ITAT: Unabsorbed Depreciation Refers to Depreciation or Part thereof Remained to be Set Off Against Existing Business Profits

ITAT: Unabsorbed Depreciation Refers to Depreciation or Part thereof Remained to be Set Off Against Existing Business Profits

The Income Tax Appellate Tribunal (ITAT), Delhi by its division-member bench of Yogesh Kumar US (Judicial Member) and Pradip Kumar Kedia elucidated that as per Section 32(2) of the Income Tax Act, 1961 (the Act), ‘unabsorbed depreciation’ refers to the depreciation or part thereof which remained to be set off against the existing business profits of any year owing to the fact that either there is no profit or such profits were not sufficient to set off the same.

The factual matrix of the case was that the appellant/ assessee M/s. PVR Pictures Ltd filed an appeal against the order of the learned Commissioner of Income Tax (Appeals) [CIT(A)], dated 29 March, 2017 arising from the assessment order dated 28.02.2017 passed by the Assessing Officer under Section 143(3) of the Act, concerning Assessment Year 2012-13.

As per the grounds of appeal, the assessee challenged the computation of adjustment allowable in terms of clause (iii) of Explanation-1 to Section 115JB(2) for computation of book profits made by the Assessing Officer resulting in lower adjustment to the extent of Rs.93,06,502/-.

The ld. counsel for the assessee submitted that the assessee had furnished its return of income computing total income under normal provisions of the Act. Likewise, book profit under Section 115JB was also computed at Nil. In the course of the assessment proceedings, the book profit was re-determined by the assessee at Rs.1,10,12,730/-. The Assessing Officer computed the tax liability on such book profits accordingly.

In the first appeal, the assessee contended that it was entitled to adjust the book profit by way of brought forward loss or depreciation as per books of account whichever is less in terms of clause (iii) of Explanation-1 to Section 115JB(2) of the Act.

In the first appeal, the assessee reiterated adjustment of carried forward business loss or unabsorbed depreciation whichever was lower, against ‘Book Profit’ for the purposes of Section 115JB of the Act.

In Financial Year (FY) 2010-11, the assessee had claimed total book loss of Rs.22,18,04,962 which was solely on account of unabsorbed depreciation loss claimed of Rs.39,38,03,227/-. Since, such depreciation exceeds the resultant book loss and thus the total book loss represents the unabsorbed depreciation after part absorption against available profit was shown in the working filed.

The CIT(A) on the other hand separated the total depreciation of Rs.39.38 crore as unabsorbed depreciation and taken the remaining amount of Rs.17,19,98,268/-, i.e., [Book loss 22,18,04,962 (-) unabsorbed depreciation 399803227] as business loss. Such methodology ultimately resulted in Nil business loss vis-à-vis an unabsorbed depreciation of Rs.41,21,25,855/- as against the total unabsorbed depreciation loss of Rs.24,01,27,590/- and business loss of Rs.93,06,502/- computed by the assessee.

The ld. counsel thus submitted that the ld. CIT(A) had wrongly computed the amount of unabsorbed depreciation and business loss for the FY 2010-11 opposed to the intendment of the provision of Section 115JB resulting in the present anomaly. It was contended that the action of the CIT(A) is based on both misconception of law and misconception of facts.

The issue that came up for consideration before the bench was with respect to the adjustment of Book profit under by Section 115JB by lower of business loss and unabsorbed depreciation.

The bench explained that as per clause (iii) of Explanation-1 to Section 115JB(2) of the Act states that an assessee is entitled to reduce the book profits by the amount of loss brought forward (excluding depreciation) or unabsorbed depreciation, whichever is less as per books of account.

The bench noted that the expression employed in the provision is the ‘unabsorbed depreciation’ and not the ‘depreciation.’ In this regard the bench observed-

“The reference to the words ‘unabsorbed depreciation’ rather than the word ‘depreciation’ reflects the intention of the Legislature that in any earlier year if there is some standalone book profit, depreciation of that year stands adjusted to the extent of profit so available and balance unabsorbed depreciation, if any, only should be taken for the purposes of adjustment under Section 115JB. If intent of legislature would have been to consider profit and depreciation independent of each other there was no need to use the word "unabsorbed" before the word depreciation. The word ‘unabsorbed’ would be rendered redundant, if the view of revenue is endorsed.”

The ITAT regarding the ‘unabsorbed depreciation’ referred to the provisions of section 32(2) of the Act governing the carry forward and set off of unabsorbed depreciation and held, ‘unabsorbed depreciation’ refers to the depreciation or part thereof which remained to be set off against the existing business profits of any year owing to the fact that either there is no profit or such profits were not sufficient to set off the same.

The ITAT in light of the law enunciated, was of the view that the assessee had correctly considered the figure of unabsorbed depreciation for FY 2010-11 at Rs.22,18,04,962/- in its working which portion remained unabsorbed against the existing book profits of that year.

The bench opined that the figure of Rs.39,38,03,227/- considered by the CIT(A) was total depreciation allowance instead of unabsorbed depreciation and thus the position taken by the CIT(A) was contrary to the phraseology of clause (iii) of Explanation-1 to Section 115JB(2).

The bench reiterated clause (iii) of Explanation-1 to Section 115JB(2) uses the expression ‘unabsorbed depreciation’ which has distinct connotations vis-à-vis total depreciation and held that amount which is lower between unabsorbed depreciation and business loss deserves to be set off against the current Assessment Year (A.Y.) book profits in terms of the provisions of Income Tax Act.