Facts of the Case

The appellant, Commissioner of Income Tax, challenged the order of the Income Tax Appellate Tribunal (ITAT) which allowed the respondent, Govind Nagar Sugar Limited, to carry forward unabsorbed depreciation for the assessment year 2001-02 despite filing its return of loss late. The assessee had declared a loss of `6,75,38,576/- for AY 2001-02, filing the return on 31st March 2003, beyond the due date of 31st October 2001 under Section 139(3) of the Income Tax Act. The Assessing Officer initially disallowed the carry forward of unabsorbed depreciation, a decision upheld by the CIT(A) but overturned by the ITAT.

Issues Involved

  1. Whether ITAT was correct in holding that carrying forward unabsorbed depreciation does not require filing a return within the time allowed under Section 139(1) read with Section 139(3).
  2. Whether Section 80 of the Income Tax Act applies to unabsorbed depreciation under Section 32(2) of the Act.

Petitioner’s Arguments

  • Unabsorbed depreciation is part of “loss,” and since the assessee did not file the loss return within the prescribed time under Section 139, carry forward should be disallowed.
  • Section 80, by its language, applies to all losses, including unabsorbed depreciation, and the assessee cannot bypass time limitations.
  • Relied on Garden Silk Weaving Factory v. CIT (189 ITR 512) to argue that late filing bars carry forward of depreciation.

Respondent’s Arguments

  • Section 32(2) provides a separate mechanism for carry forward of unabsorbed depreciation, independent of Sections 80 and 139.
  • Section 80 and 139(3) apply to general business losses but not to unabsorbed depreciation or investment allowances.
  • Supported by several case laws including:
    • Shri Hari Mills Ltd. v. First ITO (1967) 65 ITR 348
    • Sathappa Textiles Pvt. Ltd. v. Second ITO (1969) 71 ITR 260
    • Brahmavar Chemicals Pvt. Ltd. v. Second ITO [1999] 239 ITR 807
    • CIT v. Haryana Hotels Ltd. (2005) 276 ITR 521
    • CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC)

Court Order / Findings

  • Delhi High Court held that Section 32(2) exclusively governs the carry forward of unabsorbed depreciation.
  • Section 80 and 139(3) relate only to business losses and not to depreciation allowances.
  • ITAT was correct in allowing carry forward irrespective of late filing of the return.
  • Both questions raised by the Revenue were answered in favor of the assessee.
  • Appeal dismissed with no order as to costs.

Important Clarifications

  • Unabsorbed depreciation has a distinct identity from business losses and is not subject to time restrictions for carry forward.
  • Depreciation carried forward becomes part of the current year’s allowance and is deductible against any income.
  • Filing deadlines under Section 139(1) do not apply to depreciation carry forward.

Section(s) Involved

  • Section 32(2), Section 80, Section 72, Section 139(1) & (3) of the Income Tax Act, 1961

Link to download the order:https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:1788-DB/MLM25032011ITA1642008.pdf

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