M/S. Fenoplast Ltd.,, Hyderabad vs Department Of Income Tax

This is Revenue's appeal against the order of the Commissioner of Income Tax (Appeals)-II, Hyderabad dated 21-08-2013, for Assessment Year (AY) 2005-06 allowing the carry forward depreciation to assessee disallowed u/s. 154 rws 263 of the Income Tax Act [Act].

2. Briefly stated, assessee is a company in which public are substantially interested. Assessee had un-absorbed depreciation of Rs. 76,19,881/- (Rs. 55,52,124/- + 20,67,757/- for AYs. 1996-97 & 1997-

98). This amount was originally allowed to be set-off in an order u/s. 154 dt. 18-03-2010. Subsequently, Ld.CIT passed an order u/s. 263 on the order u/s. 154 dt. 18-03-2010 on the reason that depreciation I.T.A. No. 1479/Hyd/2013 :- 2 -: M/s. Fenoplast Ltd.,

pertaining to year 1996-97 and 1997-98 cannot be carried forward beyond eight years and accordingly set-off of the carried forward depreciation was not correct. He accordingly set aside the orders u/s. 154 and directed the AO to modify the order accordingly. AO passed consequential order denying the depreciation which was appealed before the CIT(A) who by the impugned order considered assessee's submissions and noted the amendment brought out by Finance Act, 2001 as supported by Circular of 14 of 2001 dt. 22-11-2001 and also the decision of Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd., Vs. DCIT Special Civil Application No. 1773/2012 dt. 23- 08-2012, allowed assessee's contentions and directed the AO to allow the carried forward depreciation amounts.

3. Revenue is aggrieved and raised the following two grounds:

"2. The CIT(A) erred in stating that the unabsorbed depreciation of earlier years including AY. 1996-97 can be carried forward to the succeeding years without any time limit.

3. The CIT(A) should have dismissed the appeal as the order u/s. 263 of the IT Act which is cause of action u/s. 154 is upheld by the jurisdictional ITAT".

The material Ground No.2 is with reference to the carried forward depreciation of earlier years and Ground No.3 is with reference to the fact that CIT(A) should have dismissed the appeal as the order was passed consequent to the order u/s. 263 which was upheld by the jurisdictional ITAT.

4. At the outset, both the parties agreed that this issue is decided by the SMC bench of ITAT, in ITA Nos. 1478 & 1480/Hyd/2013 dt. 30-06- 2015 in assessee's own case for AYs. 2004-05 & 2006-07. This being the intervening year and facts being same, the order will apply.

I.T.A. No. 1479/Hyd/2013 :- 3 -: M/s. Fenoplast Ltd.,

5. The ITAT in the above referred case has examined the contentions on the grounds which are similar in those years and decided vide para 6 and 7 as under:

"6. We have considered the issue and examined the contentions. Technically speaking, CIT(A) could not have allowed the appeal when the consequential order was passed on the directions of the CIT(A) u/s. 263. However, the orders of the ITAT were not placed before the CIT(A), consequently, Ld.CIT(A) decided the issue on merits of the contentions. Be that as it may, as the law stands now, assessee is entitled for set-off of carried forward depreciation. This is analysed in the order of the CIT(A) in para 6, which is extracted as under:

"6. The information on record, submissions of the appellant are carefully considered. As per the Finance Act 1996 the unabsorbed depreciation can be carried forward for the next 8 subsequent years. This amendment takes effect from 01.04.1997 and therefore, is applicable to A.Y. 1997-98 and subsequent years. Finance Act, 1996 is explained in Circular No. 762 dated 08.02.1998 as under:

"23.5 Sub-section (2) of section 32, as it existed upto assessment year 1996-97, provided that the unabsorbed depreciation of a year shall be added to the amount of the allowance, for depreciation of the following previous year and deemed to be part of that allowance. Therefore, the unabsorbed depreciation allowance, if any, of assessment year 1996-97 shall be added to the amount of the allowance for depreciation of assessment year 1997-98 and deemed to be part of the allowance for this year. In other words, the unabsorbed depreciation allowance of assessment year 1996-97 shall be added to the allowance of 1997- 98 and will be deemed to be the I.T.A. No. 1479/Hyd/2013 :- 4 -: M/s. Fenoplast Ltd.,

allowance of that year. The limitation of eight years shall start from the assessment year 1997-98. 23.6 These amendments take effect from the 1st day of April, 1997, and win accordingly, apply in relation to assessment year 1997-98 and subsequent years".

