considering the SC judgment of Virmani Industries.