Facts of the Case

The assessee had unabsorbed depreciation pertaining to earlier assessment years, the earliest being Assessment Year 1998–99. During Assessment Year 2010–11, the assessee claimed set-off of such carried forward depreciation.

The Assessing Officer disallowed the claim on the ground that under the pre-amended Section 32(2), unabsorbed depreciation could only be carried forward for eight years and that the amendment brought by the Finance Act, 2001 removing such restriction was prospective.

The Commissioner of Income Tax (Appeals) allowed the assessee’s claim. The Income Tax Appellate Tribunal upheld the order of CIT(A). Aggrieved, the Revenue preferred appeal before the Delhi High Court.

Issues Involved

  1. Whether unabsorbed depreciation relating to years prior to Assessment Year 2002–03 could be carried forward beyond eight years after amendment of Section 32(2) by Finance Act, 2001?
  2. Whether the benefit of unlimited carry forward introduced by the amendment applies to depreciation accumulated prior to 01.04.2002?

Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that the amendment to Section 32(2) removing the eight-year limitation was prospective in nature.
  • It contended that depreciation relating to years prior to 01.04.2002 would remain governed by the earlier law.
  • The Revenue further argued that reliance on Motor & General Finance Ltd. was misplaced because that case arose in reassessment proceedings under Section 147 and did not conclusively settle the interpretation of Section 32(2).

Respondent’s Arguments (Assessee’s Contentions)

  • The assessee argued that once the Finance Act, 2001 removed the restriction of eight years, all unabsorbed depreciation available as on 01.04.2002 became eligible for unlimited carry forward.
  • Reliance was placed on General Motors India Pvt. Ltd. v. DCIT and Motor & General Finance Ltd. v. ITO, where Courts recognized that such accumulated depreciation merges into current depreciation and enjoys unrestricted carry forward.
  • It was submitted that the legislative intent and CBDT Circular clearly supported this interpretation.

Court Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and held:

  • The amendment made by the Finance Act, 2001 removing the eight-year restriction under Section 32(2) applies to all unabsorbed depreciation available as on 01.04.2002.
  • Such depreciation becomes part of the depreciation allowance for Assessment Year 2002–03 and thereafter can be carried forward without any time limit.
  • The Court approved the reasoning of the Gujarat High Court in General Motors India Pvt. Ltd. v. DCIT and reaffirmed its earlier decision in Motor & General Finance Ltd.
  • No substantial question of law arose in favour of the Revenue.

Important Clarification

This judgment clarifies that:

  • The removal of the eight-year cap under Section 32(2) is beneficial in nature.
  • Any unabsorbed depreciation existing on 01.04.2002 automatically falls under the amended regime.
  • There is no distinction between depreciation arising before or after the amendment once it remains unabsorbed as on the effective date.
  • Taxpayers can claim such depreciation indefinitely until fully absorbed.

Sections Involved

  • Section 32(2), Income Tax Act, 1961 (Carry Forward of Unabsorbed Depreciation)
  • Section 147, Income Tax Act, 1961 (Reassessment – referred contextually)
  • Finance Act, 1996
  • Finance Act, 2001
  • CBDT Circular No. 14 of 2001

 Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:191-DB/AKC09012018ITA10312017.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.