Facts of the Case

  • The petitioner filed its return for AY 2011–12 declaring nil income after setting off brought forward business losses and unabsorbed depreciation.
  • Assessment under Section 143(3) was completed.
  • Subsequently, notice dated 26.03.2018 under Section 148 was issued.
  • The reassessment was initiated alleging incorrect set-off of unabsorbed depreciation amounting to ₹7.63 crores relating to AY 1998–99 to 2001–02.
  • The Assessing Officer held that such depreciation could not be carried forward beyond the prescribed period.

 Issues Involved

  1. Whether reassessment under Sections 147/148 beyond four years is valid without alleging failure to disclose material facts.
  2. Whether unabsorbed depreciation from AY 1998–99 to 2001–02 can be carried forward and set off in AY 2011–12.

Petitioner’s Arguments

  • Prior to Finance Act, 1996, unabsorbed depreciation could be carried forward indefinitely.
  • Finance Act, 1996 restricted the period to 8 years.
  • Finance Act, 2001 removed such restriction, restoring unlimited carry forward.
  • Therefore, in AY 2011–12, there was no bar on set-off of accumulated depreciation.
  • The reasons recorded by the AO did not allege any failure to disclose material facts fully and truly.
  • Since reassessment was initiated after four years, compliance with the first proviso to Section 147 was mandatory.
  • Reliance was placed on Motor & General Finance Ltd. vs ITO (2017).

 Respondent’s Arguments

  • The revenue contended that the petitioner had wrongly set off unabsorbed depreciation beyond the permissible period under the Act.
  • It was argued that such set-off resulted in under-assessment of income.
  • Reference was made to judicial interpretation relating to depreciation adjustment.

 Court’s Findings / Order

  • The Court observed that the reasons recorded by the AO did not mention any failure on the part of the assessee to disclose material facts.
  • As the reassessment was initiated after four years, such failure must be explicitly stated under the first proviso to Section 147.
  • Absence of this condition renders the reassessment invalid.
  • On merits, the Court accepted that unabsorbed depreciation could be carried forward and set off in AY 2011–12.
  • Accordingly:
    • Notice dated 26.03.2018 under Section 148 was quashed.
    • Order dated 20.11.2018 was set aside.

 Important Clarifications

  • Reassessment beyond 4 years is invalid unless there is explicit failure to disclose material facts.
  • Unabsorbed depreciation (post Finance Act, 2001) can be carried forward indefinitely.
  • Jurisdictional requirement under Section 147 is mandatory and not procedural.

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

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