Amendment to section 32(2) is not prospective. Unabsorbed depreciation can be carried forward beyond 8 years, prior to amendment-High Court
Section 32(2) of the Income Tax Act, 1961 (“the Act”) provides that where due to loss or inadequate profits in any year, full depreciation allowance could not be claimed by the assessee then, subject to the conditions, such unabsorbed depreciation shall be carried forward to the following previous years perpetually.
The Finance Act, 2001 has amended Section 32(2) which prior to the amendment had a limit of eight years for the carry forward of depreciation. This restriction was brought in, by Finance Act, 1996. It is notable that prior to that amendment also, there was no restriction or cap in the carrying forward of depreciation.
Unabsorbed depreciation can be carried forward beyond 8 years
ABCAUS Case Law Citation:
ABCAUS 2165 (2018) (01) HC
Important Case Laws Cited/relied upon by the parties:
CIT v. Govind Nagar Sugar Ltd., (2011) 334 ITR 13 (Del);
CIT V s. Haryana Hotels Ltd., (2005) 276 ITR 521 (P&H);
CIT v. Fabriquip Private Ltd., (2003) 260 ITR 207 (Guj)
General Motors India Pvt. Ltd. v. DCIT, 354 ITR 244 (Guj)
Brief Facts of the Case:
The assessee in this case had carried forward depreciation for a number of years, the earliest of which, was 1998-99. For Assessment Year (A.Y.) 2010-11, the Assessing Officer (AO) disallowed the amounts claimed as depreciation on the ground that the amendment to Section 32(2) of the Act, which removed the cap, was prospective and effective only from 01.04.2002.
The CIT (A) however reversed that decision relying several decisions of High Courts.
The ITAT upheld the decision of the CIT(A) following a subsequent judgment of the Gujarat High Court.
The Substantial Questions of Law framed/pressed for determination:
Whether the interpretation of Section 32(2) of the Income Tax Act, 1961 (‘the Act’) as amended by Finance Act, 2001, could be given effect to beyond the period of eight years, prior to its commencement?
Observations made by the High Court:
The Hon’ble High Court observed that the entire history of the legislation was considered by the Gujarat High Court including the reasons for the Finance Act No.2 of 1996, the amendment of 2001-brought into force with effect from 01.04.20002 as well as the circular of the Central Board of Direct Taxes (Circular No.14 of 2001).
The Hon’ble High Court expressed its agreement with the reasoning of the Gujarat High Court. The Hon’ble High Court opined that the rationale for the amendment appeared to be that the restriction against set off and carry forward limited to 8 years, beyond which the benefit could not be claimed under provisions of the Income Tax Act, was for the reasons deemed appropriate by the Parliament.
As the Gujarat High Court observed, Had the intention of Parliament being really to restrict the benefit (of unlimited carry forward prospectively), there were more decisive ways of doing so-such as, an expressed provision or an exception or proviso etc. The absence of any such legislative devise meant that provisions had to be construed in its own term and not so as to restrict the benefit or advantage, it sought to confirm.
The Hon’ble High Court also approved and followed the judgment of the Gujarat High Court. Appeal was dismissed as no substantive question of law had arisen.