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Unit 4: Set-off and Carry Forward of Losses

The assessee preferred further appeal to the Tribunal, challenging the order of the Notes
Commissioner (Appeals) regarding the carry forward of unabsorbed losses and
disallowance of unabsorbed depreciation. The Tribunal allowed the appeal of the assessee
and directed the AO to allow the claim of carry forward of unabsorbed depreciation as well
as unabsorbed losses.
At the instance of the Revenue, the Court was requested to address the following question
of law. “Without prejudice of the above, whether on the facts and in the circumstances of
the case, the Tribunal was right in law in allowing the carry forward of business losses and

depreciation when neither any valid return for the A.Y. 1986-87 was filed, nor any business
loss and depreciation was determined for the A.Y. 1986-87 to be carried forward in the
succeeding year i.e., the A.Y. 1987-88?”
Attention of the Court was drawn to the provisions of S. 72, S. 80, S. 139(3) and S. 157
of the Act and it was contended by the Revenue that in the event of failure on the part

of the assessee to file a valid return, no business loss could be carried forward and the
Tribunal had, thus, erred in granting relief to the assessee. It was submitted that on the
same analogy, as applicable to the carry forward of unabsorbed losses, even unabsorbed
depreciation u/s.32(2) of the Act could not be allowed to be carried forward and that the
Commissioner (Appeals) and the Tribunal had wrongly allowed the same. The Revenue
placed reliance on Sri Rajarathinam Transports (P) Ltd. v. CIT, 199 ITR 203 (Mad.) to augment
its submissions.

In reply, the assessee, controverting the submissions of the Revenue, supported the orders
of the Commissioner (Appeals) and the Tribunal, and submitted that in view of the decision
of the Apex Court in CIT v. Virmani Industries (P) Ltd. etc. 261 ITR 607 (SC), the Tribunal had
rightly allowed set-off and carry forward of unabsorbed depreciation and business losses.
The Court observed that the reading of S. 32(2) of the Act made it clear that a carried
forward unabsorbed depreciation allowance was deemed to be part of and stood on the
same footing as current depreciation. It further observed that if in the assessment of the
assessee, full effect could not be given to any allowance in any previous year, owing to

there being no profits or gains chargeable for that previous year, the allowance or part of
the allowance to which effect had not been given, should be added to the amount of the
allowance for depreciation for the following previous year and deemed to be part of the
said allowance. That there was no time limit provided u/s.32(2) of the Act for carry forward
of unabsorbed depreciation to any subsequent year. The Court took note of the decision
of the Apex Court in CIT v. Jaipuria China Clay Mines (P) Ltd., 59 ITR 555 (SC), which had
held that unabsorbed depreciation of past years had to be added to the depreciation of
the current year and the aggregate unabsorbed and current year’s depreciation had to be
deducted from the total income of the assessment year.
The Court, on giving thoughtful consideration, was unable to accept the view as laid down
by the Madras High Court in Sri Rajarathinam Transports’ case (supra), as according to the
Court, u/s.32(2) of the Act, unabsorbed depreciation of earlier previous years formed part
of the current year’s depreciation and thereafter allowance for depreciation was given from
the current year’s income. That there was no such provision in S. 72 of the Act by virtue of
which business losses of earlier years formed part of the current year’s business losses and
allowed to be set-off from current year’s income and in view of that, only such business

losses of earlier years which were notified by the AO were allowed to be carried forward
and set-off from the current year’s income. That there was no similar provision under the
Act which made it mandatory for the assessee to file return for carry forward and set-off of

unabsorbed depreciation which was to be notified by the AO as in the case of unabsorbed
business loss. On a reading of the provisions of the Act, the distinction between unabsorbed
depreciation and unabsorbed business loss for the purposes of set-off and carry forward
was clear to the Court.
Contd...

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