6.1 The Finance Act, 2001 removed the restriction of 8 years. According to this amendment of unabsorbed depreciation can be carried forward without any limit. Circular No.14 of 2001 dated 22.11.2001 explains the effect of Finance Act, 2001. The relevant portion is reproduced as under:

"30.1 Under the existing provisions of section 32 of the Income-tax Act, carry forward and set off of unabsorbed depreciation is allowed for 8 assessment years.

30.2 With a view to enable the industry to conserve sufficient funds to replace plant and machinery, especially in an era where obsolescence takes place so often, the Act has dispensed with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The Act has also clarified that in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory.

30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside India in the assessee's business or profession in another country.

30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001.

30.5 These amendments will take effect from the t» April, 2002, and win accordingly, apply in relation to the assessment year 2002-2003 and subsequent years. "

I.T.A. No. 1479/Hyd/2013 :- 5 -: M/s. Fenoplast Ltd.,

6.2 The Hon'ble Gujarat High Court had discussed the issue of carrying forward of unabsorbed depreciation at length in the case of General Motors India Pvt. Ltd., Vs. DCIT in the order dated 23.08.2012 and held that the unabsorbed depreciation can be carried forward to the subsequent years without any restriction. Referring to amendment through Finance Act, 2001 the Hon'ble Gujarat High Court held that "accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A. Y.2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A. Y.1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2) of the Act a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under Section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act 2001 would allow the I.T.A. No. 1479/Hyd/2013 :- 6 -: M/s. Fenoplast Ltd.,

unabsorbed depreciation allowance available in the A.Y.1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the A.Y.2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years."

6.3 Having considered the Circular No. 762 dated 08.02.1998, Circular No. 14 of 2001 dated 22.11.2001 and also the decision of Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd. Vs. DCIT, the unabsorbed depreciation of earlier years including A.Y. 1996-97 can be carried forward to the succeeding years without any time limit. Accordingly, the first three grounds of appeal are allowed".

7. As things stand now, the restriction of eight years was removed. Even though Special Bench decision of the ITAT in the case of DCIT Vs. Times Guaranty Ltd., [ITA No.4917 & 4918/Mum/2008] [TTJ 257 (Mum) (SB)] was relied on by the CIT at the time of passing the order u/s. 263, subsequently, Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd., Vs. DCIT (supra) has held that restriction is not valid and unabsorbed depreciation could be set-off against the profits and gains of subsequent years. In view of this, I agree with the order of the CIT(A) and reiterate that assessee is entitled to set-off the carried forward depreciation of AY 1996-97 and 1997-98. In view of this, we direct the AO to modify the orders if not done so far and allow the set-off accordingly".

6. Since the facts are similar, we agree with the order of the CIT(A) and reiterate that assessee is entitled to set-off the carry forward depreciation of AY. 1996-97 and 1997-98. We direct the AO to modify the orders accordingly and allow the set-off.

I.T.A. No. 1479/Hyd/2013 :- 7 -: M/s. Fenoplast Ltd.,

7. In the result, appeal is dismissed.

Order pronounced in the open court on 10th July, 2015.

Sd/- Sd/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 10th July, 2015

TNMM Copy to :

1. The Dy. Commissioner of Income Tax, Circle-1(3), Room No. 413, 4th Floor, Aayakar Bhavan, Hyderabad.

2. M/s. Fenoplast Ltd., 306-308, Chenoy Trade Centre, Parklane, Secunderabad.

3. CIT(Appeals)-II, Hyderabad.

4. CIT-I, Hyderabad.

5. D.R. ITAT, Hyderabad.

6. Guard File.