Facts of the Case

  • The assessee, Rishab Ispat Ltd., was engaged in the business of manufacturing steel ingots.
  • The assessee filed its return of income for Assessment Year 1998-99 declaring nil income from business and profession.
  • The Assessing Officer assessed the income at Rs. 1,09,19,779 and made additions by disallowing cash credits and treating certain liabilities as taxable income.
  • The assessee challenged the assessment before the Commissioner of Income Tax (Appeals).
  • The CIT(A) deleted additions relating to cash credits and also disallowed the addition of Rs. 73,36,374 made on account of cessation of business and unsecured loans.
  • Subsequently, the assessee filed an application under Section 154 seeking rectification on the ground that brought forward depreciation, forming part of earlier assessed losses, had not been considered.
  • The assessee contended that unabsorbed depreciation remained allowable even if the business had been discontinued.
  • The CIT(A) rectified the earlier order and allowed the claim for carry forward of depreciation.
  • The Revenue challenged the rectification order before the Income Tax Appellate Tribunal.
  • The Tribunal dismissed the Revenue’s appeal and upheld the rectification.
  • Aggrieved by the Tribunal’s decision, the Revenue approached the Delhi High Court.

Issues Involved

  1. Whether unabsorbed depreciation can be carried forward and set off even when the assessee is no longer carrying on the same business.
  2. Whether the CIT(A) was justified in rectifying the order under Section 154 to allow brought forward depreciation.
  3. Whether the amendment to Section 32(2) required continuation of the same business for claiming unabsorbed depreciation.
  4. Whether the Tribunal’s findings gave rise to a substantial question of law under Section 260A.

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The rectification order passed by the CIT(A) was erroneous.
  • The assessee had not claimed depreciation in the manner suggested during the original proceedings.
  • The issue regarding unabsorbed depreciation had not been adjudicated by the Assessing Officer.
  • After the amendment to Section 32(2), read with the relevant provisos applicable from Assessment Year 1997-98, continuation of the same business was necessary for claiming carry forward and set-off of depreciation.
  • Therefore, the assessee was not entitled to the benefit once the business stood discontinued.

Respondent’s Arguments (Assessee)

The assessee argued that:

  • Unabsorbed depreciation formed part of the assessment records of earlier years.
  • The claim was based on existing records and required no fresh factual investigation.
  • The benefit of unabsorbed depreciation under Section 32(2) survives irrespective of whether the same business continues.
  • The omission to grant such benefit constituted a mistake apparent from the record capable of rectification under Section 154.
  • Consequently, the rectification order passed by the CIT(A) was legally valid.

Court Findings

The Delhi High Court observed that:

  • The Tribunal had recorded a finding that unabsorbed depreciation was already available on record.
  • No further factual investigation was required to determine the existence of such depreciation.
  • The Tribunal held that after computation of income, the assessee remained entitled to claim set-off of unabsorbed depreciation.
  • The Tribunal further held that such claim was admissible regardless of whether the assessee continued the same business.
  • The High Court found no infirmity in the Tribunal’s reasoning.
  • The finding regarding availability and admissibility of unabsorbed depreciation was essentially factual and consistent with the statutory provisions.

Court Order / Findings

  • The Delhi High Court upheld the order of the Income Tax Appellate Tribunal.
  • The Court confirmed that the assessee was entitled to carry forward and set off unabsorbed depreciation.
  • It accepted the Tribunal’s finding that continuation of the same business was not a condition for availing the benefit.
  • The Court held that no substantial question of law arose from the Tribunal’s decision.
  • The Revenue’s appeal was dismissed.

Important Clarification

This judgment reiterates that unabsorbed depreciation under Section 32(2) has a distinct statutory character and may be carried forward and set off even if the assessee is no longer carrying on the same business. The Court also recognized that where the existence of unabsorbed depreciation is already evident from the assessment records, correction of its omission can be undertaken through rectification proceedings under Section 154.

Sections Involved

  • Section 32(2) of the Income-tax Act, 1961 – Carry forward and set-off of unabsorbed depreciation
  • Section 154 of the Income-tax Act, 1961 – Rectification of mistakes apparent from the record
  • Section 260A of the Income-tax Act, 1961 – Appeal before the High Court
  • Provisions relating to brought forward depreciation and business losses

Link to download the order -
https://delhihighcourt.nic.in/app/case_number_pdf/2008:DHC:673-DB/VBG25022008ITA952008.pdf

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