Facts of the Case

The present writ petition was filed challenging the notice dated 26.03.2018 issued under Section 148 of the Income Tax Act, 1961, along with the order dated 20.11.2018 rejecting objections of the petitioner.

The reassessment proceedings were initiated on the ground that the petitioner had carried forward unabsorbed business losses and unabsorbed depreciation and set them off against income for Assessment Year 2011–12.

The Assessing Officer restricted the alleged violation only to unabsorbed depreciation amounting to Rs. 7,63,79,560/- pertaining to Assessment Years 1998–99 to 2001–02 and held that such depreciation could not be set off in AY 2011–12 due to expiry of the permissible carry-forward period.

Issues Involved

  1. Whether reassessment proceedings initiated under Sections 147/148 after four years are valid without allegation of failure to disclose material facts.
  2. Whether unabsorbed depreciation pertaining to AY 1998–99 to 2001–02 can be carried forward and set off in AY 2011–12.
  3. Whether limitation of 8 years for carry forward of depreciation applies post amendment by Finance Act, 2001.

Petitioner’s Arguments

  • Prior to the Finance Act, 1996, unabsorbed depreciation could be carried forward indefinitely.
  • The Finance Act, 1996 restricted the period to 8 years, but this restriction was removed by the Finance Act, 2001.
  • Therefore, in AY 2011–12, there was no restriction on setting off unabsorbed depreciation accumulated between AY 1998–99 to 2001–02.
  • The reassessment was initiated beyond four years without any allegation of failure to disclose fully and truly all material facts, making it invalid under the first proviso to Section 147.
  • Reliance was placed on Motor & General Finance Ltd. vs ITO (Delhi High Court).

Respondent’s Arguments

  • The Assessing Officer contended that unabsorbed depreciation and losses should have been set off within the prescribed period and not beyond AY 2006–07 to 2009–10.
  • It was argued that the assessee had incorrectly set off depreciation, resulting in underassessment of income.
  • Reference was made to the Supreme Court ruling in Peerless General Finance and Investment Co. Ltd..

Court’s Findings / Order

  • The Court held that the reasons recorded for reopening did not state any failure on the part of the assessee to disclose fully and truly all material facts.
  • Since reassessment was initiated after four years, compliance with the first proviso to Section 147 was mandatory, which was not fulfilled.
  • On merits, the Court accepted that unabsorbed depreciation could be carried forward and set off in AY 2011–12.
  • Accordingly, the notice dated 26.03.2018 and the order dated 20.11.2018 were set aside.

 Important Clarification

  • Reassessment beyond four years is invalid unless there is a clear allegation of failure to disclose material facts.
  • Unabsorbed depreciation post Finance Act, 2001 can be carried forward indefinitely and set off without time limitation.
  • The judgment reinforces the settled position that reopening cannot be based on mere change of opinion or incorrect legal interpretation.

Sections Involved

  • Section 147 – Income escaping assessment
  • Section 148 – Issue of notice for reassessment
  • Section 32(2) – Unabsorbed depreciation
  • Section 72 – Carry forward and set-off of business losses
  • First Proviso to Section 147 – Condition for reopening beyond 4 years

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60817052023CW133802018_190725.pdf

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